CALGARY, Nov. 7 /CNW/ - STORM ENERGY LTD: (SEM - TSX) announces results for the three and nine months ended September 30, 2003.
Storm Energy Ltd.
Consolidated Highlights
Three Five Nine Five
months Weeks months Weeks
ended ended ended ended
September September September September
30, 2003 30, 2002 (1) 30, 2003 30, 2002 (1)
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Financial ($ thousands,
except where noted)
Oil and gas revenue 15,014 5,367 44,075 5,367
Other income 215 48 539 48
Cash flow from
operations (2) 7,980 3,200 25,957 3,200
Per share - basic ($) 0.27 0.11 0.89 0.11
Per share - diluted ($) 0.27 0.11 0.89 0.11
Net income 2,210 1,317 9,111 1,317
Per share - basic ($) 0.07 0.05 0.31 0.05
Per share - diluted ($) 0.07 0.05 0.31 0.05
Capital expenditures, net 4,628 2,583 69,071 2,583
Indebtedness (including
working capital) 62,724 21,935 62,724 21,935
Common shares outstanding
(thousands)
Basic 29,890 28,590 29,890 28,590
Diluted 32,322 31,045 32,322 31,045
Weighted average common
shares outstanding
(thousands)
Basic 29,890 28,590 29,047 28,590
Diluted 29,935 28,590 29,138 28,590
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Operations
Average daily production
Crude oil and NGLs
(Bbls/d) 3,878 3,056 3,620 3,056
Natural gas (Mcf/d) 1,698 994 1,059 994
Barrels of oil equivalent
(boe/d (at) 6:1) 4,161 3,222 3,796 3,222
Average product prices
Crude oil and NGL's
($Cdn/Bbl) 40.10 44.43 42.75 44.43
WTI ($US/Bbl) 30.22 29.40 30.96 29.40
Natural gas ($Cdn/Mcf) 4.99 3.58 6.55 3.58
Wells drilled
Gross 7.00 4.00 21.00 4.00
Net 4.77 2.80 14.47 2.80
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(1) Period is from August 23, 2002 to September 30, 2002.
(2) The Company in part evaluates its performance based on cash flow from
operations. Cash flow from operations is a non-GAAP measure that
represents cash generated from operating activities before changes in
non-cash working capital items and site restoration costs paid during
the period. Cash flow from operations may not be comparable to
similar measures used by other companies.
REPORT TO SHAREHOLDERS
Storm Energy Ltd. is pleased to present its operational and financial
results for the three and nine month periods ended September 30, 2003.
In contrast to the second quarter of 2003 when corporate activity was
directed to the acquisition and integration of the property purchase from Star
Oil & Gas Ltd, the third quarter of 2003 saw our focus shift to the
exploitation of our opportunity rich asset base. We began an ambitious
drilling program and we have made progress towards addressing concerns around
production growth and asset stability which were discussed in our second
quarter report.
Average volumes for the quarter to September 30, 2003 amounted to 4,161
barrels of oil equivalent per day (BOED), an increase of 29% from the period
ended September 30, 2002, and 15% higher than average production for the first
half of 2003. As discussed in our second quarter report, most of this growth
is the result of the acquisition of producing assets at Red Earth. As also
indicated in that report, an aggressive 40 well drilling program began in the
third quarter which will continue into the spring of 2004. Successful
execution of this program should result in a resumption of quarterly organic
production growth at meaningful levels. To date we have drilled 12 wells, four
of which have been successfully completed, four are being evaluated and four
were dry and abandoned. Only one of the four potential producing wells is
contributing to our current rate of 4,300 barrels of oil per day (BOED),
although we expect that six may be producing by year end. Gas well tie-ins
associated with our new drilling plus the benefit of a plant modification at
our main Evi facility at Red Earth should add 500-600 BOED to our current
volumes. Exact timing of completions and tie ins will clearly impact fourth
quarter volumes and exit rates; nevertheless we anticipate that year end
volumes should exceed 5,000 BOED.
We expect to have at least 24 of our 40 wells drilled by year end and we
are confident that we have the equipment in place to ensure our entire program
can be completed by spring breakup in 2004. With respect to drilling to date,
the results of our first seven wells at Red Earth have been encouraging in the
Slave Point zone but disappointing in the Granite Wash. The remaining 14 wells
in the program at Red Earth will be split fairly evenly between Granite Wash,
Slave Point and dual zone targets, and approximately 40% will be exploratory.
Drilling in West Central Alberta has been encouraging as four of five wells
have been cased as gas wells and we should see corresponding increases in our
gas production before year end. In this regard, we successfully increased our
inventory of Devonian gas projects in West Central Alberta and North Eastern
British Columbia during the third quarter and we are excited about the
potential impact of the 7-9 wells we expect to drill in these areas before
breakup.
In our last quarterly report we indicated that the volatility of our
producing assets had increased with the full development and initial declines
from our largest asset, representing 35% of our production, the Loon Granite
Wash P pool. Third quarter net production averaged 1,390 BOED from total fluid
of 1,985 barrels of fluid per day (BFPD). Current rates are 1,400 BOPD and
2,000 BFPD respectively. The decline rate, which steepened as a result of the
13-6 well which began producing during the second quarter, has flattened
considerably in the last three months.
During the quarter we incorporated Storm Ventures International Inc
(SVI), with the corporate purpose of taking advantage of the number of
international opportunities that are being brought to our attention. Storm's
ownership position is 50% and by June 30, 2004 our investment will amount to
$3.3 million. Other investors have or by June 30, 2004 will provide financing
in the amount of $6.7 million, for total funding of $10 million. SVI will
proceed cautiously, but there is clearly an increasing opportunity for smaller
exploration and production companies to participate successfully in the
exploitation of reservoirs outside of the Western Canadian Sedimentary Basin
which do not meet the size criteria of major producers. Fundamental to SVI's
approach will be a focus on defined petroleum systems with repeatable trend
exposures within jurisdictions that offer minimal political, security or legal
risks.
Excluding cash owned by SVI, consolidated debt levels at the end of the
third quarter totaled $65.7 million, approximately 1.9 times our trailing 12
month cash flow and down $1.8 million since the end of the previous quarter.
Debt reduction below 1.5 times cash flow remains a priority and we intend to
meet that target by mid 2004 through dedication of cash flow, particularly
over breakup next year, and minor asset sales. We completed $1.6 million of
minor property dispositions in the third quarter and expect to close an
additional $4.3 million of non-core asset sales prior to year end.
Nevertheless we continue to evaluate and bid on assets which complement our
core holdings and our initiatives in West Central Alberta and North Eastern
British Columbia. Largely as a consequence of a strengthening Canadian dollar,
which has increased in value 16% over its US counterpart since the beginning
of 2003, our asset borrowing base for bank lending purposes has fallen by 8%
to $68 million. However, the lower borrowing base is above the anticipated
debt level we require to support our winter program and will be subject to
review early next year following our independent reserve evaluation.
Generally we are satisfied with our progress. The Star assets have been
successfully integrated into our operations and have lived up to expectations.
The pursuit of liquids rich gas opportunities in West Central Alberta, an
initiative which began more than 18 months ago, is now showing considerable
success. Near term tie-ins and production increases from facility optimization
should result in appreciable production growth prior to year end. Operating
costs remain low, and although Storm no longer benefits from the Technical
Services Agreement with Focus Energy Trust, general and administrative costs
will fall on a per unit basis as production expands and we benefit from cost
recoveries from drilling.
Finally, an ambitious winter drilling program lies ahead with
approximately 28 wells remaining to be drilled by spring of 2004. We look
forward to reporting to you the results of this program in future shareholder
reports. With respect to our financial and operating outlook for 2004, we will
provide information on our website after completion of our planning process in
early December of this year.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis of financial condition and results
of operations (MD&A) for the Company should be read in conjunction with the
unaudited interim consolidated financial statements for the three and nine
months ended September 30, 2003 and the audited consolidated financial
statements and MD&A for the period ended December 31, 2002. As the Company
commenced operations effective August 23, 2002, comparative information for
the period ended September 30, 2002 is for approximately five weeks only. The
limitations of such comparative information should be recognized. Where
useful, comparative information for the quarter ended June 30, 2003 is also
provided.
MEASUREMENTS AND EQUIVALENTS
- All financial amounts are stated in thousands of Canadian dollars
except where otherwise indicated.
- Conversion of natural gas volumes to a crude oil equivalent (boe) has
been made using a ratio of six thousand cubic feet to one barrel of
crude oil in conformity with Canadian Securities Regulators proposed
National Instrument 51-101 - Standards of Disclosure for Oil and Gas
Activities.
- Volumetric measurements correspond to American Petroleum Institute
standards.
- Land ownership is measured in acres.
PRODUCTION
Three Months Five Weeks Three Months Nine Months
Average daily Ended Ended Ended Ended
production September 30, September 30, June 30, September 30,
2003 2002 2003 2003
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Crude oil and natural
as liquids (bbls/d) 3,678 2,938 3,707 3,461
Natural gas (mcf/d) 1,698 994 1,021 1,059
Natural gas liquids
(bbls/d) 200 118 152 159
Total (BOED) 4,161 3,222 4,029 3,797
Oil and liquids
production as a
percentage of
total boe
production 93% 95% 96% 95%
-------------------------------------------------------------------------
For the three months ended September 30, 2003 average daily boe (boe/d)
production increased by 29% over production levels for the period ended
September 30, 2002 and 3% over production for the quarter to June 30, 2003.
Average daily boe production for the nine months to September 30, 2003 showed
an increase of 18% when compared to the period ended September 30, 2002. The
net increase in boe production from September 30, 2002 to the quarter and nine
months ended September 30, 2003 is largely attributable to the acquisition of
properties from Star Oil & Gas Ltd. which took place effective May 1, 2003.
Marginal growth in production during the quarter to September 30, 2003,
when compared to the immediately prior quarter, is attributable to the absence
of drilling in the second quarter which resulted in no new well production
being recognized for the full September quarter. However, field activity in
the quarter to September 30, 2003 resulted in production approximating to
4,300 boe/d at quarter end.
COMMODITY PRICING
For the three and nine month periods to September 30, 2003 the company
realized the following commodity prices. Comparative information for the
period ended September 30, 2002 and for the quarter ended June 30, 2003 is
provided.
Three Months Five Weeks Three Months Nine Months
Average realized Ended Ended Ended Ended
Prices September 30, September 30, June 30, September 30,
($Cdn/Boe) 2003 2002 2003 2003
-------------------------------------------------------------------------
Crude oil 40.71 44.43 40.40 43.34
Hedging adjustment (0.20) - - (0.07)
Natural gas 4.99 3.58 8.13 6.55
Natural gas liquids 28.59 26.03 26.82 29.63
WTI US$30.22 US$29.40 US$28.90 US$30.96
US$ - Canadian
$ exchange rate US$0.725 US$0.635 US$0.715 US$0.70
-------------------------------------------------------------------------
A reconciliation of the oil price realized by Storm to the average price
for West Texas Intermediate for each of the periods is as follows:
Three Months Five Weeks Three Months Nine Months
Ended Ended Ended Ended
September 30, September 30, June 30, September 30,
2003 2002 2003 2003
-------------------------------------------------------------------------
WTI ($US/bbl) 30.22 29.40 28.90 30.96
IPL factor ($US/bbl) (0.53) (0.93) 0.47 (0.06)
---------------------------------------------------
Edmonton ($US/bbl) 29.69 28.47 29.37 30.90
$US/$Cdn exchange rate 0.725 0.635 0.715 0.70
---------------------------------------------------
Edmonton par price
($Cdn/bbl) 40.95 44.83 41.07 44.14
Company differential
($Cdn/bbl) (0.24) (0.40) (0.67) (0.80)
---------------------------------------------------
Average selling price
($Cdn/bbl) 40.71 44.43 40.40 43.34
-------------------------------------------------------------------------
The Company has entered into certain derivative financial instruments for
crude oil designed to protect future earnings and cash flow from commodity
price volatility. The Company does not, in the ordinary course, enter into
hedging contracts, but does so in circumstances where higher debt levels are
assumed to fund major property acquisitions. The additional debt incurred to
fund the property purchase from Star Oil & Gas Ltd. during the quarter ended
June 30, 2003 resulted in debt levels exceeding the Company's standard debt to
cash flow guideline, thus meriting cash flow protection during the period when
debt will be reduced to an acceptable level. Details of outstanding commodity
price contracts are as follows:
Contract Volume Strike Price Cost Term
-------------------------------------------------------------------------
Costless
collar 1,250 bbls/d US$26.00 - US$27.50 - October 1, 2003 -
December 31, 2003
Swap 1,250 bbls/d US$31.25 - November 1, 2003 -
December 31, 2003
Swap 1,250 bbls/d US$30.04 - January 1, 2004 -
March 31, 2004
Swap 1,250 bbls/d US$28.62 - April 1, 2004 -
June 30, 2004
Put option 1,250 bbls/d US$24.00 US$2.18 Calendar Year 2004
-------------------------------------------------------------------------
The Company has not hedged its exposure to changes in the Canadian - US
dollar exchange rate.
REVENUE
Gross revenue for the quarter ended September 30, 2003 grew by 2%
compared to the quarter ended June 30, 2003. Sales of natural gas and natural
gas liquids are not significant contributors to the Company's revenue base;
however the natural gas price realized by the Company for the third quarter
averaged $4.99 which was lower than expected due to the settlement of certain
gas marketing contracts in the quarter which related to the immediately
preceding quarter. The realized price for natural gas liquids increased by 7%.
Other income includes interest on minor cash balances and third party royalty
income.
No meaningful comparison can be made between the three and nine months
ended September 30, 2003 to the five weeks ended September 30, 2002.
ROYALTIES
For the three months ended September 30, 2003, royalties averaged 21.7%
compared to 29.5% for the period ended September 30, 2002 and 23.6% for the
quarter ended June 30, 2003. For the nine months ended September 30, 2003,
royalties averaged 24%. The reduction in the royalty rate is attributable to
the elimination of certain overriding royalties that had been paid by Storm
prior to the property acquisition from Star during the second quarter of this
year. In addition certain new wells brought into production during the quarter
to September 30, 2003 receive a Crown royalty holiday.
PRODUCTION EXPENSES
Total production costs for the three months ended September 30, 2003
increased 25.5% over the quarter ended June 30, 2003. On a boe basis,
production costs for the three months ended September 30, 2003 were $4.73
compared to $3.94 for the previous quarter and $4.67 for the period ended
September 30, 2002; and were $4.10 for the nine months ended September 30,
2003. The increase in production costs reflects higher costs associated with
the properties acquired from Star during the second quarter of 2003 and higher
processing and transportation charges associated with remote gas production.
Comparative field netbacks are as follows:
Three Months Five Weeks Three Months Nine Months
Ended Ended Ended Ended
($Cdn/boe) September 30, September 30, June 30, September 30,
2003 2002 2003 2003
-------------------------------------------------------------------------
Production income 39.40 42.72 40.23 42.59
Hedging loss (0.18) - - (0.07)
---------------------------------------------------
Net production income 39.22 42.72 40.23 42.52
Royalties, net (8.38) (12.61) (9.60) (10.16)
Production expenses (4.73) (4.67) (3.94) (4.10)
---------------------------------------------------
Field netback 26.11 25.44 26.69 28.26
-------------------------------------------------------------------------
Storm anticipates that production costs for the final quarter of 2003
will approximate $4.80 per boe.
GENERAL AND ADMINISTRATIVE EXPENSES
June 30, 2003 saw the expiration of the Technical Services Agreement with
Focus Energy Trust with the result that net general and administrative
expenses for the quarter ended rose by 411% from the previous quarter, net of
the recovery. On a boe basis, net general and administrative expenses were
$2.77 for the three months ended September 30, 2003 compared to a net recovery
of $0.42 for the period ended September 30, 2002; $0.56 for the three months
ended June 30, 2003; and $1.13 for the nine months ended September 30, 2003.
Storm expects that general and administrative costs for the final quarter of
the year and for the full year will approximate $1.97 and $1.37 per boe
respectively.
INTEREST EXPENSE
Interest expense for the third quarter rose by 14% when compared to the
quarter to June 30, 2003 due to increased debt, incurred effective May 1, 2003
to fund the Star asset purchase, being outstanding for the full third quarter
of 2003. However retirement at the end of the second quarter of the bridge
loan drawn as part of the purchase financing commitment, along with
satisfaction of certain debt to cash flow covenants, has resulted in
substantial rate reductions, with the current interest rate being
approximately 4.10%. Year-to-date interest expense includes $277,600 in
financing fees associated with the new credit facility entered into at the
time of the Star property acquisition. On a boe basis, interest costs amounted
to $2.86 for the quarter ended September 30, 2003; $0.78 for the period to
September 30, 2002; $2.61 for the quarter ended June 30, 2003 and $2.38 for
the nine months ended September 30, 2003. Interest for the final quarter of
2003 is expected to approximate $2.15 per boe.
DEPLETION AND DEPRECIATION
Total depletion and depreciation increased 7.8% for the quarter ended
September 30, 2003 compared to the quarter ended June 30, 2003. On a boe
basis, depletion and depreciation for the three months ended September 30,
2003 amounted to $10.22 compared to $9.88 for the quarter to June 30, 2003, an
increase of 3%. The rate for the period ended September 30, 2002 amounted to
$6.68 per boe and the rate for the nine months ended September 30, 2003
amounted to $9.54 The increase in the provision for depletion and depreciation
in the third quarter of 2003 is largely due to the inclusion of the costs to
date of the 2003-2004 winter capital program for which at this stage there are
no reportable reserve additions.
SITE RESTORATION AND ABANDONMENT
The provision for site restoration and abandonment for the quarter ended
September 30, 2003 increased by 19% over the provision for the quarter ended
June 30, 2003. Measured on a boe basis the provision for the quarter to
September 30, 2003 amounted to $0.60; $0.53 for the period ended September 30,
2002; $0.53 for the quarter ended June 30, 2003 and $0.54 for the nine months
ended September 30, 2003.
INCOME AND OTHER TAXES
Capital taxes are a function of the size of the Company and will continue
to increase as the Company grows. The effective rate of future income tax for
the quarter ended September 30, 2003 was 41.6% which substantially corresponds
to the effective statutory rate. Tax rates are reducing, which for many
companies will result in a downward revaluation of the future income tax
provision which had been set up at higher rates prevailing in earlier periods.
As Storm began business in August 2002, the Company will benefit only
marginally from lower future income taxes resulting from rate reductions.
NET INCOME
Net income for the three months ended September 30, 2003 increased 68%
when compared to the period ended September 30, 2002 and was 26% lower than
reported for the quarter ended June 30, 2003. The decrease in comparison to
the second quarter of 2003 is attributable to higher general and
administrative expenses resulting from the expiration of the Technical
Services Agreement with Focus Energy Trust. Excluding income from the
Technical Services Agreement, net income for the third quarter of 2003 was 15%
higher than net income in the second quarter. Net income for the nine months
ended September 30, 2003 was $9.1 million. Measured per share, net income for
the quarter ended September 30, 2003 amounted to $0.7, compared to $0.05 for
the period to September 30, 2002 and $0.10 for the quarter to June 30, 2003.
Net income per share for the nine months to September 30, 2003 amounted to
$0.31. Basic and diluted per shares values are the same for each period.
CASH FLOW FROM OPERATIONS
Cash flow from operations is a non-GAAP measure which measures cash
generated from operating activities before changes in non-cash working capital
items and site restoration costs paid during the period. Cash flow from
operations may not be comparable to similar measures used by other companies.
Measurement of cash flow from operations for the Company is detailed on the
Consolidated Statement of Cash Flows.
Cash flow for the quarter ended September 30, 2003 was $8.0 million, an
increase of 149% from the period to September 30, 2002 and a decrease of 8%
from the quarter ended June 30, 2003. Cash flow per share was $0.27 for the
quarter ended September 30, 2003 compared to $0.11 for the period ended
September 30, 2002 and $0.30 for the quarter ended June 30, 2003. Cash flow
for the nine months ended September 30, 2003 amounted to $26.0 million or
$0.89 per share. The decrease in cash flow between the third and second
quarters of 2003 is attributable to the expiration of the Technical Services
Agreement at June 30, 2003, resulting in increased general and administrative
costs, as well as higher debt servicing costs. Basic and diluted per share
values are the same for each period.
CAPITAL EXPENDITURES
Capital expenditures for the quarter ended September 30, 2003 totaled
$4.6 million. During the nine months ended September 30, 2003 the Company
spent $69.1 million. Expenditures were incurred as follows:
Three Months Five Weeks Three Months Nine Months
Ended Ended Ended Ended
September 30, September 30, June 30, September 30,
($ thousands) 2003 2002 2003 2003
-------------------------------------------------------------------------
Land 498 66 396 1,266
Seismic 555 230 595 2,905
Drilling and
completion 3,495 1,959 877 14,169
-------------------------------------------------------------------------
Total exploration and
development 4,548 2,255 1,868 18,340
Facilities, equipment
and workovers 2,071 327 228 3,713
Acquisitions 34 - 72,366 73,129
Dispositions (1,610) - (23,905) (25,514)
-------------------------------------------------------------------------
Net operations 5,043 2,582 50,557 69,668
Field inventory (37) - (582) (261)
Administrative assets 23 - 46 74
Minority interest (411) - - (411)
-------------------------------------------------------------------------
Net capital
expenditures 4,618 2,582 50,021 69,070
-------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Debt at September 30, 2003 amounted to $62.7 million, comprising bank
debt of $62.2 million and a working capital deficiency of $0.5 million.
Working capital deficiency includes cash on hand of $3 million, in the
treasury of Storm Ventures International Inc., which would not, in the
ordinary course, be available to fund operations of the parent company. Debt
at September 30, 2002 totaled $21.9 million, made up of bank debt of $22.4
million and working capital of $0.5 million. Storm has a syndicated term bank
facility in the amount of $68 million which should be adequate for the capital
program planned by the Company for the final quarter of 2003 and the first
quarter of 2004. In addition, Storm, as operator of most of its projects, will
have a significant working capital deficiency for the period of its winter
drilling program, which will reduce bank indebtedness during this period.
On behalf of the Board of Directors,
Matthew J. Brister Donald G McLean
President and C.E.O. Vice President and C.F.O.
Calgary, November 7, 2003
FORWARD LOOKING INFORMATION
Certain information regarding Storm set forth in this quarterly report,
including management's assessment of Storm's future plans and operations,
contains forward looking statements that involve substantial known and unknown
risks and uncertainties. These forward looking statements are subject to
numerous risks and uncertainties, certain of which are beyond Storm's control,
including the impact of general economic conditions, industry conditions,
volatility of commodity prices, currency fluctuations, imprecision of reserve
estimates, environmental risks, competition from other producers, the lack of
available qualified personnel or management, stock market volatility and
ability to access sufficient capital from internal and external sources.
Storm's actual results, performance or achievement could differ materially
from those expressed in, or implied by, these forward looking statements and,
accordingly, no assurance can be given that any events anticipated by the
forward looking statements will transpire or occur, or if any of them do, what
benefits Storm can derive therefrom.
Storm Energy Ltd.
Consolidated Balance Sheet
(UNAUDITED)
September 30, 2003 December 31, 2002
---------------------------------------
ASSETS
Current
Cash (note 4) 3,021,343 -
Accounts receivable 11,938,361 13,719,444
Prepaid expenses 940,103 742,512
---------------------------------------
15,899,807 14,461,956
---------------------------------------
Investment (note 8) 2,810,140 -
Property and equipment (note 2) 121,761,757 65,387,567
---------------------------------------
140,471,704 79,849,523
---------------------------------------
---------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued
liabilities 16,467,989 23,367,504
Long term debt (note 3) 62,155,694 22,061,767
Future income taxes 9,085,229 2,677,073
Provision for site restoration and
abandonment 1,799,392 1,264,557
Minority interest (note 4) 1,510,671 -
Shareholders' equity
Share capital (note 5) 36,396,021 26,533,076
Retained earnings 13,056,708 3,945,546
---------------------------------------
49,452,729 30,478,622
---------------------------------------
140,471,704 79,849,523
---------------------------------------
---------------------------------------
See accompanying notes.
Storm Energy Ltd.
Consolidated Statement of Income and Retained Earnings
(UNAUDITED)
Three Nine
months Period months Period
ended ended ended ended
September September September September
30, 2003 30, 2002 (1) 30, 2003 30, 2002 (1)
----------------------------------------------------
Revenue
Production 15,013,081 5,367,054 44,074,989 5,367,054
Royalties, net (3,206,784) (1,584,772) (10,526,201) (1,584,772)
Other 214,976 48,302 539,358 48,302
----------------------------------------------------
12,021,273 3,830,584 34,088,146 3,830,584
----------------------------------------------------
Expenses
Production 1,812,036 587,786 4,250,540 587,786
General and
administrative 1,058,596 399,133 3,271,315 399,133
General and
administrative cost
recovery (note 8) - (451,613) (2,100,000) (451,613)
Interest on long
term debt 1,092,984 95,516 2,461,457 95,516
Depletion and
depreciation 3,910,687 838,805 9,886,549 838,805
Provision for site
restoration and
abandonment 228,620 65,971 551,622 65,971
----------------------------------------------------
8,102,923 1,535,598 18,321,483 1,535,598
----------------------------------------------------
Income before income
and other taxes 3,918,350 2,294,986 15,766,663 2,294,986
Income and other
taxes
Future income tax 1,630,817 978,123 6,408,155 978,123
Capital taxes 77,963 - 247,346 -
----------------------------------------------------
1,708,780 978,123 6,655,501 978,123
----------------------------------------------------
Net income for the
period (note 6) 2,209,570 1,316,863 9,111,162 1,316,863
Retained earnings,
beginning of period 10,847,138 - 3,945,546 -
----------------------------------------------------
Retained earnings,
end of period 13,056,708 1,316,863 13,056,708 1,316,863
----------------------------------------------------
----------------------------------------------------
See accompanying notes.
(1) Period is from August 23, 2002 to September 30, 2002 (note 1).
Storm Energy Ltd.
Consolidated Statement of Cash Flows
(UNAUDITED)
Three Nine
months Period months Period
ended ended ended ended
September September September September
30, 2003 30, 2002 (1) 30, 2003 30, 2002 (1)
----------------------------------------------------
Operating activities
Net income for the
period 2,209,570 1,316,863 9,111,162 1,316,863
Add non-cash items:
Depletion and
depreciation 3,910,687 838,805 9,886,549 838,805
Provision for site
restoration and
abandonment 228,620 65,971 551,622 65,971
Future income taxes 1,630,817 978,123 6,408,155 978,123
----------------------------------------------------
Cash flow from
operations 7,979,694 3,199,762 25,957,488 3,199,762
Actual site restoration
paid (7,664) - (16,924) -
Net change in non-cash
working capital items
(note 7) (957,841) 854,568 (7,375,165) 854,568
----------------------------------------------------
7,014,189 4,054,330 18,565,399 4,054,330
----------------------------------------------------
Financing activities
(Decrease) increase in
long term debt (2,561,543) (1,771,286) 40,093,927 (1,771,286)
Minority interest 1,510,671 - 1,510,671 -
Issuance of flow
through shares, net (27,055) - 9,862,945 -
----------------------------------------------------
(1,077,927) (1,771,286) 51,467,543 (1,771,286)
----------------------------------------------------
Investing activities
Property and equipment
additions, net (4,618,916) (2,582,791) (69,070,740) (2,582,791)
Net change in non-cash
working capital items
(note 7) 1,703,997 299,747 2,059,141 299,747
----------------------------------------------------
(2,914,919) (2,283,044) (67,011,599) (2,283,044)
----------------------------------------------------
Change in cash during
the period 3,021,343 - 3,021,343 -
Cash, beginning of
period - - - -
----------------------------------------------------
Cash, end of period 3,021,343 - 3,021,343 -
----------------------------------------------------
----------------------------------------------------
See accompanying notes.
(1) Period is from August 23, 2002 to September 30, 2002 (note 1).
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
As at September 30, 2003
1. SIGNIFICANT ACCOUNTING POLICIES
Storm Energy Ltd. (the "Company") was incorporated on July 15, 2002 and
commenced operations on August 23, 2002 under a Plan of Arrangement entered
into by Storm Energy Inc., a Toronto Stock Exchange listed public company.
Under the Plan of Arrangement, various assets and obligations of Storm Energy
Inc., comprising certain producing and all undeveloped assets, were
transferred to Storm Energy Ltd., along with a pro rata share of debt. Storm
Energy Inc. continued as FET Resources Ltd., a wholly-owned subsidiary of
Focus Energy Trust.
The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiary, Redearth Energy Inc., its 60% share of
the Redearth Partnership, and its 50% interest in Storm Ventures International
Inc., and have been prepared by management in accordance with Canadian
generally accepted accounting principles and are consistent with the
accounting policies set out in the Company's 2002 audited consolidated
financial statements. These consolidated financial statements do not include
full note disclosure provided at fiscal year end and should be read in
conjunction with the Company's 2002 audited consolidated financial statements.
2. ACQUISITIONS & DISPOSITIONS
a) On April 30, 2003, the Company purchased certain petroleum and natural
gas properties in the Berrymore area of Central Alberta for the
purchase price of $3.9 million, which was funded by the Company's
credit facility. The effective date of the acquisition was December 1,
2002.
b) On May 1, 2003, the Company acquired certain producing, development
and exploratory petroleum and natural gas properties in North Central
Alberta and Northeast British Columbia, along with undeveloped land,
an inventory of 3-D seismic, and facilities. The purchase price was
$68.4 million, of which $59 million has been ascribed to the acquired
oil and natural gas reserves, with the remainder to undeveloped
property, seismic and facilities. The effective date of the
acquisition was May 1, 2003.
c) On June 2, 2003, the Company disposed of certain producing petroleum
and natural gas properties in North Central Alberta, along with an
interest in facilities. The proceeds of disposition were
$20.9 million. The effective date of the disposition was May 1, 2003.
d) On June 20, 2003, the Company disposed of certain producing petroleum
and natural gas properties in North Central Alberta. The proceeds of
disposition were $3.0 million with an effective date of July 1, 2003.
e) On September 26, 2003, the Company disposed of certain producing
petroleum and natural gas properties in Northern Alberta. The proceeds
of disposition were $1.6 million with an effective date of
September 1, 2003.
3. LONG TERM DEBT
On April 29, 2003, the Company entered into an underwritten syndicated
bank facility in the amount of $102.5 million, replacing the previous facility
of $45 million. The facility had two components: an extendible revolving
facility in the amount of $83 million and a bridge loan of $19.5 million. At
September 30, 2003, as a result of asset dispositions described above, the
bridge loan was fully repaid and the borrowing base associated with the
revolving facility was reduced to $68 million. The extendible revolving
facility can be drawn as Canadian and US prime or base rate loans, bankers'
acceptances or LIBOR-based loans. It is subject to annual review by the
lenders and if certain conditions are not satisfied the facility is
convertible into a two year term loan. Interest was initially payable on the
total facility at a rate of approximately 5.6%, with the rate being reduced
upon retirement of the bridge loan and the Company attaining certain debt to
cash flow ratios. These conditions have been satisfied and the current rate of
interest approximates 4.10%.
4. MINORITY INTEREST
On August 28, 2003 the Company incorporated Storm Ventures International
Inc. ("SVI"), a private corporation with the purpose of participating in oil
and gas activities outside of the Western Canadian Sedimentary Basin. On
September 2, 2003, the Company purchased 2,200,000 common shares in SVI for
$1,100,000, reflecting a 50% interest. The Company has also entered into an
agreement to subscribe for an additional 4,400,000 common shares of SVI at a
price of $0.50 per share to be payable on or before June 30, 2004.
Concurrently with the Company's purchase of a 50% interest, SVI raised an
additional $2,200,000 under a private placement memorandum, with participants
under the private placement committed to providing an additional $4,400,000 on
or prior to June 30, 2004. Failure by participants to provide the additional
funding will result in termination of their initial ownership position. The
investment in SVI has been consolidated into the accounts of the Company as
the Company has operating and financial control. The subscription for
additional shares has not been reflected in the accounts of the Company, as
the Company is not bound to the obligation. However, should such payment not
occur the Company will surrender its original investment.
The cash balance of $3,021,343 included in current assets is an asset of
SVI and cannot be aggregated with the Company's revolving long term debt
facility (note 3).
5. SHARE CAPITAL
Authorized
An unlimited number of voting common shares
An unlimited number of preferred shares
Issued
Number of Consideration
Shares $
------------------------------------------------------------------------
Common Shares
Issued upon incorporation - 100
Issued in connection with
Plan of Arrangement 28,590,302 26,532,976
---------------------------------
Balance as at December 31, 2002 28,590,302 26,533,076
Issue of flow through shares 1,300,000 10,400,000
Share issue costs - (537,055)
---------------------------------
Balance as at September 30, 2003 29,890,302 36,396,021
------------------------------------------------------------------------
------------------------------------------------------------------------
On June 26, 2003, the Company issued 1,300,000 flow through shares at a
price of $8.00 per share for proceeds of $10,400,000, before commission and
expenses. Under the terms of the share issue, the Company is required to
renounce to subscribers Canadian Exploration Expenditures in the amount of
$10,400,000, to be incurred by the Company prior to December 31, 2004. No
amounts were renounced up to September 30, 2003.
Stock Based Compensation Plan
The Company has a stock option plan under which it may grant, at the
Company's discretion, stock options to its directors, officers and employees
for the purchase of common shares. Under the plan, 3,000,000 shares are
reserved for issuance. The exercise price of each option equals the weighted
average market price of the five days prior to the date of grant. The options
vest in equal amounts at the end of each year for four years. The following
table summarizes the status of the Company's stock option plan as at
September 30, 2003 and December 31, 2002 and changes during the periods ended
on those dates:
September 30, 2003 December 31, 2002
------------------------------------------------------------------------
Shares Weighted-Average Shares Weighted-Average
(000's) Exercise Price ($) (000's) Exercise Price ($)
------------------------------------------------------------------------
Outstanding at
beginning of
period 2,455 5.37 - -
Granted 251 5.86 2,455 5.37
Repurchased (119) 5.37 - -
Cancelled (155) 5.37 - -
------------------------------------------------------------------------
Outstanding at
end of period 2,432 5.42 2,455 5.37
------------------------------------------------------------------------
The Company accounts for its stock-based compensation plan using the
intrinsic value of options granted. No costs have been recognized in the
consolidated financial statements for stock options granted to employees and
directors, as the market price of the shares was equivalent to the exercise
price of the options at the date of grant. Under Canadian generally accepted
accounting principles, the impact of using the fair value method on
compensation costs and recorded net income must be disclosed. If the fair
value method had been used, the Company's net income and net income per share
would approximate the following pro forma amounts:
($000's, except Three months Period ended Nine months Period ended
per share) ended Sept. 30, ended Sept. 30,
Sept. 30, 2003 2002 Sept. 30, 2003 2002
------------------------------------------------------------------------
Compensation costs 220 144 626 144
Net income:
As reported 2,210 1,317 9,111 1,317
Pro forma 1,990 1,173 8,485 1,173
Net income per
common share
Basic
As reported 0.07 0.05 0.31 0.05
Pro forma 0.07 0.04 0.29 0.04
Diluted
As reported 0.07 0.05 0.31 0.05
Pro forma 0.07 0.04 0.29 0.04
------------------------------------------------------------------------
The fair value of each option on the date of grant is determined using
the Black-Scholes option-pricing model with weighted average assumptions for
grants as follows:
------------------------------------------------------------------------
Risk free interest rate (%) 4.25
Expected lives (years) 5.00
Expected volatility (%) 40.00
Dividend per share 0.00
------------------------------------------------------------------------
6. PER SHARE AMOUNTS
Three months Period ended Nine months Period ended
ended Sept. 30, ended Sept. 30,
Sept. 30, 2003 2002 Sept. 30, 2003 2002
------------------------------------------------------------------------
Basic
Net income
per share ($) 0.07 0.05 0.31 0.05
Weighted average
number of shares
outstanding
(000's) 29,890 28,590 29,047 28,590
---------------------------------------------------
Diluted
Net income
per share ($) 0.07 0.05 0.31 0.05
Weighted average
number of shares
outstanding
(000's) 29,935 28,590 29,138 28,590
------------------------------------------------------------------------
The number of shares used to calculate diluted net income per share for
the nine months ended September 30, 2003 included the weighted average number
of shares outstanding of 29,047,445 (three months ended September 30, 2003 -
29,890,302) plus 90,463 (three months ended September 30, 2003 - 44,469)
shares related to the dilutive effect of stock options. Diluted net income per
share for the three months and nine months ended September 30, 2003, did not
include 241,000 shares under the stock option plan because the respective
exercise prices exceeded the average market price of the common shares and the
effect would have been anti-dilutive.
7. CASH FLOW INFORMATION
Three months Period ended Nine months Period ended
ended Sept. 30, ended Sept. 30,
($000's) Sept. 30, 2003 2002 Sept. 30, 2003 2002
------------------------------------------------------------------------
Accounts receivable 3,645 (4,638) 1,781 (4,638)
Prepaid expenses 280 19 (198) 19
Accounts payable
and accrued
liabilities (3,179) 5,773 (6,899) 5,773
--------------------------------------------------
Change in non-cash
working capital 746 1,154 (5,316) 1,154
--------------------------------------------------
--------------------------------------------------
These changes relate
to the following
activities:
Operating activities (958) 854 (7,375) 854
Investing activities 1,704 300 2,059 300
--------------------------------------------------
746 1,154 (5,316) 1,154
--------------------------------------------------
--------------------------------------------------
Interest paid 1,093 96 2,462 96
Income and capital
taxes paid 264 - 264 -
--------------------------------------------------
--------------------------------------------------
8. RELATED PARTY TRANSACTIONS
i. As part of the Plan of Arrangement (Note 1), the Company entered into
a Technical Services Agreement with FET Resources Ltd., a successor
company to Storm Energy Inc. Under this agreement, the Company
provided certain technical and administrative services in exchange
for a monthly fee of $350,000, which is recorded as a general and
administrative cost recovery. The Technical Services Agreement
expired
June 30, 2003.
ii. The Company sold its interest in certain producing oil and gas
properties in the Medicine River area of central Alberta, for fair
value proceeds of $2,800,000, to a private company, Rock Energy Ltd.,
in exchange for common shares amounting to an approximate 46%
ownership of the private company. Storm's shareholding of this
company has been recorded at cost, as the investment is temporary.
9. SUBSEQUENT EVENTS
i. On October 3, 2003, the Company disposed of certain non-producing
petroleum and natural gas properties in Northeastern British
Columbia. The proceeds of disposition were $2.5 million with an
effective date of July 1, 2003.
ii. The Company entered into an additional financial crude oil contract
with a major financial institution in order to protect future
earnings and cash flow from commodity price volatility. The terms of
the contract are as follows:
Volume
Exposure Hedged Pricing Term
------------------------------------------------------------------------
Oil 1,250 Bbls/d $US 31.25/bbl November 1, 2003 - December 31, 2003
$US 30.04/bbl January 1, 2004 - March 31, 2004
$US 28.62/bbl April 1, 2004 - June 30, 2004
------------------------------------------------------------------------
------------------------------------------------------------------------
Corporate Information
Senior Management
Matthew J. Brister
President & CEO
Brian Lavergne
Vice President, Operations & COO
Donald G. McLean
Vice President, Finance & CFO
P. Grant Wierzba
Vice President,
Corporate Development
Harry Ediger
Vice President, Land
Thomas N. Lindskog
Vice President, Exploration
Robert S. Tiberio
Vice President, Production
Eric Blakely
Exploration Manager
Adeline L. Roth
Controller
Directors
Matthew J. Brister
John A. Brussa
Stuart G. Clark
J. Keith Farries, Chairman
Gregory G. Turnbull
P. Grant Wierzba
Raymond I. Woods
Executive Offices
Suite 3300, 205 - 5th Avenue, SW
Calgary, Alberta T2P 2V7
Tel: (403) 264-3959
Fax: (403) 266-6209
Website: www.stormenergy.com
Stock Exchange Listing
Toronto Stock Exchange
Trading Symbol "SEM"
Solicitors
McCarthy Tétrault LLP
Burnet Duckworth & Palmer LLP
Calgary, Alberta
Auditors
Deloitte & Touche LLP
Calgary, Alberta
Bankers
C.I.B.C., Oil & Gas Group
TD Bank Financial Group
Calgary, Alberta
Registrar & Transfer Agent
Valiant Trust Company
Calgary, Alberta
/For further information: Matthew J. Brister, President and Chief Executive Officer, Donald G. McLean, Vice President and Chief Financial Officer, Telephone: (403) 264-3959, Facsimile: (403) 266-6209, www.stormenergy.com/
