CALGARY, ALBERTA–(Marketwired – Jan. 23, 2014) –
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Storm Resources Ltd. (“Storm”) (TSX VENTURE:SRX) has entered into an agreement to acquire a 100% working interest in 29 sections of undeveloped land in the Umbach-Nig area prospective for liquids rich natural gas from the Montney formation (the “Acquisition”). Included in the Acquisition are two horizontal wells producing 359 Boe net per day (19% natural gas liquids or “NGL”) from the Montney formation. The total cost of the Acquisition is $87.7 million, which consists of $30.0 million in cash plus 13.6 million common shares (“Common Shares”) of Storm with a deemed value of $4.23 per Common Share, being the closing price of the Common Shares on the TSX Venture Exchange on January 22, 2014. Closing of the Acquisition is subject to customary conditions, including receipt of applicable regulatory approvals, and is expected to occur on or about January 31, 2014.
As a result of the Acquisition, Storm will be updating its 2014 guidance, as set forth below.
The cash portion of the Acquisition will be satisfied from funds advanced under Storm’s credit facility, which amounts shall be repaid from $34.8 million of gross proceeds from a bought deal financing and non-brokered private placement of Common Shares at a price of $4.10 per Common Share.
DETAILS AND RATIONALE FOR THE TRANSACTION
The Acquisition increases Storm’s Montney land holdings in the Umbach-Nig area to 140 net sections (98,000 net acres) and includes two 100% working interest horizontal wells with one producing from the upper Montney and the other from the lower Montney. In the third quarter of 2013, production from both horizontal wells totaled 359 Boe per day with NGL recovery averaging 38 bbls per Mmcf sales. The majority of the production is from the C-42-A horizontal well producing from the upper Montney at a current rate of 1.6 Mmcf per day gross raw gas with 1.4 Bcf gross raw gas produced to-date. Storm management forecasts ultimate recovery from this well to be 5.0 Bcf gross raw gas.
The acquired lands are contiguous with Storm’s existing Umbach South lands. In 2013, Storm drilled and commenced production from five Montney horizontal wells (all 100% working interest) at Umbach South which are adjacent to the acquired lands. The five horizontal wells averaged 3.7 Mmcf per day gross raw gas over the first 90 operating days and first year production is forecast to be 2.4 Mmcf per day gross raw gas (based on comparing operated day rates over the first 90 days or over the first 180 days, if available). Storm management forecasts ultimate recovery from the five horizontal wells to average 4.4 Bcf gross raw gas and NGL recovery is expected to be similar to Storm’s adjacent Umbach South lands. At Umbach South, in the third quarter of 2013, NGL recovery was 35 barrels per Mmcf sales, shrinkage from raw gas to sales was 12%, and the operating netback was $19.15 per Boe (average AECO daily index price for the quarter was $2.31 per GJ).
Further details regarding the Acquisition are provided below:
- The Common Shares forming a portion of the consideration under the Acquisition will be distributed to the vendor’s shareholders assuming that the vendor’s shareholders vote in favor of the distribution of the Common Shares at a special meeting expected to be held on March 11, 2014;
- Adds 26% to Storm’s land position at Umbach-Nig and adds 7% to corporate production;
- Common Share dilution associated with the Acquisition and the associated equity issue is 25%;
- DPIIP in the upper Montney for the 29 sections of land to be acquired is estimated by Storm management to be 1.6 Tcf assuming 52 metres of thickness, 6% average porosity, and reservoir pressure of 18,000 to 23,000 kPa (represents 21% of Storm’s entire land position in the Umbach-Nig area);
- Storm management views the middle Montney as prospective across the Acquisition;
- The allocation of the purchase price is 11% to acquire cash flow and reserves associated with two producing horizontal wells, 30% for 20 sections of undeveloped land and 59% for nine sections of land where Storm management estimates 35 horizontal wells remain to be drilled in the upper Montney based on existing vertical wells plus producing horizontal wells (assuming four horizontal wells per section with 32% recovery of estimated DPIIP); and
- Storm management expects two to three horizontal wells will be drilled on the acquired lands in 2014 with additional wells being planned for 2015.
The Acquisition adds materially to Storm’s land position in an area where Storm has gained meaningful proprietary knowledge from drilling a total of 15 horizontal wells over the past three years. Production rates on the last ten horizontal wells have improved by 50% to 60% from earlier horizontal wells. In addition, horizontal wells drilled on the acquired lands will benefit from being near Storm’s gathering pipelines and a new facility that is expected to start-up in September 2014. The capacity of the new facility is designed to be expandable from 24 Mmcf per day to 48 Mmcf per day which will allow for significant, low cost growth in production into 2015.
The Common Shares to be distributed to the vendor’s shareholders provide for continued participation in the upside associated with exploitation of the Montney formation in the Umbach-Nig area. Storm’s higher level of activity over the next two to three years is expected to result in accelerated growth in asset value for all shareholders. In addition, Storm’s ownership of infrastructure in the area (pipelines and field compression) is expected to result in lower operating costs and improved capital efficiencies.
UPDATED 2014 GUIDANCE
The following sets forth Storm’s updated guidance for full year 2014 estimates.
November 14, 2013
January 22, 2014(2)
|Estimated year-end debt plus working capital deficiency(1)||$50.0 – $55.0 million||$50.0 million|
|Estimated average operating costs||$8.00 – $10.00 per Boe||$8.00 – $9.00 per Boe|
|Estimated average royalty rate (on production revenue before hedging)||14% – 15%||14% – 15%|
|Estimated operations capital, excluding acquisitions & dispositions||$81.0 million||$78.0 million|
|Estimated cash G&A net of recoveries||not provided||$3.9 million|
|Forecast fourth quarter average production||7,300 – 7,800 Boe/d||7,500 – 7,900 Boe/d|
|(21% oil + NGL)||(20% oil + NGL)|
|Forecast average annual production||5,200 – 6,450 Boe/d||5,500 – 6,500 Boe/d|
|(21% oil + NGL)||(21% oil + NGL)|
- Includes value of publicly listed securities.
- Guidance updated January 22, 2014 includes the Acquisition and the Equity Financings.
Operations capital in the updated guidance was reduced to $78.0 million from $81.0 million because the drilling of one horizontal well at Umbach was moved forward into the fourth quarter of 2013 instead of being drilled in 2014. Major expenditures included in the updated 2014 operations capital guidance are:
- $47.0 million at Umbach to drill 10 horizontal wells (10.0 net) with 9 horizontal wells (9.0 net) being completed and tied in; and
- $19.0 million to expand infrastructure at Umbach, which includes $14.0 million to construct a new field compression facility, expandable from initial capacity of 24 Mmcf per day to 48 Mmcf per day (Storm anticipates an additional investment of $8.0 million for the expansion to occur in 2015).
Storm’s production in the fourth quarter of 2013 was approximately 4,750 Boe per day based on field estimates and is forecast to increase to an average of 7,500 to 7,900 Boe per day in the fourth quarter of 2014 (60% year over year growth) as a result of the acquisition and Storm’s planned horizontal drilling program in the Umbach-Nig area.
The updated guidance for 2014 assumes an average natural gas price at AECO of $3.35 per GJ and an Edmonton Par oil price of $89 per barrel. Including the Acquisition, corporate production is expected to be 5,000 to 5,500 Boe per day until September 2014 when the new facility at Umbach will be operational. Adjusted net debt is forecasted to be approximately $50 million at the end of 2014 (net of the value of a public company investment), which is approximately 1.0 times forecast annualized funds from operations in the fourth quarter of 2014.
THE EQUITY FINANCINGS
Storm has entered into an agreement with a syndicate of underwriters led by FirstEnergy Capital Corp. and including Peters & Co. Limited, National Bank Financial Inc., Clarus Securities Inc., RBC Capital Markets, Cormark Securities Inc. and Macquarie Capital Markets Canada Ltd. (collectively, the “Underwriters”) to issue, on a bought deal basis, 7,250,000 Common Shares at a price of $4.10 per Common Share, for aggregate gross proceeds of $29.7 million (the “Bought Deal Financing”). In addition, contemporaneously with the completion of the Bought Deal Financing, Storm announces that it will issue up to 1,250,000 Common Shares to directors, officers, and employees of Storm, at a price of $4.10 per Common Share, for aggregate gross proceeds of up to $5.1 million (the “Non-Brokered Financing”, together with the Bought Deal Financing, the “Equity Financings”). Aggregate gross proceeds of the Equity Financing will be up to $34.9 million, with up to 8,500,000 Common Shares being issued.
Closing is expected to occur on or about February 14, 2014, and is subject to certain conditions including, but not limited to, the receipt of all necessary approvals including the approval of the TSX Venture Exchange.
The net proceeds of the Equity Financings will be used to repay indebtedness in respect of funds advanced under Storm’s credit facility to satisfy the cash portion of the purchase price of the Acquisition. The Common Shares issuable pursuant to the Bought Deal Financing will be offered in all provinces of Canada by way of a short form prospectus. The Common Shares issuable pursuant to the Non-Brokered Financing will be offered by way of private placement exemptions in all of the provinces of Canada and will be subject to a four-month hold period under applicable Canadian securities laws. Closing of the Equity Financings will be conditional on closing of the Acquisition.
Boe Presentation – For the purpose of calculating unit revenues and costs, natural gas is converted to a barrel of oil equivalent (“Boe”) using six thousand cubic feet (“Mcf”) of natural gas equal to one barrel of oil unless otherwise stated. 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. All Boe measurements and conversions in this report are derived by converting natural gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil. Mmcf means 1,000 Mcf. Tcf means 1,000 Mmcf.
Discovered-Petroleum-Initially-in-Place (“DPIIP”) – is defined in the Canadian Oil and Gas Evaluation Handbook (COGEH) as the quantity of hydrocarbons that are estimated to be in place within a known accumulation. DPIIP is divided into recoverable and unrecoverable portions, with the estimated future recoverable portion classified as reserves and contingent resources. There is no certainty that it will be economically viable or technically feasible to produce any portion of this DPIIP except for those portions identified as proved or probable reserves.
Forward-Looking Statements – The information in this press release contains certain forward-looking statements. These statements relate to future events or our future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as “seek”, “anticipate”, “plan”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “should”, “believe”, “would” and similar expressions. In particular, and without limitation, forward looking statements in this press release includes, but is not limited to: working capital, debt, average production, reserves, undeveloped land holdings, ultimate recover factors, planned drilling and development activities, the potential number of drilling locations at Storm’s properties, estimated 2014 exit rate production, estimated 2014 capital expenditures, anticipated benefits from the Acquisition, the use of proceeds of the financings, the anticipated closing date of the Acquisition and financings, shareholder meeting dates, Storm’s facilities and expansions and timing thereof, capital efficiencies, the receipt of required regulatory and third party approvals, Storm’s capital program, production, production guidance, drilling plans and commodity prices.
These statements involve substantial known and unknown risks and uncertainties, certain of which are beyond Storm’s control, including: the impact of general economic conditions; industry conditions; changes in laws and regulations including the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced; fluctuations in commodity prices and foreign exchange and interest rates; stock market volatility and market valuations; volatility in market prices for oil and natural gas; liabilities inherent in oil and natural gas operations; uncertainties associated with estimating oil and natural gas reserves; competition for, among other things, capital, acquisitions, reserves, undeveloped lands and skilled personnel; incorrect assessments of the value of acquisitions; changes in income tax laws or changes in tax laws and incentive programs relating to the oil and gas industry; geological, technical, drilling and processing problems and other difficulties in producing petroleum reserves; and obtaining required approvals of regulatory authorities, including the approval of the TSX Venture Exchange. The intended use of proceeds of the financings by Storm may change if the board of directors of Storm determines that it would be in the best interests of Storm to deploy the proceeds for some other purpose. Storm’s actual results, performance or achievement could differ materially from those expressed in, or implied by such forward-looking statements and, accordingly, readers should not place undue reliance on the forward-looking statements and information contained in this press release. No assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur or, if any of them do, what benefits Storm will derive from them.
Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on these and other factors that could affect the operations or financial results of Storm are included in reports on file with applicable securities regulatory authorities and may be accessed through the SEDAR website (www.SEDAR.com) and on Storm’s website (stormresourcesltd.com). The forward-looking statements contained in this press release are made as of the date hereof and Storm undertakes no obligation to publicly update or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless required by applicable securities laws.
Financial Outlooks – The estimates of 2014 year end net debt and 2014 funds from operations contained in this press release are financial outlooks within the meaning of applicable securities laws. These financial outlooks have been prepared by management of Storm to provide an outlook of Storm’s anticipated funds from operations for a full year of
operations with its current assets and based on management’s expectations and assumptions as to a number of factors, including commodity pricing, production, operating expenses and royalties. Readers are cautioned that this information may not be appropriate for any other purpose. Management does not have firm commitments for all of the costs, expenditures, prices or other financial assumptions used to prepare the financial outlooks or assurance that such results will be achieved. The actual results of Storm will likely vary from the amounts set forth in the financial outlooks and such variation may be material. Storm and its management believe that the financial outlooks have been prepared on a reasonable basis, reflecting the best estimates and judgments, and represent, to the best of management’s knowledge and opinion, Storm’s expected expenditures and results of operations following completion of the Acquisition. However, because this information is highly subjective and subject to numerous risks, including the risks discussed under the note regarding Forward Looking Statements, it should not be relied on as necessarily indicative of future results. Except as required by applicable securities laws, Storm undertakes no obligation to update this information.
In this press release GJ means gigajoule and kPA means kilopascal.
The securities offered have not been and will not be registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or applicable exemption from the registration requirements. This news release does not constitute an offer to sell or the solicitation of any offer to buy nor will there be any sale of these securities in any province, state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such province, state or jurisdiction.
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