Storm Resources Ltd. has filed its unaudited condensed interim consolidated financial statements as at June 30, 2021 and for the three and six months then ended along with Management’s Discussion and Analysis (“MD&A”) for the same period.
2021 SECOND QUARTER HIGHLIGHTS
Improving commodity prices continue to provide a ‘tail wind’ with funds flow exceeding capital investment for the second consecutive quarter which resulted in debt being reduced by $18 million from the previous quarter and by $30 million in the first half of 2021. Capital efficiencies remain strong with production increasing 4% from the previous quarter with only one new well starting production in early June.
- Production was 26,862 Boe per day which is a 12% increase year over year and a 4% increase from the previous quarter. This was consistent with guidance for an average of 25,000 to 27,000 Boe per day.
- Liquids production (condensate plus NGL) totaled 5,166 barrels per day which was 19% of total production and 35% of total revenue. Liquids production increased 7% from last year.
- During the quarter, one new horizontal well started production in early June at Umbach and, year to date, three new horizontal wells started production, all at Umbach.
- Performance of recent wells continues to be strong with the Nig Creek wells completed in 2020 having an average IP270 of 1,900 Boe per day sales (23% liquids) and the Umbach wells completed in 2021 having an average IP90 of 1,080 Boe per day sales (22% liquids).
- Revenue net of transportation was $21.97 per Boe, a 163% increase from last year as a result of higher commodity prices and a 12% decrease in the per-Boe transportation cost. Liquids prices saw the biggest improvement with condensate and NGL prices rising 203% and 274% respectively.
- Production, general and administrative, and interest and finance costs totaled $5.79 per Boe, a year-over-year reduction of 2%.
- Realized hedging loss was $9.1 million, or $3.71 per Boe, which is a result of the rapid and unexpected improvement in commodity prices over the last 12 months.
- Funds flow was $27.9 million, or $0.23 per share, an increase of 155% from last year. This was largely from higher production and higher commodity prices which were partially offset by the $9.1 million hedging loss.
- The net loss was $11.8 million, or $0.10 per share, which was largely the result of an unrealized hedging loss of $30.3 million (change in the mark-to-market valuation of future hedging contracts).
- Cash return on capital employed (CROCE) was 19% and return on capital employed (ROCE) was 2% with both calculated on a 12-month trailing basis. ROCE was reduced by non-cash hedging losses of $30.3 million in the quarter and $39.0 million for the year to date.
- Capital investment was $10 million (versus guidance for $14 million). At Fireweed, investment included $2.2 million net for equipment deposits for the facility and $0.8 million net to complete the gathering and sales pipelines. At Nig Creek, $5.2 million was invested to purchase an inlet compressor for the gas plant which was installed in July.
- Total debt including working capital surplus was $102 million which is a reduction of $18 million from the previous quarter and represents 0.9 X annualized quarterly funds flow.
- Commodity price hedges protect revenue on approximately 47% of current production for the remainder of 2021 and on approximately 33% of current production for 2022. The financial liability for future hedging contracts totaled $47 million using forward strip pricing at the end of the quarter.
OPERATIONS REVIEW
Umbach, Nig Creek and Fireweed Areas, Northeast British Columbia
Storm’s land position is prospective for liquids-rich natural gas from the Montney formation and totals approximately 120,000 net acres (189 gross sections, 170 net sections) with 90 horizontal wells (83.4 net) drilled to the end of the second quarter.
Field activity in the second quarter was minimal and included completing construction of gathering and sales pipelines at Fireweed plus work to upgrade leases and roads in preparation for a busy third quarter. Wet weather in June and early July delayed some activity including the movement of a drilling rig to Nig Creek by approximately three weeks.
Expected field activity in the third quarter will include drilling and starting completions on four lower Montney wells (4.0 net) at Nig Creek, drilling three wells (3.0 net) at Umbach, drilling one well (0.5 net) and completing three wells (1.5 net) at Fireweed, installing inlet compression at the Nig Creek Gas Plant in early July, and starting construction of the field compression facility at Fireweed.
At the end of the second quarter, there were seven Montney horizontal wells (4.0 net) that had not started producing which included one well (1.0 net) at Umbach and six wells (3.0 net) at Fireweed.
At Umbach, produced raw natural gas contains 1.2% H2S, field compression capacity totals 150 Mmcf raw per day, and firm processing commitments total 80 Mmcf raw per day. Second quarter gross raw gas averaged 96 Mmcf per day (Storm working interest approximately 98%) while net sales were 16,450 Boe per day (80.8 Mmcf per day, 1,515 barrels per day condensate, 1,470 barrels per day NGL). Activity in the remainder of 2021 is expected to include drilling and completing four wells (4.0 net).
At Nig Creek (100% working interest), produced raw natural gas contains up to 0.5% H2S and is directed to Storm’s 100% working interest sour gas plant. Gas plant inlet volumes in the second quarter averaged 52 Mmcf per day raw, sales were 10,065 Boe per day (47.4 Mmcf per day, 910 barrels per day condensate, 1,255 barrels per day NGL), and the production cost was $1.25 per Boe. Capacity of the gas plant is estimated to be 70 Mmcf per day at current average H2S of 0.3%. Activity in the remainder of 2021 is expected to fill the gas plant and will include adding inlet compression in July plus drilling and completing four wells (4.0 net) this summer in the lower Montney.
At Fireweed (50% working interest), activity in the remainder of 2021 is expected to include construction of a 50 Mmcf raw per day field compression facility, drilling five wells (2.5 net) and completing six wells (3.0 net). First production of approximately 2,500 Boe per day net is expected in the fourth quarter of 2021 from five wells (2.5 net).
Recent wells at Nig Creek and Umbach continue to meet or exceed expectations:
The four wells completed at Nig Creek in 2020 started producing in late October, have an average calendar day IP270 of 9.5 Mmcf per day raw or approximately 1,900 Boe per day sales (8.8 Mmcf per day, 200 barrels per day condensate, 235 barrels per day NGL), and cumulative operating income from all four wells was $41 million to the end of June. Payout of the $17 million cost to drill, complete and equip was achieved in five months.
The three wells completed at Umbach in 2021 started producing in late March and early June, have an average calendar day IP90 of 5.7 Mmcf per day raw or approximately 1,080 Boe per day sales (5.1 Mmcf per day, 155 barrels per day condensate, 80 barrels per day NGL), and cumulative operating income from all three wells was $5 million to the end of June. The cost was $15 million to drill, complete and equip.
HEDGING
The objective of the commodity price hedging program is to support longer-term growth by protecting revenue on up to 50% of current production for the next 18 months and up to 25% for 19 to 36 months forward. The current hedge position is shown below (excludes price differential contracts which are shown in the financial statements). Future production growth is not hedged.
OUTLOOK
Production in the third quarter of 2021 is forecast to average 25,000 to 28,000 Boe per day (production to date in the quarter has averaged approximately 26,500 Boe per day based on field estimates). Capital investment in the quarter is forecast to be $43 to $48 million which includes $18 million ($9.0 million net) for construction of the Fireweed facility, $17 million to drill 7.5 net wells and $15 million to complete and equip 5.5 net wells.
Updated guidance for 2021 is provided below. Capital investment is being increased to a range of $110 to $115 million from $85 to $90 million. Forecast pricing and annual funds flow was updated to reflect actual prices to date with assumed prices for the remainder of the year being approximately equal to the current forward strip.
Capital investment is being increased by $25 million which represents approximately half of the increase in forecast annual funds flow from the initial estimate in November 2020 (remainder will be directed to debt reduction which also increases asset value per share). The increase adds 3.0 net drills and 2.5 net completions, includes $3 million to advance construction of a multi-well pad and access road into 2021 from 2022, and assumes that inflation adds $2 million to the cost of previously planned drills and completions in the second half of 2021.
The additional wells will start production late in the fourth quarter, are expected to benefit from higher winter pricing for natural gas and are forecast to add approximately 2,000 Boe per day to average production in 2022.
Strong rates of return are anticipated from the incremental capital investment given unused capacity at existing facilities with half-cycle payouts estimated to be less than one year at current forward strip commodity prices.
Development at Fireweed continues to progress as planned with construction of the large diameter gathering and sales pipelines completed early in the second quarter while site preparation for the facility has been completed and equipment deliveries will start in late August. Wet weather in June resulted in a delayed start to site preparation for the facility; however, first production of approximately 2,500 Boe per day net is still expected in the fourth quarter of 2021.
The financial liability for future hedges totaled $47 million at the end of the second quarter. The large future liability is the result of the rapid and unexpected increase in commodity prices over the last 12 months since the hedges were layered on. In response to the backwardation in pricing where future prices are below current spot prices, additional hedges for the second half of 2022 will be layered on more slowly depending on pricing and market conditions. This is expected to result in approximately 45% of current production being hedged six to nine months forward with a lesser volume 10 to 18 months forward. Currently, approximately 45% of production is hedged 12 months forward through the first half of 2022 while the second half of 2022 is approximately 25% hedged.
There is no additional information available at this time regarding the Judgement in the Supreme Court of British Columbia in the Yahey (Blueberry River First Nations) v. British Columbia case on June 29, 2021 which declared that cumulative effects of industrial development have infringed on rights guaranteed under Treaty 8. At this time, the Judgement is not expected to affect Storm’s planned activity for 2021 and 2022. Potential longer term effects, if any, are not known at this time.
The focus of the business plan in 2021 remains on growing asset value and funds flow per share which will largely be accomplished by:
- Filling the Nig Creek Gas Plant which reduces production cost and increases the proportion of liquids;
- Adding future drilling inventory in the lower Montney at Nig Creek;
- Starting production from the Fireweed area where condensate is forecast to be a higher proportion of production;
- Continuing to evolve drilling and completion techniques to reduce well costs while improving performance; and
- Reducing debt to increase future financial flexibility for acquisitions, accelerating organic growth or returning capital to shareholders.
