2021 THIRD QUARTER HIGHLIGHTS
Stronger than expected well performance along with continued improvement in commodity prices resulted in funds flow increasing to $33 million in the quarter while capital investment at $37 million was less than guidance for $43 to $48 million due to weather related delays in July. Production and funds flow are both forecast to increase in the fourth quarter and into 2022 with 12.5 net new wells expected to start production at Nig Creek, Umbach and Fireweed in the fourth quarter and early 2022 (first production was achieved from the Fireweed area on November 4).
Subsequent to the end of the quarter, on November 9, 2021, Storm entered into a definitive arrangement agreement with Canadian Natural Resources Limited (“Purchaser”) pursuant to which the Purchaser has agreed to acquire all of the issued and outstanding common shares of Storm (“Storm Shares“) for cash consideration of $6.28 per Storm Share (the “Purchase Price“). The proposed transaction is expected to close in December 2021 and offers attractive value for Storm shareholders with the Purchase Price implying an enterprise value for Storm of approximately $965 million using financial results from the third quarter of 2021 and including transaction related expenses plus the decommissioning liability. This represents 4.8 times annualized funds flow in the third quarter of 2021 excluding the loss on risk management contracts (hedging losses). The Purchase Price also represents an all-time high share price for Storm as well as a premium of 10% to Storm’s 10-day volume weighted average trading price on the Toronto Stock Exchange as of the close of markets on November 9, 2021.
• Production was 27,499 Boe per day, a 45% increase year over year and a 2% increase from the previous quarter. This was at the higher end of guidance for an average of 25,000 to 28,000 Boe per day and was achieved with the Nig Creek Gas Plant shut in for nine days in July to install inlet compression and to conduct a maintenance turnaround. Comparisons to the previous year are less meaningful given the effect of planned maintenance turnarounds at third party gas plants which reduced production in the third quarter of 2020.
• Liquids production (condensate plus NGL) totaled 5,094 barrels per day which was 19% of total production and provided 32% of total revenue. Liquids production increased 35% from last year.
• Well performance continues to be strong with third quarter corporate production increasing by 6% from the first quarter of 2021 which was accomplished with only three new wells starting production at Umbach.
• Recent well performance continues to exceed expectations with the calendar day IP365 for the last four wells starting production at Nig Creek averaging 1,940 Boe per day sales (22% liquids) and the calendar day IP180 for the last three wells starting production at Umbach averaging 1,080 Boe per day sales (21% liquids).
• Revenue net of transportation was $29.08 per Boe, a 172% increase from last year as a result of higher commodity prices and a 28% decrease in the per-Boe transportation cost as incremental sales volumes are directed to BC Station 2 which has the lowest pipeline tariff.
• Production, general and administrative, and interest and finance costs totaled $5.44 per Boe, a year-over-year reduction of 18%. Production costs are expected to decline as volumes directed to the Nig Creek Gas Plant are increased.
• Realized hedging loss was $16.6 million, or $6.57 per Boe, a result of the continued improvement in commodity prices.
• Funds flow was $33.4 million, or $0.27 per share, an increase of 400% from last year. This was largely from both higher production and higher commodity prices, partially offset by a $16.6 million hedging loss.
• Net loss was $8.9 million, or $0.07 per share, and was largely due to the unrealized loss on risk management contracts totaling $31.1 million (non-cash hedging loss) which reflects the change in the mark-to-market valuation of future contracts.
• Cash return on capital employed (CROCE) was 24% and return on capital employed (ROCE) was 4% with both calculated on a 12-month trailing basis. ROCE was reduced by non-cash hedging losses of $31.1 million in the quarter and $70.1 million for the year to date.
• Capital investment was $36.8 million and included $23.1 million to drill 6.5 net and complete 1.5 net horizontal wells, $6.9 million to advance construction of the new facility at Fireweed, and $2.0 million to complete installation of inlet compression at the Nig Creek Gas Plant.
• Total debt including working capital deficiency was $104 million which represents 0.8 X annualized quarterly funds flow.
• Commodity price hedges protect revenue for approximately 41% of forecast production for the fourth quarter of 2021. The financial liability for future hedging contracts totaled $78 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 98 horizontal wells (90.9 net) drilled to the end of the third quarter.
The third quarter was busy in terms of field activity.
• At Fireweed, construction of the new field compression facility continued to advance, one well (0.5 net) was drilled, and three wells (1.5 net) were completed.
• At Nig Creek, installation of inlet compression and a maintenance turnaround were completed at the gas plant in July and four wells (4.0 net) were drilled in the lower Montney with completions starting in late September.
• At Umbach, two wells (2.0 net) were drilled with completions planned for October.
The fourth quarter will also be busy for field activity.
• At Fireweed, the new facility was completed, four wells (2.0 net) will be drilled, two wells (1.0 net) completed, and four wells (2.0 net) are expected to start producing.
• At Nig Creek, four wells (4.0 net) in the lower Montney were completed in October and are scheduled to start producing in mid-November.
• At Umbach, three wells (3.0 net) will be drilled, five wells (5.0 net) will be completed, and five wells (5.0 net) are expected to start producing.
At the end of the third quarter, there were 14 Montney horizontal wells (10.5 net) that had not started producing which included five completed wells (2.5 net), all at Fireweed.
At Umbach, production is directed to third-party gas plants for processing via Storm’s 100% working interest field compression facilities where capacity totals 150 Mmcf raw per day. Firm processing commitments at third-party gas plants total 80 Mmcf raw per day. Third quarter inlet volumes averaged 98 Mmcf per day gross raw gas (approximate 98% working interest) resulting in 17,015 Boe per day sales (84.0 Mmcf per day, 1,525 barrels per day condensate, 1,490 barrels per day NGL).
At Nig Creek (100% working interest), third quarter inlet volumes at the sour gas plant averaged 54 Mmcf per day raw resulting in 10,280 Boe per day sales (49.4 Mmcf per day, 877 barrels per day condensate, 1,167 barrels per day NGL) at a production cost of $1.30 per Boe. Total production from the area averaged 69 Mmcf per day raw with approximately 22% directed to the Umbach field compression facilities. Capacity of the sour gas plant is estimated to be 70 Mmcf raw per day and the plant is expected to be full once the four lower Montney wells are pipeline connected and start producing.
At Fireweed (50% working interest), the new field compression facility was completed and production started on November 4 from three wells (1.5 net) with a fourth well (0.5 net) starting up in mid-November and another three wells (1.5 net) expected to be tied in and producing in early January 2022. Net sales are currently approximately 2,100 Boe per day (approximately 5.8 Mmcf per day sales, 1,070 barrels per day condensate, 65 barrels per day NGL). A firm processing commitment was added at a third-party gas plant for 11 Mmcf raw per day net to Storm.
Recent wells at Nig Creek and Umbach continue to meet or exceed expectations:
• The four wells completed at Nig Creek in 2020, have an average calendar day IP365 of 9.8 Mmcf per day raw or approximately 1,940 Boe per day sales (9.1 Mmcf per day, 200 barrels per day condensate, 230 barrels per day NGL), and cumulative operating income from all four wells was $53 million to the end of August. Payout of the $17 million cost to drill, complete and equip was achieved in four months after the start of production in late October 2020.
• The three wells completed at Umbach in 2021, have an average calendar day IP180 of 5.7 Mmcf per day raw or approximately 1,080 Boe per day sales (5.1 Mmcf per day, 145 barrels per day condensate, 80 barrels per day NGL), and cumulative operating income from all three wells was $10 million to the end of August. Payout of the $15 million cost to drill, complete and equip is forecast to be achieved within seven months after the start of production in April 2021.
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 fourth quarter of 2021 is forecast to average 30,000 to 32,000 Boe per day (production to date in the quarter has averaged approximately 28,400 Boe per day based on field estimates). Capital investment in the quarter is forecast to be $40 to $45 million which includes $10 million to drill 5.0 net wells, $27 million to complete and equip 10.0 net wells, and $6 million ($3.0 million net) to complete construction of the Fireweed facility.
Updated guidance for 2021 is provided below. Capital investment is expected to be $115 to $120 million, an increase of $5 million from previous guidance in order to drill and complete an additional well at Umbach. Forecast pricing 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.
First production was achieved from the Fireweed area after start-up of the new facility on November 4, 2021 with net sales currently being approximately 2,100 Boe per day from three wells (1.5 net). Four additional wells (2.0 net) are expected to start production by early January. To date, completion results have been encouraging and management is optimistic regarding future well performance.
The financial liability for future hedges increased to $78 million at the end of the third quarter from $47 million at the end of the previous quarter. With the improvement in the balance sheet and given the backwardation in pricing (future prices are below current spot prices), hedging activity has been reduced since last summer. This will result in approximately 45% of current production being hedged six to nine months forward with a lesser volume 10 to 18 months forward (future growth is not 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. Potential longer term effects, if any, are not known at this time.
The summer and fall were busy in terms of field operations with two drilling rigs running from August to October and completion results to date being very encouraging. This is translating into higher production levels in the fourth quarter of 2021 with the successful and safe start-up of the new Fireweed facility being a notable contributor.
