CALGARY, ALBERTA--(CCNMatthews - Feb. 22, 2006) - Storm Exploration Inc ("Storm" or the "Company") (TSX:SEO) is pleased to report its financial and operational results for the three month and twelve month periods ended December 31, 2005, the first full year of operations following the emergence in June 2004 of Storm from the Plan of Arrangement involving the sale of Storm Energy Ltd. to Harvest Energy Trust.
ACCOMPLISHMENTS
- Maintained commitment to per share growth as evidenced by 2005 capital expenditures totalling $42.6 million, funded largely by cash flow, which resulted in production growing from 2,750 Boe per day at the start of 2005 to approximately 4,000 Boe per day at year end.
- Grew production to an average of 3,324 Boe per day in 2005, an increase of 143% over average production for the first six months of operations ending December 31, 2004.
- Generated cash flow of $38.0 million or $0.93 per diluted share during 2005, an increase from cash flow per diluted share of $0.14 in the period to December 31, 2004, the first six months of oil and gas operations.
- Improved balance sheet strength with debt and working capital deficiency of $33.2 million at year end, being a debt to fourth quarter annualized cash flow ratio of 0.6.
- Drilled 25 wells (15.2 net) with a 72% success rate resulting in 13 gas wells (7.8 net) and 5 oil wells (3.0 net).
- Expanded the inventory of opportunities to 65 drilling locations and 15 exploitation projects comprised of workovers, reactivations and recompletions.
- Added proved reserves for $14.06 per Boe and proved plus probable reserves for $11.45 per Boe (both including future development capital and excluding acquisitions, dispositions, and revisions in accordance with NI 51-101 requirements).
- Achieved a recycle ratio of 2.7 based on proved plus probable reserve additions and a cash flow netback of $31.31 per Boe.
- Increased net income to $0.65 per diluted share in 2005 compared to $0.18 per diluted share for the first six months of oil and gas operations ended December 31, 2004. Net income per share in 2005 included investment gains of $0.13 per diluted share. Net income per share in 2004 included a non cash tax recovery of $0.12 per diluted share.
- Generated record results in the fourth quarter of 2005 including:
- average daily production of 3,665 Boe, an increase of 112% over production for the final quarter of 2004 and 14% over the third quarter of 2005.
- cash flow of $12.9 million or $0.32 per diluted share, an increase of 273% over the final quarter of 2004 and 25% over the third quarter of 2005.
- net income of $13.5 million or $0.33 per diluted share, an increase of 142% over the final quarter of 2004 and 114% over the third quarter of 2005. Net income included investment gains of $5.3 million, or $0.13 per diluted share.
- capital expenditures totalled $15.3 million which included the drilling of 12 wells (7.2 net) with a 75% success rate.
- Maintained operational momentum into the first quarter of 2006 through the drilling of eight wells (4.6 net), of which seven wells (4.0 net) have been cased for production resulting in a success rate of 88%. Quarter end production is expected to exceed 4,500 Boe per day once these wells are tied in. The remainder of the Company's winter drilling program will be completed by the end of March and includes the drilling of seven additional wells (4.2 net).
HIGHLIGHTS - Unaudited
in $CDN Three Three Fourteen
except common Months Months Year Months
share and Ended Ended Ended Ended
volumetric December 31, December 31, December 31, December 31,
amounts 2005 2004 2005 2004
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Financial
Gas sales 19,758,000 5,087,000 53,374,000 7,443,000
NGL sales 1,835,000 1,541,000 8,206,000 2,612,000
Oil sales 1,935,000 525,000 7,919,000 869,000
Royalty Income 205,000 252,000 846,000 490,000
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Production
Revenue 23,733,000 7,405,000 70,345,000 11,414,000
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Cash flow from
operations 12,886,000 3,453,000 37,992,000 5,114,000
Per share -
basic 0.33 0.10 0.98 0.15
Per share -
diluted 0.32 0.09 0.93 0.14
Net income 13,507,000 5,586,000 26,533,000 6,496,000
Per share -
basic 0.35 0.16 0.68 0.19
Per share -
diluted 0.33 0.16 0.65 0.18
Capital
expenditures,
net of
dispositions 15,297,000 47,882,000 42,577,000 57,550,000
Debt, including
working capital
deficiency 33,248,000 29,225,000 33,248,000 29,225,000
Weighted
average common
shares
outstanding
Basic 39,163,000 34,376,000 38,838,000 34,376,000
Diluted 40,905,000 35,755,000 40,810,000 35,755,000
Common shares
outstanding
Basic 39,184,000 38,673,000 39,184,000 38,673,000
Fully Diluted 42,012,000 41,582,000 42,012,000 41,582,000
Operations
Oil Equivalent
(6:1)
Barrels of oil
equivalent 337,000 159,000 1,213,000 251,000
Barrels of oil
equivalent per
day 3,665 1,727 3,324 1,366
Average selling
price ($CDN per
BOE) $ 69.78 $ 45.09 $ 57.29 $ 43.47
Royalties 27.1% 28.0% 25.4% 29.9%
Gas production
Thousand cubic
feet 1,687,000 738,000 5,824,000 1,136,000
Thousand cubic
feet per day 18,338 8,019 15,957 6,176
Average selling
price ($CDN per
mcf) $ 11.71 $ 6.91 $ 9.16 $ 6.55
NGL Production
Barrels 27,000 27,000 125,000 47,000
Barrels per day 299 293 342 255
Average selling
price ($CDN per
barrel) $ 66.80 $ 57.17 $ 65.71 $ 55.76
Oil Production
Barrels 28,000 9,000 117,000 15,000
Barrels per day 310 97 322 82
Average selling
price ($CDN per
barrel) $ 67.90 $ 58.83 $ 67.40 $ 57.61
Wells drilled
Gross 12.0 9.0 25.0 14.0
Net 7.2 7.5 15.2 10.1
Management's Discussion & Analysis and financial statements for the year ended December 31, 2005 are appended to this press release.
CORE AREA REVIEW
Peace River Arch, North West Alberta and North East British Columbia
The Peace River Arch is the largest of Storm's core areas, with current net production of approximately 3,000 Boe per day. Overall for 2005, Storm drilled 18 wells at a 78% success rate, resulting in ten gas wells (6.9 net) and four oil wells (2.3 net). During the fourth quarter, Storm was successful on 67% of the nine wells that were drilled at Parkland, Pouce Coupe, and Teepee which resulted in five gas wells (3.5 net) and one oil well (0.7 net). The five gas wells have been tied in and have added incremental production of approximately 600 Boe per day net to Storm. Storm is waiting on a service rig to complete the oil well.
The largest property within the Peace River Arch core area is Parkland, with current net production of 950 Boe per day. Storm was successful on 89% of the nine wells that were drilled at Parkland during 2005, including 100% success on the four wells that were drilled during the fourth quarter. Production rates on successful wells appear to be stabilizing in a range of 300 to 1,750 mcf per day with a typical well stabilizing at approximately 600 mcf per day. Storm's drilling inventory at Parkland has grown considerably over the last year and now includes 14 step-out locations and. In addition to the step-outs, an initial infill program consisting of three wells will be drilled on reduced spacing of two wells per section.
During 2006, a significant amount of activity is planned in this core area including:
- Drilling 30 wells with 13 wells (9.8 net) at Parkland, seven wells (4.1 net) at Teepee, seven wells (4.4 net) at Pouce Coupe and three wells (1.5 net) at Buick Creek. Storm expects to drill five of these wells by the end of the first quarter.
- Installing a second 1,000 horsepower compressor at Parkland to increase the gross capacity from nine mmcf per day to 18 mmcf per day.
- Shooting a 37 square kilometre 3-D seismic program in the first quarter.
Cabin-Kotcho-Junior, North East British Columbia
Net production from this area is currently 700 Boe per day.
To date in 2006, Storm has participated in the following activities:
- shot two 3-D seismic programs covering 50 square kilometres,
- drilled two wells (0.85 net) targeting the high impact Slave Point formation with 100% success,
- tied in a standing gas well (0.25 net) at Cabin that was drilled last winter, which is producing at a gross rate of 1.3 mmcf per day.
- started construction of the pipeline to tie-in the first successful Slave Point gas well (0.35 net), which is expected to begin production shortly at a rate of 2 to 3 mmcf per day (gross).
The second successful Slave Point gas well (0.5 net) flowed gas at a rate of 3.2 mmcf per day after completion and will be tied in by April, 2006.
Storm is currently drilling the third and final well (0.5 net) in this winter's program, which is also targeting the Slave Point formation.
Third quarter production from this area will be affected by an outage at the Fort Nelson Gas Plant which will result in all of Storm's gas production from this area being shut-in for 18 days in July.
Red Earth, Alberta
Current net production from this area has grown to 200 Boe per day as a result of 100% drilling success on two wells (1.1 net) drilled in the fourth quarter of 2005. One well (0.55 net) is currently producing 175 bopd net to Storm from the Granite Wash formation and the second well is awaiting a service rig to complete the Slave Point formation.
To date in the first quarter of 2006, Storm has drilled four wells (2.65 net) resulting in three oil wells (2.1 net) and one dry hole (0.55 net). Two of these oil wells (1.6 net) have been completed in the Granite Wash formation and both are expected to begin producing shortly at a total rate of 155 bopd net to Storm. The third well will be completed shortly in the Granite Wash formation.
Before the end of the first quarter, another two wells (1.1 net) will be drilled, targeting a shallow gas zone.
During the remainder of 2006, Storm expects to drill four more wells (2.2 net) targeting the Granite Wash light oil formation and two wells (2.0 net) targeting a shallow gas zone.
Brazeau-Pembina, West Central Alberta
Storm's net production from this area is currently 300 Boe per day. This is curtailed from production capacity of 400 Boe per day due to a mechanical failure at the mid-stream gas plant that processes Storm's gas volumes.
Storm participated in drilling and casing one gas well (0.4 net), targeting the Edmonton sand formation, during the fourth quarter. The well was not productive after completion.
During the first quarter of 2006, Storm participated in the drilling of one successful well (0.5 net) that has been completed in the Notikewin formation and tested gas at a rate of four mmcf per day. This well will be tied in shortly and is expected to produce at a stabilized rate of one mmcf per day. An additional well will be drilled targeting the Nisku formation, on lands that were farmed out in the Lodgepole area with the operator paying 100% of drilling and completion costs to earn a 60% working interest after payout.
Storm Ventures International Inc.
Storm owns 16% of the common shares of Storm Ventures International ("SVI"), a Calgary based, private energy company focused on international exploration and exploitation opportunities.
In Tunisia, SVI completed the drilling and evaluation of its first exploratory test on the 1.25 million acre Remada Sud permit in southern Tunisia. The well was suspended after recovering non-commercial quantities of oil from the Silurian Acacus formation. SVI is evaluating up to five more prospects on this permit. SVI is also planning to shoot a 3-D seismic program in the 1.1 million acre offshore Hammamet block later in 2006.
In the North Sea, SVI's 50% owned affiliate, Silverstone Energy Limited, has entered into a significant farm-in in the highly prolific North Sea V-Fields area with the first of two commitment wells to be spudded in March, 2006. Eight prospects have been identified on the farm-in lands, with each having the potential for 60 to 80 Bcf of gas in place.
In November 2005, SVI completed a private placement raising approximately $40 million before issue costs at a price of $4 per share, which resulted in a reduction of Storm's ownership from 26% to 16%. As shares were issued under the private placement at a price per share greater than the carrying amount per share of Storm's existing shareholding, accounting rules require that a dilution gain be recognized, which amounted to $3.6 million or $0.09 per diluted share.
Reserves at December 31, 2005
Storm's year-end reserve evaluation effective December 31, 2005 was prepared by Paddock Lindstrom & Associates Limited ('Paddock'). Paddock has evaluated 100% of Storm's reserves. The Paddock price forecast at December 31, 2005 was used to determine all estimates of future net revenue (also referred to as net present value or NPV). Storm's Reserves Committee, comprised of independent and appropriately qualified directors, has reviewed and approved the evaluation prepared by Paddock.
Highlights
- Proved reserves totalled 7.025 million Boe (Mmboe) at December 31, 2005, an increase of 23% per fully diluted share over proved reserves at December 31, 2004.
- Proved plus probable reserves totalled 9.079 Mmboe at December 31, 2005, an increase of 18% per fully diluted share over proved plus probable reserves at December 31, 2004.
- Total proved finding and development costs amounted to $14.06 per Boe. As per NI 51-10 requirements, changes to future development costs of properties were included in the calculation and the effect of acquisitions, divestitures, and revisions have been excluded. The comparable amount for the prior period ending December 31, 2004 was $18.36.
- Total proved plus probable finding and development costs amounted to $11.45 per Boe. As per NI 51-101 requirements, changes to future development costs of properties were included in the calculation and the effects of acquisitions, divestitures, and revisions have been excluded. The comparable amount for the prior period ending December 31, 2004 was $14.20.
- Total proved plus probable 10% NPV amounted to $187.0 million. The comparable amount at December 31, 2004 was $92 million.
- Proved developed producing reserves represent 88% of total proved reserves and 68% of total proved plus probable reserves. Comparable amounts at December 31, 2004 were 78% and 58%.
- Storm's drilling program (discoveries) added 2.1 Boe of proved plus probable reserves for each Boe that was produced during 2005.
- Storm's recycle ratio was 2.7 times for 2005 using the 2005 cash flow netback of $31.31 per Boe and using proved plus probable reserve additions, which include future development capital and exclude the effects of acquisitions, dispositions and revisions.
SUMMARIZED RESERVE INFORMATION AT DECEMBER 31, 2005
GROSS COMPANY INTEREST RESERVES
(Before deduction of royalties payable, not including royalties
receivable)
--------------------------------------------------
Light Crude Sales 6:1 Oil
Oil Gas NGLs Equivalent
(Mbbls) (mmcf) (Mbbls) (Mboe)
--------------------------------------------------
Proved
Producing 388 31,215 593 6,184
Proved
Non-Producing - 3,243 33 573
--------------------------------------------------
Total Proved
Developed 388 34,458 626 6,757
Proved
Undeveloped - 1,603 1 268
--------------------------------------------------
Total Proved 388 36,061 627 7,025
Probable
Additional 119 10,699 152 2,054
--------------------------------------------------
Total Proved
plus Probable 507 46,760 779 9,079
--------------------------------------------------
--------------------------------------------------
GROSS COMPANY INTEREST RESERVE RECONCILIATION FOR 2005
(Gross company interest reserves before deduction of royalties
payable)
----------------------------------
6:1 Oil Equivalent (Mboe)
Proved
Total plus
Proved Probable Probable
----------------------------------
December 31, 2004 - Opening Balance 5,713 2,012 7,725
Acquisitions 465 110 575
Revisions - existing properties (127) (562) (689)
Discoveries 2,009 459 2,468
Extensions 581 221 802
Dispositions (409) (186) (595)
Production (1,207) 0 (1,207)
----------------------------------
December 31, 2005 - Closing
Balance 7,025 2,054 9,079
----------------------------------
----------------------------------
TOTAL PROVED FINDING AND DEVELOPMENT SINCE
COST - per NI 51-101 2005 2004 INCEPTION
--------------------------------------------------------------------
Capital expenditures excluding
acquisitions and
dispositions - $'000 $41,452 $19,864 $61,316
Net change from previously
allocated future development
capital - $'000 ($ 5,044) ($ 2,403) ($ 7,447)
Total capital including the
net change in future
capital - $'000 $36,408 $17,461 $53,869
Reserve additions excluding
acquisitions, dispositions and
revisions - MBoe 2,590 951 3,541
Total Proved Finding and
Development Costs - per Boe $ 14.06 $ 18.36 $ 15.21
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TOTAL PROVED + PROBABLE FINDING AND SINCE
DEVELOPMENT COST - per NI 51-101 2005 2004 INCEPTION
--------------------------------------------------------------------
Capital expenditures excluding
acquisitions and
dispositions - $'000 $41,452 $19,864 $61,316
Net change from previously
allocated future development
capital - $'000 ($ 4,001) ($ 2,463) ($ 6,464)
Total capital including the
net change in future
capital - $'000 $37,451 $17,401 $54,852
Reserve additions excluding
acquisitions, dispositions and
revisions - MBoe 3,270 1,226 4,496
Total Proved plus Probable
Finding and Development Costs
- per Boe $ 11.45 $ 14.20 $ 12.20
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TOTAL PROVED FINDING, DEVELOPMENT
AND ACQUISITION COST
- All In, which includes Acquisitions, SINCE
Dispositions and Revisions 2005 2004 INCEPTION
--------------------------------------------------------------------
Capital expenditures including
acquisitions and
dispositions - $'000 $42,577 $57,550 $100,127
Net change from previously
allocated future development
capital - $'000 ($ 5,044) $ 5,519 $ 475
Total capital including the
net change in future
capital - $'000 $37,533 $63,069 $100,602
Reserve additions including
acquisitions, dispositions and
revisions - MBoe 2,519 2,744 5,263
Total Proved Finding and
Development Costs - $/Boe $ 14.90 $ 22.98 $ 19.11
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TOTAL PROVED + PROBABLE FINDING
DEVELOPMENT AND ACQUISITION COST
- All in, which includes Acquisitions, SINCE
Dispositions and Revisions 2005 2004 INCEPTION
--------------------------------------------------------------------
Capital expenditures including
acquisitions and
dispositions - $'000 $42,577 $57,550 $100,127
Net change from previously
allocated future development
capital - $'000 ($ 4,001) $ 5,815 $ 1,814
Total capital including the
net change in future
capital - $'000 $38,576 $63,365 $101,941
Reserve additions including
acquisitions, dispositions and
revisions - MBoe 2,561 3,931 6,492
Total Proven plus Probable
Finding and Development
Costs - $/Boe $ 15.06 $ 16.12 $ 15.70
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There are no finding and development costs for 2003 and there is no 3 year average to report as the company began oil and gas operations effective July 1, 2004.
Proven plus probable reserve revisions can mainly be attributed to deteriorating well performance at Brazeau. Wells have underperformed in comparison to volumetric estimates which had to be relied upon, given the limited performance information from offsets producing from the same formation in the area.
Total exploration and development costs incurred in the most recent financial year and the change during that year in estimated future development costs, generally will not reflect total finding and development costs related to reserve additions for that year.
NET PRESENT VALUE SUMMARY AS AT DECEMBER 31, 2005
Benchmark oil and NGL prices used are adjusted for quality of oil or NGL produced and for transportation costs.
The calculated NPVs include a deduction for estimated future well abandonment costs.
Alberta Royalty Tax Credit is included in the calculated NPVs.
--------------------------------------------------------
DISCOUNTED DISCOUNTED DISCOUNTED DISCOUNTED
UNDISCOUNTED AT 5% AT 10% AT 15% AT 20%
$'000 $'000 $'000 $'000 $'000
--------------------------------------------------------
Proved
Producing $ 191,952 $ 162,268 $ 142,504 $ 128,162 $ 117,163
Proved
Non-Producing 19,891 14,880 12,167 10,459 9,268
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Total Proved
Developed 211,843 177,148 154,671 138,621 126,431
Proved
Undeveloped 4,926 4,157 3,588 3,147 2,795
--------------------------------------------------------
Total Proved 216,769 181,305 158,259 141,768 129,226
Probable
Additional 56,126 38,170 28,819 23,093 19,226
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Total Proved
plus
Probable $ 272,895 $ 219,475 $ 187,078 $ 164,861 $ 148,452
--------------------------------------------------------
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Outlook for 2006
Storm has significant exposure to natural gas prices (77% of 2005 revenue was from natural gas) which were at a historically high level of Cdn $10.80 per GJ in the fourth quarter of 2005. Prices have since dropped to Cdn $7.00 per GJ, a level below the average 2005 price (Cdn $8.27 per GJ) and are likely to remain at this level in the short term given historically high levels of natural gas in storage due to this winter being warmer than normal. However, longer term, prices are likely to continue to trend higher given that many mature producing regions are experiencing irreversible declines and additions to supply continue to be more and more costly each year.
Storm's current production has grown to approximately 4,200 Boe per day mainly as a result of fourth quarter drilling success. Production is expected to exceed 4,500 Boe per day by the end of the first quarter as successful wells from this winter's drilling program are brought on production.
Looking forward, Storm's 2006 capital expenditure budget of $50 million is expected to be funded by internally generated cash flow. A total of 45 wells (28 net) are expected to be drilled with 15 wells (8.8 net) planned for the first quarter. This level of activity and capital investment is expected to result in production increasing to 5,000 Boe per day by the end of 2006, an increase of 360% on a per share basis (fully diluted) since inception in July 2004.
Storm's 2006 business plan will continue to emphasize:
- per share financial and operational growth.
- balanced growth from exploration, exploitation, and acquisition activities.
- a diversified drilling program targeting low to medium risk play types with a modest component directed towards higher risk, higher impact opportunities.
- maintaining balance sheet strength in order to be able to pursue strategic property acquisitions that can expand existing core areas and introduce new ones.
With a growing opportunity portfolio that includes 65 drilling locations, 15 exploitation projects, and a large undeveloped land base, Storm is well positioned for further success in 2006 and beyond.
I would like to thank all of Storm's employees for their hard work during 2005, Storm's directors for their valuable advice and guidance and Storm's shareholders for their continued support.
A conference call to discuss the results for the fourth quarter and the year will be held at 9:00 AM Calgary time on Thursday February 23, 2006. The call in number is 1-888-458-1598, except for Calgary callers who should use 232-6311. The passcode is 1713120#.
Respectfully,
Brian Lavergne, President and Chief Executive Officer
February 22, 2006
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND OPERATING RESULTS FOR THE YEAR AND QUARTER ENDED DECEMBER 31, 2005
Set out below is management's discussion and analysis of financial and operating results for Storm (or the "Company") for the year and quarter ended December 31, 2005. It should be read in conjunction with the audited financial statements for the year ended December 31, 2005 and other operating and financial information included in this press release, and is based on information up to February 22, 2005.
Introduction and Limitations:
Basis of Presentation - The financial data presented below has in part been derived from the Company's annual audited financial statements prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") and in accordance with accounting policies as set out in footnote 2 to the Company's financial statements. The reporting and the measurement currency is the Canadian dollar.
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.
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 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.
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 and funds from operations per share 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.
Basis of Presentation - Storm began oil and gas operations effective July 1, 2004 as a participant in a Plan of Arrangement entered into by Harvest Energy Trust, Harvest Operations Corp., Storm Energy Ltd. and the Company (the "Plan"). Under the Plan, various assets formerly held by Storm Energy Ltd. were transferred to the Company. The Company's year end was changed from October 31 to a calendar year end effective December 31, 2004, with the result that for purposes of financial reporting continuity, comparative financial statements are provided for the fourteen month period ended December 31, 2004. However, as a result of circumstances related to the Company's prior business and to the Company's participation in the Plan, comparative historical financial information actually presented in this Management's Analysis and Discussion is for oil and gas operations for the six months ended December 31, 2004 only.
PRODUCTION AND REVENUE
Average Daily Production
--------------------------------------------------------------------
Year Ended Six Months to
Period December 31, 2005 December 31, 2004
--------------------------------------------------------------------
Natural gas (Mcf/d) 15,957 6,176
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Natural gas liquids (Bbls/d) 342 255
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Crude oil (Bbls/d) 322 82
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Total (Boe/d) 3,324 1,366
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For the year ended December 31, 2005, the Company's production averaged 3,324 Boe per day, an increase of 1,958 Boe per day, or 143%, over average production for the six months ended December 31, 2004. The year-on-year increase in production came from the Company's successful drilling and exploitation programs throughout 2005, coupled with a major acquisition completed in December 2004. Production per million shares outstanding in 2005 averaged 87 Boe per day, compared to 40 Boe per day for the six months to December 31, 2004.
Production as of the date of this report approximated 4,200 Boe per day. This represents growth of 370% since inception of oil and gas operations in July 2004.
Production Profile and Per Unit Prices
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Year Ended Six Months to
Period December 31, 2005 December 30, 2004
---------------------------------------------------------------------
Average Average
Selling Selling
Percentage Price Before Percentage Price Before
of Total Boe Transportation of Total Boe Transportation
Production Costs Production Costs
---------------------------------------------------------------------
Natural gas 80% $ 9.16/mcf 75% $ 6.55/mcf
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Natural gas
liquids 10% $65.71/bbl 19% $55.76/bbl
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Crude oil 10% $67.40/bbl 6% $57.61/bbl
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Per Boe $ 57.29 $ 43.47
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The Company's production base is largely natural gas and associated liquids. For the year to December 31, 2005, the AECO C spot price for natural gas averaged Cdn $8.27 per GJ, compared to Cdn $6.07 for the six months to December 31, 2004, an increase of 37%. The Company's average realized price was higher than the annual average, as higher benchmark prices in the final months of the year coincided with steadily increasing production volumes. In addition the Company generally produces higher heat content gas, which increases the price per mcf. For crude oil, Edmonton par price averaged Cdn $69.85 per barrel for 2005, compared to Cdn$56.94 for the second half of 2004, an increase of 23%. Natural gas liquids prices tended to track crude oil prices throughout 2005 and also in 2004.
Production by Area - Boe per Day
------------------------------------------------------------
Year Ended Six Months to As at
December 31, December 30, July 1,
Period 2005 2004 2004
------------------------------------------------------------
Peace River Arch 1,984 394 34
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Cabin-Kotcho-Junior 774 404 340
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Red Earth 38 60 60
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Brazeau-Pembina 528 508 466
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Total 3,324 1,366 900
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The above sets out the average production from each of the Company's core areas and the evolution of the Company's production base since commencement of operations on July 1, 2004. Within the Peace River Arch area, production from the Parkland property averaged 581 Boe per day for the year ended December 31, 2005, compared to 105 Boe per day for the six months to December 31, 2004.
Production Revenue
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Year Ended Six Months to
Period December 31, 2005 December 30, 2004
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Natural gas $53,374,000 $ 7,443,000
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Natural gas liquids 8,206,000 2,612,000
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Crude oil 7,919,000 869,000
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Revenue from product sales $69,499,000 $10,924,000
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Royalty income 846,000 490,000
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Total Production Revenue $70,345,000 $11,414,000
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For the year ended December 31, 2005, revenue from product sales before royalty income and transportation costs increased by 537% over the six months to December 31, 2004. Of this increase, volume increases represented 383% and price increases 154%.
Royalty income for each of the periods above is derived from ownership of overriding royalties in each of the Company's core areas.
ROYALTIES
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Year Ended Six Months to
Period December 31, 2005 December 30, 2004
--------------------------------------------------------------------
Charge for period $17,714,000 $3,270,000
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Royalties as a percentage
of revenue from product sales
- Crown 21.9% 24.0%
- Overriding 3.5% 5.9%
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Total 25.4% 29.9%
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--------------------------------------------------------------------
Per Boe $ 14.60 $ 13.01
--------------------------------------------------------------------
--------------------------------------------------------------------
The increase in the royalty charge and the royalty charge per Boe reflects both additional production volumes and higher product prices. The reduction in Crown royalty rate for the year ended December 31, 2005 in comparison to the prior period, and in the context of higher product prices, is attributable to royalty holidays on new wells in 2005, which have now expired.
PRODUCTION COSTS
--------------------------------------------------------------------
Year Ended Six Months to
Period December 31, 2005 December 30, 2004
--------------------------------------------------------------------
Charge for period $8,757,000 $1,559,000
--------------------------------------------------------------------
Percentage of production
revenue 12.45% 13.65%
--------------------------------------------------------------------
Per Boe $ 7.22 $ 6.20
--------------------------------------------------------------------
--------------------------------------------------------------------
Total production costs for 2005 have increased in response to growing product sales, although production costs have decreased as a percentage of total revenue, reflecting increased product volumes. Nevertheless, in common with most producers, the Company has been faced with increasing per unit operating costs. Cost containment will continue to be an operational focus throughout 2006.
Storm's cash costs, which include production, cash general and administrative, interest and large corporations tax amounted to $9.74 per boe for 2005 compared to $9.70 for the six months ended December 31, 2004.
TRANSPORTATION COSTS
--------------------------------------------------------------------
Year Ended Six Months to
Period December 31, 2005 December 30, 2004
--------------------------------------------------------------------
Charge for period $2,836,000 $623,000
--------------------------------------------------------------------
Percentage of production
revenue 4.0% 5.5%
--------------------------------------------------------------------
Per Boe $ 2.34 $ 2.48
--------------------------------------------------------------------
--------------------------------------------------------------------
Increased volumes have resulted in increases in total transportation costs, although, as a result of higher product prices, transportation costs have fallen as a percentage of production revenue. Transportation costs per Boe reflect the Company's increasing natural gas production, to which, in comparison to crude oil, higher transportation costs normally apply.
FIELD NETBACKS
Details of field netbacks per commodity unit are as follows:
-----------------------------------------------------------------------
Year Ended Six Months to
Period December 31, 2005 December 30, 2004
-----------------------------------------------------------------------
Natural Natural
Crude Gas Natural Crude Gas Natural
Oil Liquids Gas Total Oil Liquids Gas Total
($ Bbl) ($ Bbl) ($ Mcf) ($ Boe) ($ Bbl) ($ Bbl) ($ Mcf) ($ Boe)
-----------------------------------------------------------------------
Product
sales $67.40 $65.71 $9.16 $57.29 $57.61 $55.76 $6.55 $43.47
-----------------------------------------------------------------------
Royalty
income 1.58 0.30 0.11 0.70 5.23 0.13 0.36 1.95
-----------------------------------------------------------------------
Royal-
ties (8.91) (23.28) (2.36) (14.60) (18.19) (21.36) (1.76) (13.01)
-----------------------------------------------------------------------
Production
costs (6.39) - (1.37) (7.22) (6.25) - (1.29) (6.20)
-----------------------------------------------------------------------
Transpor-
tation (1.54) (1.57) (0.42) (2.34) (1.39) (1.12) (0.48) (2.48)
-----------------------------------------------------------------------
Field
net-
backs $52.14 $41.16 $5.12 $33.83 $37.01 $33.41 $3.38 $23.73
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Production costs for natural gas liquids are included with natural gas costs.
Average revenue per Boe increased by 32% in 2005 compared to the final six months of 2004. Royalties and production costs also increased in 2005 over 2004 but not pro rata; accordingly, field netbacks increased by 43%. In 2005, field netbacks amounted to 59% of revenue per Boe, compared to 55% in 2004.
INTEREST
--------------------------------------------------------------------
Year Ended Six Months to
Period December 31, 2005 December 30, 2004
--------------------------------------------------------------------
Charge for period $1,055,000 $146,000
--------------------------------------------------------------------
Per Boe $ 0.87 $ 0.58
--------------------------------------------------------------------
--------------------------------------------------------------------
In 2004, the Company had no significant bank debt outstanding until December which accounts for the considerable increase in the total interest charge between 2005 and the prior reporting period. Average bank debt outstanding during 2005 approximated $21,000,000.
GENERAL AND ADMINISTRATIVE COSTS
Total costs:
--------------------------------------------------------------------
Year Ended Six Months to
Period December 31, 2005 December 30, 2004
--------------------------------------------------------------------
Gross general and
administrative costs $3,812,000 $1,436,000
--------------------------------------------------------------------
Capital and operating recoveries (1,545,000) (594,000)
--------------------------------------------------------------------
Net general and administrative
costs 2,267,000 842,000
--------------------------------------------------------------------
Stock based compensation costs (381,000) (126,000)
--------------------------------------------------------------------
Cash general and
administrative costs $1,886,000 $716,000
--------------------------------------------------------------------
--------------------------------------------------------------------
Costs per Boe:
--------------------------------------------------------------------
Year Ended Six Months to
Period December 31, 2005 December 30, 2004
--------------------------------------------------------------------
Gross general and
administrative costs $3.15 $5.72
--------------------------------------------------------------------
Capital and operating recoveries (1.28) (2.36)
--------------------------------------------------------------------
Net general and administrative
costs 1.87 3.36
--------------------------------------------------------------------
Stock based compensation costs (0.31) (0.51)
--------------------------------------------------------------------
Cash general and administrative
costs per Boe $1.56 $2.85
--------------------------------------------------------------------
--------------------------------------------------------------------
Gross general and administrative costs for the year ended December 31, 2005 increased by 33% when compared to an annualized amount for the period ended December 31, 2004. Increases were primarily due to staff additions. These cost increases were offset in part by increased capital and operating recoveries arising from the Company's growing field programs. Measured per Boe, gross general and administrative costs fell by 45% in 2005 when compared to the prior period.
The Company does not capitalize general and administrative or exploration overhead. Cash general and administrative costs per Boe for future quarters should be lower, due to higher capital and operating recoveries and an increased production base. Nevertheless, although Storm's general and administrative costs are low, the Company faces industry - wide pressures on many components of its cost structure.
DEPLETION, DEPRECIATION AND ACCRETION
--------------------------------------------------------------------
Year Ended Six Months to
Period December 31, 2005 December 30, 2004
--------------------------------------------------------------------
Depreciation and depletion
charge for period $16,121,000 $2,745,000
--------------------------------------------------------------------
Accretion charge for period 216,000 40,000
--------------------------------------------------------------------
Total $16,337,000 $2,785,000
--------------------------------------------------------------------
Total per Boe $ 13.47 $ 11.08
--------------------------------------------------------------------
--------------------------------------------------------------------
The increase in the charge for depreciation, depletion and accretion for the year ended December 31, 2005 when compared to the charge for the six months to December 31, 2004, is due to higher production volumes offset by a higher reserve base used in the calculation of depletion.
Accretion represents the increase in the present value of the Company's asset retirement obligation. The discount rate used is 8%.
INVESTMENT GAINS
Storm realized investment gains as follows:
--------------------------------------------------------------------
Year Ended Six Months to
Period December 31, 2005 December 30, 2004
--------------------------------------------------------------------
Gain on sale of investment $1,684,000 -
--------------------------------------------------------------------
Dilution gain on share issue
by Storm Ventures
International Inc. 3,575,000 -
--------------------------------------------------------------------
Total $5,259,000 -
--------------------------------------------------------------------
--------------------------------------------------------------------
During 2005, the Company entered into an asset sale and farmout agreement with a private industry partner, the terms of which included the investment by Storm of $100,000 in common shares. Subsequently the investee company completed an initial public offering and Storm sold its investment for proceeds, after transaction costs, of $1,784,000.
The Company began 2005 with a 26% ownership position in Storm Ventures International Inc. ("SVI"), a private company focused on international exploration and development opportunities. During 2005 SVI completed a private placement offering of common shares, with the Company participating in a rights offering component of the private placement. Nevertheless, Storm's equity interest in SVI was reduced from 26% to 16%. As the price per share of the private placement by SVI was higher than Storm's initial carrying value per share, generally accepted accounting principles mandate the recognition of a non-cash dilution gain of $3,575,000. Storm's participation in the private placement by SVI amounted to $2,000,000, largely funded by proceeds from the sale of the above common share investment. This is consistent with the Company's strategy that its investment in SVI does not conflict with its domestic investment programs.
INCOME AND OTHER TAXES
At December 31, 2005, the Company had operating tax losses carried forward estimated to be $15,000,000 which will begin to expire in 2007. In addition, the Company has a capital tax loss in the amount of $10,000,000 available for application against future capital gains. Through application of operating losses carried forward, the expected provision for future income taxes on the Company's income for the year ended December 31, 2005 and the six months ended December 31, 2004 in the amounts of $10,118,000 and $872,000 have been eliminated. Further, in the determination of taxable income for 2005, capital losses have been applied in reduction of taxes which otherwise would have been provided on investment gains. The Company does pay large corporations tax which amounted to $105,000, or $0.09 per Boe, in 2005, compared to $17,000, or $0.07 per Boe, in 2004.
NET INCOME AND NET INCOME PER SHARE
Net income for the year ended December 31, 2005 increased by 308% to $26,533,000 or $0.65 per diluted share, compared to $6,496,000, or $0.18 per diluted share, for the six months ended December 30, 2004. Net income for 2005 includes investment gains of $5,259,000, or $0.13 per diluted share. Net income for the six months to December 31, 2004 similarly included non recurring income of $4,293,000, or $0.12 per diluted share in the form of a non cash tax recovery associated with the issue of flow through shares during 2004. Excluding these non recurring items, net income for 2005 amounted to $21,274,000, or $0.52 per diluted share, and for the six month period in 2004 amounted to $2,203,000, or $0.06 per diluted share.
FUNDS FROM OPERATIONS
Funds from operations increased by 643% to $37,992,000 for the year ended to December 31, 2005, or $0.93 per diluted share, compared to $5,114,000, or $0.14 per diluted share, for the six months to December 31, 2004.
INVESTMENT AND FINANCING
Working Capital
Receivables comprise production revenue receivables, and receivables in respect of operating and capital costs. Prepaid costs include unamortized insurance premiums, unamortized bank commitment fees, deposits and field inventory.
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.
The Company had a working capital deficiency of $7,725,000 at December 31, 2005 compared to $5,560,000, excluding current bank debt, at December 31, 2004. The increase in the working capital deficiency at December 31, 2005 when compared to the prior year is due to the considerable year-on-year expansion in the scale of the Company's operations.
Property and Equipment
Capital costs incurred were as follows:
--------------------------------------------------------------------
Year Ended Six Months to
Period December 31, 2005 December 30, 2004
--------------------------------------------------------------------
Land and lease $4,315,000 $1,771,000
--------------------------------------------------------------------
Seismic 2,334,000 122,000
--------------------------------------------------------------------
Drilling and completions 17,608,000 7,283,000
--------------------------------------------------------------------
Facilities and equipment 16,963,000 10,620,000
--------------------------------------------------------------------
Property acquisitions 4,416,000 41,003,000
--------------------------------------------------------------------
Property dispositions (3,291,000) (3,317,000)
--------------------------------------------------------------------
Other 232,000 68,000
--------------------------------------------------------------------
Total $42,577,000 $57,550,000
--------------------------------------------------------------------
--------------------------------------------------------------------
Bank Debt, Liquidity and Capital Resources
The Company has a revolving borrowing base bank credit facility of $37 million. The amount drawn on this facility at December 31, 2005 amounted to $25,523,000. Debt including working capital deficiency at December 31, 2005 amounted to $33,248,000, resulting in a debt to annualized final quarter cash flow of 0.6 to 1.0, within Storm's internal guidelines.
The Company 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 offset by lower capital expenditures in the second and third quarters. In quarters of high field activity, the Company operates with a substantial working capital deficit, which is paid down in quarters of lower field activity, primarily from cash flow but also from the Company's bank facility.
In 2006 the Company expects to fund its capital programs through internally generated cash flow.
Investment
At December 31, 2005, the Company's investment in SVI represented a 16% ownership position. Late in 2005, SVI completed a private placement for a gross amount of $40,000,000. Although Storm participated in the offering to the extent of $2,000,000, the Company's ownership position was reduced from 26% to 16%. The carrying amount of the investment on the Company's balance sheet represents the transfer value of the investment in SVI to the Company under the Plan of Arrangement, plus the costs of participation in and the dilution gain accruing to Storm as a result of the private placement by SVI in 2005. This carrying amount should not be regarded as representative of the value of Storm's investment in SVI.
SVI recently completed a well in the Ghadames basin in southern Tunisia. Hydrocarbons were encountered but not in commercial volumes, although the well confirmed the extension into SVI's permit area of an existing producing zone. Additional prospects have been identified in the Ghadames basin and additional opportunities are being evaluated in southern Tunisia and in SVI's offshore block in northeast Tunisia. A UK based affiliate of SVI recently concluded a farmin in the prolific V-fields area in the southern North Sea and an operated offshore well will be drilled in March 2006. This well will be the first of two wells to be drilled on the farm-in bloc in 2006 on which 8-10 prospects have been identified.
Storm has no financing or other obligations to SVI, although certain administrative services are provided at cost.
Future Income Taxes
The future income tax asset is made up of the excess of the accounting amounts over the related tax bases of property and equipment transferred to the Company under the Plan, less the tax value of share issue costs, which were incurred in 2004.
Under the terms of two flow through share issues which were completed in 2004, the Company was obligated to allocate Canadian Exploration Expense to subscribers in the amount of $12.2 million and to incur these costs prior to December 31, 2005. This commitment has been satisfied.
No future income tax asset has been recorded which recognizes the future value to be obtained through use of prior tax years' losses. Details of the Company's tax assets are as follows:
--------------------------------------------------------------------
As at Maximum Annual
December 31, 2005 deduction
--------------------------------------------------------------------
Canadian oil and gas
property expense $73,792,000 10%
--------------------------------------------------------------------
Canadian development expense 13,161,000 30%
--------------------------------------------------------------------
Canadian exploration expense(1) 2,344,000 100%
--------------------------------------------------------------------
Undepreciated capital cost 36,914,000 20 - 100%
--------------------------------------------------------------------
Total $126,211,000
-------------------------------------------------
-------------------------------------------------
Operating losses $15,000,000
-------------------------------------------------
-------------------------------------------------
Capital losses $10,000,000
-------------------------------------------------
-------------------------------------------------
(1) Net of allocations to flow through share subscribers.
Asset Retirement Obligation
The Company'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 during 2005 comprise the present value of additional obligations accruing to the Company as a result of field activity during the year, less costs paid in the year in settlement of abandonment obligation, plus the quarter-by-quarter 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 the Company's properties are based on an evaluation conducted by an external environmental consulting firm.
Share Capital
Details of outstanding share capital and dilutive elements:
--------------------------------------------------------------------
December 31, 2005 December 30, 2004
--------------------------------------------------------------------
Common shares outstanding
- end of period 39,184,000 38,673,000
--------------------------------------------------------------------
Share purchase warrants 1,715,000 2,100,000
--------------------------------------------------------------------
Shares potentially issuable
under performance warrants 240,000 513,000
--------------------------------------------------------------------
Stock options 873,000 296,000
--------------------------------------------------------------------
Fully diluted common shares
- end of period 42,012,000 41,582,000
--------------------------------------------------------------------
--------------------------------------------------------------------
Weighted average common shares
- basic 38,838,000 34,376,000
--------------------------------------------------------------------
--------------------------------------------------------------------
Weighted average common shares
- diluted 40,810,000 35,755,000
--------------------------------------------------------------------
--------------------------------------------------------------------
Share purchase warrants are exercisable at a price of $2.00 on or before June 30, 2005. Outstanding performance warrants total 341,667 and are convertible into common shares using a formula based on the market price on the date of conversion. Stock options outstanding are exercisable over five years on various dates beginning September 2005 at prices ranging from $2.60 to $6.70.
NET ASSET VALUE
An estimate of the Company's net asset value at December 31, 2005 is as follows:
---------------------------------------------------- $'000 Except for share amounts ---------------------------------------------------- Reserves discounted at 10% before tax 187,077 ---------------------------------------------------- Undeveloped land (1) 19,217 ---------------------------------------------------- Investment in SVI (2) 16,400 ---------------------------------------------------- Cash proceeds on exercise of share purchase warrants and stock options 7,228 ---------------------------------------------------- Net debt (33,248) ---------------------------------------------------- Net Asset Value 196,674 ---------------------------------------------------- ---------------------------------------------------- Fully diluted common shares outstanding - '000 42,012 ---------------------------------------------------- Net Asset Value per Common Share $4.68 ----------------------------------------------------
(1) Undeveloped land was evaluated by Britt Land Services as of December 31, 2005. At year end, Storm's undeveloped land position totalled 266,500 net acres with an average valuation of $72 per acre.
(2) Storm's investment in SVI is based on the October 2005 private placement issue price of $4 share.
FOURTH QUARTER RESULTS
Storm's summarized financial and operating results for the fourth quarter of 2005 compared to the fourth quarter of 2004 and the third quarter of 2005 are as follows:
--------------------------------------------------------------------
Three Months Three Months Three Months
Ended Ended Ended
December 31, December 31, September 30,
2005 2004 2005
--------------------------------------------------------------------
Financial - $
--------------------------------------------------------------------
Production revenue $23,733,000 $ 7,405,000 $ 17,694,000
--------------------------------------------------------------------
Funds from operations 12,886,000 3,453,000 10,317,000
--------------------------------------------------------------------
Per share - basic 0.33 0.10 0.27
--------------------------------------------------------------------
Per share - diluted 0.32 0.09 0.25
--------------------------------------------------------------------
Net income 13,507,000 5,586,000 6,310,000
--------------------------------------------------------------------
Per share - basic 0.35 0.16 0.16
--------------------------------------------------------------------
Per share - diluted 0.33 0.16 0.15
--------------------------------------------------------------------
Capital
expenditures - net 15,297,000 47,882,000 12,680,000
--------------------------------------------------------------------
Debt, including
working capital
deficiency 33,248,000 29,225,000 30,625,000
--------------------------------------------------------------------
--------------------------------------------------------------------
Operations
--------------------------------------------------------------------
Boe production per day 3,665 1,727 3,208
--------------------------------------------------------------------
Gas production per
day - mcf 18,388 8,019 15,398
--------------------------------------------------------------------
NGL production per
day - bbls 299 293 327
--------------------------------------------------------------------
Oil production per
day - bbls 310 97 315
--------------------------------------------------------------------
Gross wells drilled 12.0 9.0 7.0
--------------------------------------------------------------------
Net wells drilled 7.2 7.5 4.6
--------------------------------------------------------------------
--------------------------------------------------------------------
Netback Analysis - $ per Boe
--------------------------------------------------------------------
Product sales 69.78 45.09 59.21
--------------------------------------------------------------------
Royalty income 0.61 1.58 0.74
--------------------------------------------------------------------
Royalties (18.97) (12.64) (13.44)
--------------------------------------------------------------------
Production costs (7.64) (6.15) (6.88)
--------------------------------------------------------------------
Transportation (2.24) (3.43) (2.41)
--------------------------------------------------------------------
Field netback (41.54) (24.45) (37.22)
--------------------------------------------------------------------
Interest (0.71) (0.86) (0.90)
--------------------------------------------------------------------
Cash general and
administrative costs (2.49) (1.72) (1.28)
--------------------------------------------------------------------
Capital taxes (0.13) (0.11) (0.08)
--------------------------------------------------------------------
Cash net back 38.21 21.76 34.96
--------------------------------------------------------------------
Cash costs per Boe-
excluding
transportation $ 10.97 $ 8.84 $ 9.14
--------------------------------------------------------------------
In the fourth quarter of 2005, average Boe volumes increased by 112% when compared to the fourth quarter of 2004 and by 14% when compared to the third quarter of 2005. Production gains came primarily from the tie in of wells in the Peace River Arch. Production revenue for the quarter increased by 220% over the same quarter in 2004. Price increases accounted for 51% and volume increases for 169% of the year-over-year-revenue increase. Compared to the third quarter of 2005, production revenue for the final quarter grew by 34%. Higher prices provided 17% of the revenue increase and volume increases also amounted to 17%.
The increase in royalties per Boe in the final quarter of 2005 is due to price increases and the ending of certain royalty holidays on new wells.
Operating costs for the quarter increased by 24% compared to the final quarter of 2004 and increased by 11% when compared to the third quarter of 2005. The year-over-year increase is due to the effect of widespread cost pressures across a range of services. The quarter-on-quarter increase is largely due to cost increases.
Transportation costs fell in the final quarter of 2005 when compared to the equivalent quarter in 2004 due to increased product volumes but were largely consistent with the third quarter of 2005.
The year-on-year increase in general and administrative costs is largely attributable to an increased staff complement and the inclusion in the final quarter of 2005 of various costs associated with the Company's year end which had no equivalent in 2004. Such costs approximated $250,000. In addition, overhead recoveries in the final quarter of 2005 fell when compared to the final quarter of 2004, which saw the completion of a major Company operated facility project.
Depletion, depreciation and amortization for the final quarter of 2005, amounted to $13.47, compared to $12.93 in 2004 and $13.19 in the third quarter of 2005. Increases in the per Boe charge are largely due to increasing costs of equipment and services offset by a larger reserve base.
Funds from operations for the final quarter of 2005 amounted to $12,886,000, an increase of 273% over the final quarter of 2004 and 25% over the third quarter of 2005. Funds per diluted share for the final quarter of 2005 amounted to $0.32, an increase of 255% over the same quarter in 2004 and 28% over the third quarter of 2005.
Net income per diluted share amounted to $0.33 in the final quarter of 2005, an increase of 106% over the equivalent quarter of 2004 and 120% over the third quarter of 2005. Net income for the final quarter of 2005 included investment gains of $5,259,000, or $0.13 per diluted share. Net income in the final quarter of 2004 included a one time tax recovery in the amount of $4,293,000, or $0.12 per share. Excluding such unusual gains, earnings per share for the fourth quarter of 2005 amounted to $0.20 compared to $0.04 in 2004 and $0.15 in the third quarter of 2005.
Capital costs for the final quarter of 2005 amounted to $15,297,000 compared to $47,882,000 in the final quarter of 2004 and to $12,680,000 in the third quarter of 2005. Capital expenditures in the final quarter of 2004 included a major property acquisition in the amount of $37,800,000. There was no equivalent transaction in 2005.
QUARTERLY RESULTS
Set out below are summarized results by quarter for the Company since oil and gas operations began in July 2004:
--------------------------------------------------------------------
December September June March December September
31, 30, 30, 31, 31, 30,
Quarter Ended 2005 2005 2005 2005 2004 2004
--------------------------------------------------------------------
Production
revenue -
$'000 23,733 17,694 15,951 12,968 7,405 4,009
--------------------------------------------------------------------
Funds from
operations -
$'000 12,866 10,317 8,701 6,718 3,453 1,661
Per share
- basic $ 0.33 $ 0.27 $ 0.21 $ 0.17 $ 0.10 $ 0.05
- diluted $ 0.32 $ 0.25 $ 0.20 $ 0.17 $ 0.09 $ 0.05
--------------------------------------------------------------------
Net income -
$'000 13,507 6,310 3,643 3,073 5,586 911
Per share
- basic $ 0.35 $ 0.16 $ 0.09 $ 0.08 $ 0.16 $ 0.03
- fully diluted $ 0.33 $ 0.15 $ 0.09 $ 0.08 $ 0.16 $ 0.02
--------------------------------------------------------------------
Average daily
production - Boe 3,665 3,208 3,481 2,933 1,727 1,005
--------------------------------------------------------------------
Average field
netback
per Boe $41.54 $37.22 $27.50 $27.79 $24.45 $22.56
--------------------------------------------------------------------
Capital
expenditures -
net - $'000 15,297 12,680 4,261 10,339 47,882 9,668
--------------------------------------------------------------------
--------------------------------------------------------------------
OUTLOOK FOR 2006
Storm's Board of Directors has approved a capital budget of $50,000,000 for 2006, which is expected to result in production volumes growing to 5,000 Boe per day by year end. The Company's program will involve the drilling of 45 gross (28 net) wells, of which 29 will be drilled in the Peace River Arch, with ten at Red Earth, five at Cabin and Junior and one at Brazeau. The Company also anticipates completing three 3-D seismic programs covering 90 square kilometres at Cabin, Junior and Parkland. At Parkland a compressor will be installed which will double existing capacity to 18 mmcf per day.
CONTRACTUAL OBLIGATIONS
In the course of its business the Company 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 none is with a related party.
Obligations with a fixed term are as follows:
----------------------------------------------------------------- Year 2006 2007 2008 2009 ----------------------------------------------------------------- Lease of premises - $'000 340 343 352 352 ----------------------------------------------------------------- Equipment leases - $'000 28 11 - - ----------------------------------------------------------------- ----------------------------------------------------------------- Total - $'000 368 354 352 352 ----------------------------------------------------------------- -----------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES
Financial amounts included in the Company's Management's Discussion and Analysis and in the audited financial statements for the year ended December 31, 2005 are based on accounting policies, estimates and judgment which reflect information available to management at the time of preparation. Certain financial amounts are derived from a fully completed transaction cycle, or are validated by events subsequent to the end of the reporting period, or are based on established and effective measurement and control systems. However, other amounts, as described below, are based on estimations using information that involves a high degree of measurement uncertainty. Such uncertainty could have a material effect on the Company's financial statements.
Oil and Gas Properties
Storm uses the full cost method of accounting for exploration and development activities whereby all costs associated with these activities are capitalized. The aggregate of capitalized costs, less unproved property costs, but including estimated future development costs, is amortized using the unit-of-production method based on estimated proved reserves established by external reservoir engineers reporting to the Reserves Committee of the Board of Directors.
The Company's investment in oil and gas assets is evaluated at least annually (the "ceiling test") to consider whether the investment is recoverable and the carrying amount does not exceed the value of the properties, as determined by formula. If the carrying amount of the oil and gas assets is not determined to be recoverable, a loss is recognized to the extent that it exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves plus the lower of cost and market value of unproved properties. Cash flows are estimated using future product prices and costs and are discounted using a risk-free rate appropriate to the Company.
The amount of the charge for depletion and the periodic application of the ceiling test is based on the independent reserves report, which reflects future events, including forecasts of future prices, which are subject to a high degree of estimation.
Asset Retirement Obligation
The Company records as a liability the estimated fair value of obligations associated with the retirement of field assets, such as producing well sites and processing facilities. The carrying amount of property and equipment is increased by an amount equivalent to the liability. The future asset retirement obligation is based on the Company's ownership interest in wells and facilities and reflects estimated costs to complete the abandonment and reclamation as well as the estimated timing of the costs to be incurred in future periods. The liability is increased each reporting period to reflect the passage of time, with accretion charged to earnings. The liability is also adjusted to reflect changes in the amount and timing of the future retirement obligation and is reduced by the amount of any costs incurred in the period. The amount of the abandonment obligation, the charge for accretion and the charge for depletion and depreciation of the amount added to property and equipment, are correspondingly subject to uncertainty of estimation.
Income Taxes
The measurement of the Company's income and other tax liabilities and assets, including losses carried forward and asset pools, requires interpretation of laws and regulations. All tax filings and compliance with tax regulations are subject to audit and reassessment, potentially several years after the initial filing. Accordingly, actual income tax assets or liabilities may differ significantly from the amounts initially estimated.
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. The following reviews the business risks faced by Storm.
Exploration
Exploration requires sophisticated and scarce technical skills as well as capital to generate and test exploration ideas and the drilling of an exploratory prospect frequently does not result in the discovery of economical reserves. Storm endeavours to minimize finding risk by ensuring that:
- Where possible prospects have multi-zone potential.
- Activity is focused in core regions where expertise and experience can be levered.
- Prospects are internally generated.
- The Company serves as operator where possible to maintain operational control.
- Geophysical techniques such as seismic are utilized where appropriate.
Capital Programs
The Company's field investment program recognizes the need to ensure capital costs accommodate two objectives, being immediate cash flow from development activities and future cash flow from the discovery of reserves through exploration. All investment has to recognize that the Company faces constant production declines from existing wells which have to be replaced by new production. The Company focuses its activity in core areas, which allows it to leverage its experience and knowledge. The Company attempts to use farmouts to minimize risk on plays it considers higher risk or where total capital invested exceeds an acceptable level.
The Company believes that acquisitions are necessary to support its objective of rapid and controlled growth. Acquisitions have to be reasonably priced and production should provide netbacks at least equivalent to the Company's existing production. An acquisition should provide near and medium term development opportunities and be in areas where the Company can readily add to the acquired land position. Processing and transportation infrastructure must also be in place, or within the Company's financial capacity to construct.
Reserve Estimates
Estimates of economically recoverable oil and natural gas reserves and natural gas liquids and related future net cash flows are based upon a number of variable factors and assumptions, such as commodity prices, production, future operating costs and potential changes to the Company's operations arising from regulatory amendments. All of these estimates may vary from actual results. Estimates of the recoverable oil and natural gas reserves attributable to any property vary. The Company's actual production, revenues, taxes, development and operating expenditures with respect to its reserves may vary from such estimates, and such variances may be material.
The Company's independent engineering firm, Paddock Lindstrom & Associates Ltd, completes an evaluation of the Company's reserves each year and reports to the Company's Reserves Committee.
Production
There is risk that the Company's oil and natural gas reserves cannot be economically produced at prevailing prices. Storm attempts to mitigate this risk by focusing on high net back commodities and acts as operator where possible, which allows the Company to manage costs, timing, method and marketing of production. Production risk is also addressed by concentrating exploration efforts in regions where infrastructure is readily accessible or Company owned.
Environmental and Safety Risks
Oil and gas exploration and extraction poses considerable environmental risk and worksite practices must recognize the safety risks associated with working with heavy equipment and potentially volatile liquids and gases. Accordingly, Storm has developed and implemented policies and procedures to mitigate environmental, health and safety risks. These policies and procedures include the use of formal corporate policies, emergency response plans, and other policies and procedures reflecting best oil field practices. These policies and procedures are designed to protect and maintain the environment and public and employee safety. The Company mitigates environmental and safety risks by maintaining its facilities to a high standard, complying with provincial and federal environmental and safety regulations and maintaining appropriate insurance coverage.
Competitive Industry Conditions
The Canadian oil and gas industry is highly competitive. Demand for oil and gas properties, undeveloped land, drillable prospects and qualified staff is particularly strong at present due to high commodity prices. The Company has a large undeveloped land base that provides a multi-year inventory of exploration prospects.
Availability of Services and Equipment
The availability of service and production equipment at competitive prices is vital to the Company's ability to add reserves at a competitive cost and profitably produce these reserves. In periods of increased activity, such as at present, services and equipment can become difficult to obtain. The Company attempts to mitigate this risk by developing strong long term relationships with suppliers and contractors.
Financial and Liquidity Risks
The Company relies on various sources of funding to support its growing capital expenditure program:
- Internally generated cash flow provides the initial source of funding on which the Company's annual capital expenditure program is based.
- Debt may be utilized to expand capital programs, including acquisitions, when it is deemed appropriate.
- New equity, including flow-through shares, if available on favourable terms, may be utilized to expand acquisition programs.
- Farmouts of projects may be arranged if management considers that a project requires too much capital or where the project affects the Company's risk profile.
Cash flow from operations is influenced by factors which the Company may not control, such as commodity prices, exchange rates, interest rates and changes to existing government regulations and tax policies.
Marketing Risks
Crude oil prices are affected by worldwide supply and demand fundamentals while natural gas prices are largely affected by North American supply and demand fundamentals. The Company attempts to mitigate these risks as follows:
- Natural gas properties are developed in areas where there is a suitable pipeline infrastructure.
- Exploration efforts focus on light oil and liquids rich natural gas reserves.
- Financial instruments are used where appropriate to manage commodity price volatility where the Company has funded capital assets, including acquisitions, whose cost exceeds near term projected cash flows.
Risk Management
Storm's Board of Directors has established a formal risk management policy designed to ensure cash flow is sufficient to protect the Company's investment program by reducing the exposure to commodity price, foreign exchange and interest rate volatility. These objectives may be achieved through the use of financial instruments or through fixed price contracts for the delivery of physical volumes. The Company has no financial instruments in place at the date of this report.
ADDITIONAL INFORMATION
Additional information relating to the Company 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., 3250, 205 - 5th Avenue, SW, Calgary, Alberta, T2P 2V7.
Storm Exploration Inc.
Balance Sheets
December 31, 2005 December 31, 2004
---------------------------------------
ASSETS
Current
Accounts receivable $ 12,683,000 $ 7,636,000
Prepaid expenses 1,012,000 441,000
---------------------------------------
13,695,000 8,077,000
Property and Equipment
- Net (Note 3) 116,051,000 88,203,000
Investment 8,275,000 2,700,000
Future Income Taxes (Note 4) 8,968,000 8,968,000
---------------------------------------
$ 146,989,000 $ 107,948,000
---------------------------------------
---------------------------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current
Bank Indebtedness (Note 5) $ - $ 6,000,000
Accounts payable and accrued
liabilities 21,420,000 13,637,000
---------------------------------------
21,420,000 19,637,000
Bank Indebtedness (Note 5) 25,523,000 17,665,000
Asset Retirement Obligation
(Note 6) 3,801,000 2,193,000
---------------------------------------
50,744,000 39,495,000
---------------------------------------
Shareholders' Equity (Note 7)
Share capital 62,762,000 61,831,000
Contributed surplus 454,000 126,000
Retained earnings 33,029,000 6,496,000
---------------------------------------
96,245,000 68,453,000
---------------------------------------
$ 146,989,000 $ 107,948,000
---------------------------------------
---------------------------------------
Storm Exploration Inc.
Statements of Income and Retained Earnings
Year Ended Fourteen Months Ended
December 31, 2005 December 31, 2004
--------------------------------------------
(Note 1)
Revenue
Production revenue 70,345,000 11,414,000
Royalties (17,714,000) (3,270,000)
Interest income - 31,000
--------------------------------------------
52,631,000 8,175,000
--------------------------------------------
Expenses
Production 8,757,000 1,559,000
Transportation 2,836,000 623,000
Interest 1,055,000 146,000
General and administrative 2,267,000 842,000
Depletion, depreciation
and accretion 16,337,000 2,785,000
--------------------------------------------
31,252,000 5,955,000
--------------------------------------------
Income before the
following: 21,379,000 2,220,000
Investment Gains (Note 8) 5,259,000 -
Income and other taxes
(Note 4)
Future income tax
recovery - 4,293,000
Capital taxes (105,000) (17,000)
--------------------------------------------
(105,000) 4,276,000
--------------------------------------------
Net income for the period 26,533,000 6,496,000
Retained earnings,
beginning of period 6,496,000 -
--------------------------------------------
Retained earnings,
end of period 33,029,000 6,496,000
--------------------------------------------
--------------------------------------------
Net Income per share
(Note 9) - basic 0.68 0.19
- diluted 0.65 0.18
Storm Exploration Inc.
Statements of Cash Flows
Year Ended Fourteen Months Ended
December 31, 2005 December 31, 2004
--------------------------------------------
Operating activities
Net income for the period 26,533,000 6,496,000
Less: Investment gains (5,259,000) -
Add non-cash items:
Depreciation, depletion,
and accretion 16,337,000 2,785,000
Future income tax recovery - (4,293,000)
Stock based compensation 381,000 126,000
--------------------------------------------
Funds from operations 37,992,000 5,114,000
Net change in non-cash
working capital items 2,045,000 (4,742,000)
--------------------------------------------
40,037,000 372,000
--------------------------------------------
Financing activities
Issue of common shares
- net of expenses 878,000 25,388,000
Paid to former shareholders
of Storm Energy Ltd.
(Note 1) - (3,939,000)
Increase in bank
indebtedness 1,858,000 23,665,000
--------------------------------------------
2,736,000 45,114,000
--------------------------------------------
Investing activities
Investment in Storm
Ventures International Inc. (2,000,000) -
Gain on Sale of Investments 1,684,000 -
Additions to property
and equipment (45,868,000) (60,867,000)
Disposals of property
and equipment 3,291,000 3,317,000
Net change in non-cash
working capital items 120,000 9,994,000
--------------------------------------------
(42,773,000) (47,556,000)
--------------------------------------------
Change in cash during
the period - (2,070,000)
Cash, beginning of period - -
Cash, transferred under
Plan of Arrangement
(Note 1) - 2,070,000
--------------------------------------------
Cash, end of period - -
--------------------------------------------
--------------------------------------------
STORM EXPLORATION INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2005
1. BASIS OF PRESENTATION
Storm Exploration Inc., (the "Company", "Storm"), formerly known as Alterna Technologies Group Inc., is a junior oil and gas exploration and development company listed on the Toronto Stock Exchange under the symbol SEO. The Company became a reporting issuer on July 2, 2004 upon the completion of a Plan of Arrangement (the "Plan") involving, inter alia, the Company, Storm Energy Ltd. and Harvest Energy Trust.
The Company's prior fiscal year end was October 31, which was changed to a calendar year end, effective December 31, 2004. Correspondingly, comparative financial information is presented for the fourteen month period ended December 31, 2004. However, no audited financial statements or unaudited financial statements prepared in accordance with generally accepted accounting principles were prepared effective October 31, 2003 and the ability to do so was compromised by the loss of electronic data in December 2003. Business activity during the eight month period prior to the implementation of the Plan involved transactions associated with the disposition of substantially all of the Company's prior software development business and preparation for the acquisition of oil and gas properties assets from Storm Energy Ltd. As a consequence, financial information for the eight month period from November 1, 2003 to June 30, 2004 is not included as it is neither material nor relevant to the Company's continuing oil and gas operations. As a result, financial information for the fourteen months ended December 31, 2004, reflects only the results from the Company's oil and gas operations for the six month period beginning July 1, 2004.
Under the Plan, the Company issued common shares to a subsidiary company of Harvest Energy Trust in exchange for certain assets, being undeveloped and developed oil and gas assets, administrative assets, an interest in Storm Ventures International Inc. and cash. As there is substantial continuity of ownership interest, assets were recorded on the accounts of the Company at the book values of Storm Energy Ltd. Details are as follows:
Cash $ 2,070,000
Net investment in Storm Ventures
International Inc. 2,393,000
Petroleum and natural gas
assets and equipment 31,838,000
Office furniture and equipment 50,000
Future income tax 8,546,000
Asset retirement obligation (644,000)
------------
Net assets transferred and
share capital issued $ 44,253,000
------------
------------
2. SIGNIFICANT ACCOUNTING POLICIES
The Company has adopted the accounting policies set out below:
Property and Equipment
a. Petroleum and Natural Gas Properties and Equipment
The Company follows the full-cost method of accounting for petroleum and natural gas properties, whereby all costs associated with the exploration for and development of petroleum and natural gas reserves, whether productive or unproductive, are capitalized in a Canadian cost centre. Such costs include land acquisition, drilling of both productive and unproductive wells, geological and geophysical costs and the cost of production equipment. General and administrative costs are not capitalized. Costs of acquiring and evaluating unproved properties are excluded from depletion calculations until it is determined whether or not proved reserves are attributable to the properties.
Gains or losses are not recognized upon disposition of petroleum and natural gas properties unless crediting the proceeds to accumulated costs would result in a change in the rate of depletion of 20% or more.
Depletion of petroleum and natural gas properties is provided using the unit-of-production method based on estimated proved petroleum and natural gas reserves, before royalties, as determined by independent engineers. Production and reserves of natural gas are converted to equivalent barrels of crude oil on the basis of six thousand cubic feet of gas to one barrel of oil. Processing facilities and well equipment are depreciated on a straight-line basis over the estimated useful life of the facilities and equipment.
The depletion cost base includes total capitalized costs, less prior depletion charges, less costs of unproved properties, plus provision for estimated future development costs of proved undeveloped reserves.
Net capitalized costs of the Company's petroleum and natural gas properties are subject, at least annually, to a ceiling test to ensure that capitalized costs do not exceed an estimate of future net revenues. This latter amount is the aggregate of expected undiscounted future net cash flows from proved reserves and the lower of cost or market value of unproved properties. Future cash flows are estimated using expected future prices and costs. If the carrying amount is not fully recoverable, the amount of impairment is measured by comparing the carrying amounts of the capital assets to an amount equal to the estimated net present value of future cash flows from proved plus probable reserves. This impairment in the carrying amount would be recognized and charged to current operations as additional depletion. No such charges have been incurred by the Company.
b. Office Furniture and Equipment
Office equipment is recorded at cost and is depreciated on a straight line basis over its expected useful life of 10 years.
Joint Operations
Certain of the Company's exploration and production activities are conducted jointly with others through unincorporated joint ventures. The accounts of the Company reflect its proportionate interest in such activities.
Investment
The Company's investment is comprised of a 16.5% interest in Storm Ventures International Inc. and is accounted for using the cost method, adjusted for a dilution gain. Storm Ventures International Inc. is involved in the identification and exploitation of international oil and gas exploration and development opportunities.
Asset Retirement Obligation
The Company recognizes the fair value of the retirement obligation associated with tangible properties in the period in which this liability arises and when reasonable estimates of this fair value can be made. The fair value of the liability is calculated as the present value of the expected future costs of abandonment. The obligation is recorded as a long term liability with a corresponding increase to the carrying amount of property and equipment. The liability is increased each reporting period through the accretion of interest up to the future amount of the liability. The charge for accretion is recorded as an expense in the Company's financial statements. The addition to the carrying amount of the asset is amortized on the same basis as property and equipment. Actual costs incurred upon settlement of the abandonment obligation are charged against the liability.
Revenue Recognition
Revenues from the sale of crude oil, natural gas liquids and natural gas are recorded when title passes to a third party.
Income Taxes
Income taxes are calculated using the liability method of tax accounting. Temporary differences arising from the difference between the tax basis of an asset or liability and its carrying amount on the balance sheet are used to calculate future income tax assets and liabilities. Future income tax assets and liabilities are calculated using tax rates anticipated to apply in the periods that the temporary differences are expected to reverse.
Flow-Through Shares
Flow-through shares were issued in 2004 at a fixed price with the proceeds used to fund qualifying exploration expenditures within a defined period. Expenditures funded by flow-through arrangements are renounced to investors in accordance with tax legislation. Share capital is reduced and future tax liability is increased by the total estimated future income tax cost of the renounced tax deductions in the period of filing with the tax authorities. As the Company has tax losses carried forward from prior years, the future tax liability arising from the renunciation of exploration expenditures has been eliminated, with the tax benefit thus realized being included in net income for the period ended December 31, 2004.
Stock Based Compensation
The Company has issued performance warrants and options to employees to acquire common shares. These warrants and options are accounted for using the fair value method which estimates the value of the warrants and options at the date of the grant using the Black-Scholes option pricing model. The fair value thus established is recognized as an expense over the life of the warrants and options with a corresponding increase to contributed surplus.
Per Share Amounts
Net income per share is calculated using the weighted average number of shares outstanding during the period. Diluted net income per share is calculated using the treasury stock method to determine the dilutive effect of performance warrants and stock options. The treasury stock method assumes that the proceeds received from the exercise of "in the money" performance warrants and stock options are used to purchase common shares at the average market price during the period.
Measurement Uncertainty
The amounts recorded for depletion and depreciation of capital assets, the provision for the asset retirement obligation and amounts used for ceiling test calculations are based on estimates of reserves, production rates and future prices and costs. These estimates of reserves and related future cash flows are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be material.
3. PROPERTY AND EQUIPMENT
December 31, 2005 December 31, 2004
----------------------------------------
Petroleum and natural
gas properties $134,567,000 $ 90,838,000
Furniture and equipment 350,000 110,000
--------------------------------------------
134,917,000 90,948,000
Accumulated depletion
and depreciation (18,866,000) (2,745,000)
--------------------------------------------
$ 116,051,000 $ 88,203,000
--------------------------------------------
--------------------------------------------
At December 31, 2005, the depletion calculation excluded unproved properties of $12,207,000 (2004 - $9,680,000).
The prices used in the ceiling test evaluation of the Company's natural gas, crude oil and natural gas liquids reserves at December 31, 2005 were:
%
increase
to
2006 2007 2008 2009 2010 2021
------------------------------------------------
Natural Gas ($/mcf) 10.81 9.67 8.37 7.69 7.02 2.4%
Crude Oil ($/barrel) 67.20 64.31 61.35 58.42 55.55 1.3%
Natural Gas Liquids
($/barrel) 69.75 67.03 64.11 61.07 57.89 0.3%
4. FUTURE INCOME TAXES
The future income tax asset is made up of the excess of the accounting amounts over the related tax bases of property and equipment transferred to the Company under the Plan, less the tax value of share issue costs.
The Company has operating tax losses (which generally expire in the period 2007 to 2011) and tax pools associated with property and equipment of approximately $140 million as well as capital losses of approximately $10 million, which are not subject to expiry. Given uncertainty of realization, accounting recognition has not been given to the future value to be obtained through use of prior tax years' losses, the benefit from which is recognized only when the losses are used to reduce income for tax purposes.
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:
December 31, 2005 December 31, 2004
--------------------------------------------
Statutory combined
federal and provincial
income tax rate 38.13% 39.26%
Expected income taxes $ 10,118,000 $ 872,000
Add (deduct) the income
tax effect of :
Non-deductible crown
charges 3,779,000 775,000
Resource allowance (3,338,000) (592,000)
Gain on investments (1,684,000) -
Other non-deductible
charges 167,000 54,000
Benefit of losses not
previously recognized (9,042,000) (5,402,000)
--------------------------------------------
- (4,293,000)
Large corporations tax 105,000 17,000
--------------------------------------------
$ 105,000 $ (4,276,000)
--------------------------------------------
--------------------------------------------
The Company was obligated, under the terms of flow-through share agreements in 2004, to incur Canadian Exploration Expense in the amount of $12.2 million prior to December 31, 2005. This obligation was satisfied.
5. BANK INDEBTEDNESS
The Company has an extendible revolving bank facility based on the Company's producing reserves in the amount of $37,000,000 (2004 - $24,000,000 plus a short term bridge facility of $6,000,000). The revolving facility is available to the Company until May 31, 2006, but may be extended at the Company's request until May 30, 2007, 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 credit facility will be reduced by 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. Interest paid on the revolving facility in the period to December 31, 2005 amounted to $980,000 (2004 - $34,000).
6. 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 undiscounted amount of the estimated cash flows required to settle the Company's asset retirement obligations is approximately $7.3 million (2004 - $4.5 million), which will be incurred over the next 15 years, with the majority of costs incurred between 2015 and 2020. A credit adjusted risk-free rate of eight percent was used to calculate the present value of the asset retirement obligations, amounting to $3,801,000 (2004 - $2,193,000).
7. SHARE CAPITAL
Authorized
An unlimited number of non-voting common shares
An unlimited number of voting common shares
An unlimited number of preferred shares
Issued Number of Shares Consideration
-------------------------------------
Non voting common shares 1,275,000 $ -
Common shares issued under
the Plan (Note 1) 28,648,000 44,253,000
Common shares issued under
Private Placement 2,500,000 4,320,000
Flow-through common shares
issued 3,250,000 12,225,000
Common shares issued 3,000,000 10,050,000
Tax effect of flow-through
share renunciations (4,293,000)
Share issue costs, net of
associated future tax
deductions (785,000)
Paid to shareholders of
Storm Energy Ltd. (Note 1) (3,939,000)
-------------------------------------
Balance as at December 31, 2004 38,673,000 61,831,000
Common shares issued on exercise
of warrants(i) 385,000 770,000
Common shares issued under
performance warrant plan(ii) 90,000 39,000
Stock options exercised(iii) 36,000 131,000
Share issue costs (9,000)
-------------------------------------
Balance as at December 31, 2005 39,184,000 $ 62,762,000
-------------------------------------
-------------------------------------
Except for voting rights, non-voting and voting common shares are identical.
Common Share Issues
(i) During the third quarter of 2005, 385,000 warrants were exercised and 385,000 common shares were issued for proceeds of $770,000, based on the exercise price of $2.00 per share.
(ii) On June 29, 2005, 170,833 warrants under the performance warrant plan were exercised. Based on a closing price of $4.25, a total of 90,000 common shares were issued. Related prior stock compensation expense of $39,000 was added to share capital.
(iii) During the year 36,000 stock options were exercised for proceeds of $117,000 and related prior stock based compensation of $14,000 was added to share capital.
Warrants
As part of a June 29, 2004 private placement of common shares, the Company issued warrants to acquire 2,100,000 common shares at a price of $2.00. A total of 1,715,000 warrants are outstanding and are exercisable during the period from July 1, 2005 to June 30, 2006.
Stock Based Compensation Plans
(i) The Company has a performance warrant plan under which 512,500 warrants have been issued to employees to acquire common shares. The number of common shares issuable upon exercise of the warrants is the number of warrants held, multiplied by that percentage of a common share represented by the closing price of the share on the day immediately preceding the exercise date, less $2.00, divided by the closing price. The warrants are exercisable in three equal annual amounts commencing June 29, 2005. On June 29, 2005, 170,833 warrants were exercised resulting in 341,667 warrants outstanding as at December 31, 2005.
Using the Black-Scholes pricing model, the fair value of each warrant was estimated to be $0.51 using a risk-free interest rate of 4.25%, volatility of 40% and an expected average life of two years. The cost of the warrant thus determined is amortized over its expected life, the expense being included in general and administrative costs with an equivalent allocation to contributed surplus.
(ii) 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 1,450,000 common shares has been reserved for issuance. Options to purchase 873,000 common shares issued to directors and employees of the Company were outstanding at the end of the period as follows:
Year ended Fourteen ended
December 31, 2005 December 31, 2004
Outstanding at beginning
of period 296,000 -
Issued during period 744,000 296,000
Cancelled during period (131,000) -
Exercised during period (36,000) -
-------------------------------------
873,000 296,000
-------------------------------------
Weighted average exercise price $4.35
Average remaining life 4.39 years
Number exercisable at
December 31, 2005 -
Option prices $2.60 - $6.70
Using the Black-Scholes pricing model, the weighted average fair value of the options granted in 2005 was estimated to be $1.48 (2004 - $0.93), using risk-free interest rates of 4.25% - 5.00%, volatility of 40% and an expected average life of 30 months. The amortized cost of the options is included in general and administrative costs with an equivalent allocation to contributed surplus.
8. INVESTMENT GAINS
i) As part of an asset sale and farm out agreement with an industry partner, the Company purchased common shares at total cost of $100,000. After the completion of an initial public offering by the investee company, Storm sold its shareholding for $1,784,000, realizing a gain of $1,684,000.
ii) In October 2005 the Company participated in a private placement of common shares in Storm Ventures International Inc. The Company invested an additional $2,000,000. However, the terms of the private placement were such that the Company's ownership position, formerly 26%, has been reduced to 16.5%. As the shares issued under the private placement were sold at a per share price greater than the per share price of Storm's initial investment, the Company has recognized a dilution gain of $3,575,000.
9. PER SHARE AMOUNTS
--------------------------------------------------------------------
Year ended Fourteen ended
December 31, 2005 December 31, 2004
--------------------------------------------------------------------
Basic
--------------------------------------------------------------------
Net income per share $ 0.68 $ 0.19
--------------------------------------------------------------------
Weighted average number
of shares outstanding ('000) 38,838 34,376
--------------------------------------------------------------------
--------------------------------------------------------------------
Diluted
--------------------------------------------------------------------
Net income per share $ 0.65 $ 0.18
--------------------------------------------------------------------
Weighted average number of
shares outstanding ('000) 40,810 35,755
--------------------------------------------------------------------
The reconciling items between the basic and diluted average common shares are the warrants, performance warrants and stock options described in Note 7.
10. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in non-cash working capital
Year ended Fourteen ended
December 31, 2005 December 31, 2004
---------------------------------------
Accounts receivable $ (5,047,000) $ (7,636,000)
Prepaid expenses (571,000) (441,000)
Accounts payable and
accrued liabilities 7,783,000 13,330,000
---------------------------------------
Change in non-cash working
capital $ 2,165,000 $ 5,253,000
---------------------------------------
---------------------------------------
Relating to:
Financing activities $ - $ -
Investing activities 120,000 9,994,000
Operating activities 2,045,000 (4,741,000)
---------------------------------------
$ 2,165,000 $ 5,253,000
---------------------------------------
---------------------------------------
--------------------------------------------------------------------
Year ended Fourteen ended
December 31, 2005 December 31, 2004
--------------------------------------------------------------------
Interest paid during the
period $ 1,055,000 $ 146,000
--------------------------------------------------------------------
Income taxes paid during
the period $ - $ -
--------------------------------------------------------------------
11. FINANCIAL INSTRUMENTS
The Company's financial instruments recognized on the balance sheet consist of cash and short-term investments, accounts receivable, accounts payable and accrued liabilities. The fair value of these financial instruments approximates their carrying amounts based on the short term to maturity.
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 these concentrations of credit risk to be minimal, as commodity purchasers are major industry participants, and receivables from partners are protected by effective industry standard legal remedies.
FOR FURTHER INFORMATION PLEASE CONTACT:
Storm Exploration Inc. Brian L. Lavergne President and Chief Executive Officer (403) 264-3520 or Storm Exploration Inc. Donald G. McLean Chief Financial Officer (403) 264-3520 (403) 264-3552 (FAX) www.stormexploration.com
