Storm Exploration has provided an operational update for the fourth quarter of 2008, reserve information as at December 31, 2008 and budget expectations for the year ended December 31, 2009.
FOURTH QUARTER 2008 UPDATE:
Average fourth quarter production is estimated to have increased to 8,150 Boe per day, representing year over year growth of 36% from average production of 5,992 Boe per day in the fourth quarter of 2007. This estimate is based on actual accounting data for October and November and field estimates for December. On a per share basis, the increase is 35%, using weighted average basic shares outstanding for each period.
All nine wells drilled in the fourth quarter were successful, resulting in three oil sands evaluation wells (3.0 net) at Surmont, and six (6.0 net) gas wells, including five horizontal Montney gas wells. For the year, Storm drilled 29 wells (27.8 net) which resulted in 21 gas wells (19.8 net), one dry hole (1.0 net) and seven oil sands evaluation wells at Surmont for a 97% success rate.
Invested approximately $35.5 million in the fourth quarter resulting in total capital investment for 2008 of approximately $95.5 million, net of dispositions which totaled $7.7 million. This excludes equity investments in Storm Gas Resource Corp. ("SGR") and Storm Ventures International Inc ("SVI") which totaled $6.2 million in 2008.
Started construction of the second facility at Parkland in November, 2008 which was completed and operational on January 14, 2009. Initial capacity of this facility is 12 mmcf per day which increases our total capacity at Parkland to 45 mmcf per day with current gross raw gas throughput being 36 mmcf per day.
At December 31, 2008, total proved reserves increased by 109% to 26.4 million Boe ("Mmboe"): and total proved plus probable reserves grew by 105% to 41.9 Mmboe. Using basic shares outstanding, growth per share amounted to 109% for total proved reserves and 105% for total proved plus probable reserves.
The all-in cost to add reserves was $13.02 per Boe for proved reserves and $11.12 per Boe for proved plus probable reserves (including the change in future development costs, acquisitions, dispositions and revisions). Using an estimated cash flow netback of $34.00 per Boe for 2008, Storm generated a recycle ratio of 2.6 for total proved reserve additions and 3.1 for total proved plus probable reserve additions.
Estimated net asset value per fully diluted share at December 31, 2008, amounted to $16.65, a year-over-year increase of 95% over 2007, using the pre tax present value of proved and provable reserves discounted at 10% using forecast prices.
RESERVES AT DECEMBER 31, 2008:
Storm's year-end reserve evaluation effective December 31, 2008 was prepared by Paddock Lindstrom & Associates Limited ('Paddock'). Paddock has evaluated all of Storm's crude oil, NGL and natural gas reserves. The Paddock price forecast at December 31, 2008 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, and the report of the Reserves Committee has been accepted by the Company's Board of Directors.
Total proved reserves grew by 109% to 26.4 Mmboe at December 31, 2008, an increase of 104% per share from the year earlier, using basic shares outstanding for each year.
Total proved plus probable reserves grew by 105% to 41.9 Mmboe at December 31, 2008, an increase of 104% per share from the year earlier, using basic shares outstanding for each year.
Total proved plus probable reserves increased by 9.4 Boe for each Boe that was produced during 2008 (840% reserve replacement on a total proved plus probable basis).
The total proved finding and development costs, as per NI 51-101 requirements, was $12.94 per Boe: total proved plus probable finding and development costs, as per NI 51-101 requirements, was $10.51 per Boe. Changes to future development costs (FDC) of properties were included in the calculation and the effect of acquisitions, divestitures, and revisions were excluded. Comparable amounts for the prior year were $17.41 and $10.77 per Boe.
The all-in cost for adding proved reserves was $13.02 per Boe, and for adding proved plus probable reserves was $11.12 per Boe. The all-in calculation reflects the result of Storm's entire capital investment program as it takes into account the effect of acquisitions, dispositions, revisions, as well as the change in future development costs. Comparable amounts for the prior year were $21.40 and $13.64 per Boe.
The net present value of total proved plus probable reserves, discounted at 10% before tax, amounted to $755 million, an increase of 105% year-over-year. The net present value of total proved reserves amounted to $504 million, or 67% of the net present value of total proved plus probable reserves. Increased net present value of reserves came from growth in both proved and probable reserves, as well as a 9% increase in the forecast AECO natural gas price used in the first three years of the evaluation.
During 2008 non core properties with proved and probable reserves of 209 Mboe were sold at an average price of $36.84 per Boe.
Future development costs were $140 million on a proved basis and $219 million on a total proved plus probable basis. Included in these amounts are:
Total Proved plus Probable
Montney horizontal $114 million $182 million
development at Parkland 20 horizontal wells 32 horizontal wells
Expansion of 2nd $13 million $15 million
Parkland facility (25 mmcf/d) (40 mmcf/d)
Other $13 million $22 million
$140 million $219 million
Storm plans to drill nine of the proved undeveloped horizontal Montney gas wells in 2009.
The Montney discovery at Parkland was assigned 20.8 Mmboe of proved reserves and 33.8 Mmboe of proved plus probable reserves. This reserve assignment is based on original gas in place1 in the Montney formation of 312 Bcf for proved reserves, with a recovery factor of 40%, and 409 Bcf for proved plus probable reserves, with a 50% recovery factor. Ultimate recoverable raw gas averaging 3.4 Bcf (610 Mboe sales) was assigned to the 20 horizontal wells in the proved evaluation, while an average of 4.2 Bcf (750 Mboe sales) was assigned to the 32 horizontal wells in the proved plus probable evaluation.
Total proved reserves assigned to Storm's Parkland property were 22.4 Mmboe, or 85% of total Company proved reserves, and 36.3 Mmboe on a total proved plus probable basis, or 87% of total Company proved plus probable reserves. These amounts include reserves assigned to the Halfway, Doig, and Charlie Lake formations as well as to the Montney discovery.
Proved producing reserves ('PDP') represent 44% of total proved reserves, compared to 73% in 2007, and 28% of total proved plus probable reserves compared to 45% in 2007. The proportion of PDP reserves declined year-over-year as a result of assigning 32 proved undeveloped and probable additional horizontal gas wells in Storm's Montney discovery at Parkland. This is a significant increase from December 31, 2007, when only eight proved undeveloped and probable additional horizontal gas wells were recognized in our Montney property.
The recycle or reinvestment ratio was 2.6 times for proved reserves and 3.1 times for total proved plus probable reserves, using an estimated cash flow netback of $34.00 per Boe for 2008. This measurement uses the all-in total proved finding cost of $12.96 per Boe, and proved plus probable finding cost of $11.08 per Boe (includes the effect of future development capital, acquisitions, dispositions and revisions).
Net asset value per fully diluted share of $16.65 at December 31, 2008, is based on the pre tax net present value of total proved plus probable reserves discounted at 10% using escalated prices, plus internally generated estimated values for Storm's undeveloped land inventory, investments, receipts upon exercise of stock options, less debt at year end.
Net downward revisions to prior year reserves totaled 6.3% on a total proved basis and 10.5% on a proved plus probable basis. The Parkland property was the source of 122% of the proved reserve revision (greater than 100% due to offsetting positive revisions at other properties) of the proved reserve revision and 96% of the proved plus probable reserve revision. Poorer than expected performance at wells producing from the Halfway and Doig formations accounted for the majority of the revision. Approximately 25% of the reduced well performance was the result of new, high rate Montney horizontal wells elevating gathering system pressures, which resulted in the backing out or reduction of production from Halfway and Doig wells. The remainder was due to a combination of water encroachment and reservoir size being smaller than predicted. Reserves lost as a result of higher gathering system pressures are expected to be recovered as the second Parkland facility is now operational and part of the gathering system was twinned in late 2008, which has resulted in a significant decrease in gathering system pressures.
OUTLOOK FOR 2009:
Storm's Board of Directors has approved a capital budget for 2009. The budget provides for the following:
Capital investment totaling $95 million with approximately 45% of this amount being invested in the first half of 2009. This assumes a natural gas price of $6.30 per GJ at AECO. Debt will be used to fund $11 million to be invested in expanding infrastructure at Parkland, while cash flow will be used to fund the remainder of Storm's 2009 capital budget.
The drilling of 18.0 gross wells (16.1 net) which includes nine horizontal development wells in Storm's Montney discovery at Parkland, all at a 100% working interest. In addition, three horizontal wells drilled in the fourth quarter of 2008 will be completed and tied in by mid-February.
Of the total budget, $70 million is allocated to drilling, completion and tie ins, $11 million to expanding infrastructure at Parkland, $5 million for land and seismic, and $9 million for miscellaneous projects and contingency items.
Infrastructure investment in 2009 at Parkland will approximate $11 million. This includes an amount of $5 million to complete the second facility which will provide an additional 12.5 Mmcf of capacity. In the third quarter an additional $6 million will be spent to electrify and increase the capacity of the facility to 25-30 Mmcf per day. An additional $6 million, not at present included in the capital budget, may be invested in the second half of the year to install a liquids extraction plant, which will reduce gas shrinkage and increase NGL recoveries.
Exit production for 2009, based on production for the final quarter, is anticipated to be approximately 10,000 Boe per day, an increase of 23% over 2008 fourth quarter production.
In the event that natural gas prices are lower than expected, the Company has developed a contingency budget, which will reduce drilling activity to better match lower cash flow. At an AECO price of $5.25 per GJ, capital investment will be reduced to $75 million, with debt being used to fund the investment of $11 million required to expand infrastructure at Parkland. Storm's drilling program will be reduced to 13 wells (11.4 net), with seven of these being horizontal Montney development wells at Parkland. Investment in land and seismic will not change. This reduced level of capital investment is expected to result in final quarter 2009 exit production of 9,300 Boe per day.
Operating costs for 2009 will approximate $5.80 per Boe and general and administrative costs will approximate $1.20 per Boe. The corporate royalty rate, giving effect to the New Royalty Framework's effect on Alberta production, is estimated to be 23%.
Two vertical wells (0.8 net) will be drilled in the Horn River Basin in northeastern British Columbia, with one being cored, completed and flow tested. If commercial test rates are obtained, one to three horizontal wells may be drilled later in 2009 or in 2010 to determine the economic viability of horizontal development.
Storm's business strategy for the current lower natural gas price environment will include:
Production has grown to a current rate of approximately 8,700 Boe per day as a result of starting up the second Parkland facility, the tie in of a new horizontal Montney gas well, and better than expected performance from recently drilled horizontal Montney gas wells. More than 500 Boe per day is currently curtailed or shut in, primarily at Parkland, to maximize operating netbacks. We expect to maintain production at current levels through the first half of 2009 with another three to four Montney horizontal gas wells being completed and tied in by the end of the first quarter, with two of these being standing wells and one to two being new wells drilled in the first quarter.
The Company will continue its long standing approach to management and financing of its operations, and intends to deliver continued and profitable growth per share from its operations, particularly from its low cost-high netback Montney property in Parkland. This will be achieved by reinvestment of cash flow and with a limited amount of debt, consistent with our approach to financial management.
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