STORM
CAT ENERGY CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(stated
in U.S. Dollars and in thousands)
|
|
For
the Six Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
|
(5,939 |
) |
|
|
(2,490 |
) |
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Recovery
of future income tax asset from flow-through shares
|
|
|
(1,252 |
) |
|
|
--
|
|
Stock-based
compensation
|
|
|
1,161
|
|
|
|
1,441
|
|
Depreciation,
depletion, amortization and accretion
|
|
|
3,521
|
|
|
|
1,201
|
|
Gain
on disposition of properties
|
|
|
--
|
|
|
|
185
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(761 |
) |
|
|
(144 |
) |
Prepaid
costs and other current assets
|
|
|
381
|
|
|
|
204
|
|
Accounts
payable
|
|
|
(2,674 |
) |
|
|
(1,342 |
) |
Accrued
and other current liabilities
|
|
|
(1,461 |
) |
|
|
2,719
|
|
Net
cash provided by (used in) operating activities
|
|
|
(7,024 |
) |
|
|
1,774
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Restricted
investments
|
|
|
(8 |
) |
|
|
(258 |
) |
Capital
expenditures - oil and gas properties
|
|
|
(32,386 |
) |
|
|
(21,616 |
) |
Other
capital expenditures
|
|
|
(23 |
) |
|
|
(118 |
) |
Net
cash used in investing activities
|
|
|
(32,417 |
) |
|
|
(21,992 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Issuance
of common shares for cash
|
|
|
914
|
|
|
|
2,093
|
|
Debt
issuance costs
|
|
|
(3,556 |
) |
|
|
--
|
|
Repayment
of bank debt
|
|
|
(13,278 |
) |
|
|
--
|
|
Proceeds
from Series A & B Convertible Notes
|
|
|
50,194
|
|
|
|
--
|
|
Net
cash provided by financing activities
|
|
|
34,274
|
|
|
|
2,093
|
|
Effect
of exchange rate changes on cash
|
|
|
883
|
|
|
|
958
|
|
Net
decrease in cash and cash equivalents
|
|
|
(4,284 |
) |
|
|
(17,167 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
5,299
|
|
|
|
29,502
|
|
Cash
and cash equivalents at end of period
|
|
$ |
1,015
|
|
|
$ |
12,335
|
|
Supplemental
disclosure of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
2,449
|
|
|
$ |
-
|
|
The
accompanying notes are an integral part of these financial
statements.
STORM
CAT ENERGY CORPORATION
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Storm
Cat
Energy Corporation, together with its consolidated subsidiaries (“Storm Cat” or
the “Company”), is an independent oil and gas company focused primarily on the
pursuit, exploration and development of large unconventional gas reserves
from
fractured shales, coal beds and tight sand formations and, secondarily, from
conventional formations. The Company has producing properties in
Wyoming’s Powder River Basin (“PRB”) and in Arkansas’ Arkoma Basin
(“Fayetteville Shale”). Its primary exploration and development
acreage is located in the United States and Canada.
Note
1. Basis
of Presentation
The
accompanying unaudited consolidated financial statements include the accounts
of
Storm Cat and have been prepared in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”) for the preparation of
interim financial information. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements include
all
adjustments (consisting of normal and recurring accruals) considered necessary
to present fairly the financial position of Storm Cat as of June 30, 2007
and
results of operations and cash flows for the six months ended June 30, 2007
and
2006. Interim results are not necessarily indicative of the results
that may be expected for a full year because of the impact of fluctuations
in
prices received for oil and natural gas and other factors.
Because
a
precise determination of many assets and liabilities is dependent upon future
events, the timely preparation of consolidated financial statements for a
period
necessarily requires that management make estimates and assumptions and use
judgment regarding the reported amounts of assets, liabilities, revenue and
expenses and in the disclosure of commitments and
contingencies. Actual results may differ from these estimates as
future confirming events occur, and such differences could be
significant.
For
a
more complete understanding of Storm Cat’s operations, financial position and
accounting policies, these consolidated financial statements and the notes
thereto should be read in conjunction with the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2006.
Certain
reclassifications have been made to prior amounts to conform to the
classifications used in the current period.
Note
2. Summary
of Significant Accounting Policies
Critical
accounting estimates used in the preparation of the financial statements
involve
considerable judgment and are, or could be, significantly affected by factors
that are out of the Company’s control.
Oil
and Gas Reserves
Storm
Cat
follows the full cost method of accounting whereby all costs related to the
acquisition and development of oil and gas properties are capitalized into
a
single cost center referred to as a “full cost pool.” Depletion of
exploration and development costs and depreciation of production equipment
is
computed using the units-of-production method based upon estimated proved
oil
and gas reserves. Under the full cost method of accounting,
capitalized oil and gas property costs, less accumulated depletion and net
of
deferred income taxes, may not exceed an amount equal to the present value,
discounted at 10%, of estimated future net revenues from proved oil and gas
reserves plus the cost, or estimated fair value if lower, of unproved
properties. Should capitalized costs exceed this ceiling, an
impairment would be recognized.
Costs
of
acquiring and evaluating unproved properties are initially excluded from
depletion calculations. These unproved properties are assessed
periodically to ascertain whether impairment has occurred. When
proved reserves are assigned, the cost of the property is added to costs
subject
to depletion. When property is considered to be impaired, the costs
are reported as a period expense. Proceeds from sales, if any, of
petroleum and natural gas properties are applied against capitalized costs,
with
no gain or loss recognized, unless such a sale would significantly alter
the
relationship between capitalized costs and the estimated proved oil and gas
reserves attributable to a cost center.
Estimated
reserve quantities and future net cash flows have the most significant impact
on
the Company because these reserve estimates are used in providing a measure
of
the Company’s overall value. These estimates are also used in the
quarterly calculations of depletion, depreciation and impairment of the
Company’s proved properties.
Estimating
accumulations of oil and gas is complex and is not exact because of the numerous
uncertainties inherent in the process. The process relies on
interpretations of available geological, geophysical, engineering and production
data. The extent, quality and reliability of this technical data can vary.
The
process also requires certain economic assumptions, some of which are mandated
by the SEC, such as oil and gas prices, drilling and operating expenses,
capital
expenditures, taxes and availability of funds. The accuracy of a
reserve estimate is a function of the quality and quantity of available data;
the interpretation of that data; the accuracy of various mandated economic
assumptions; and the judgment of the persons preparing the
estimate.
The
most
accurate method of determining proved reserve estimates is based upon a decline
analysis method, which consists of extrapolating future reservoir pressure
and
production from historical pressure decline and production data. The
accuracy of the decline analysis method generally increases with the length
of
the production history. Since most of the Company’s wells have been producing
less than five years, their production history is relatively short, so other
(generally less accurate) methods such as volumetric analysis and analogy
to the
production history of wells of other operators in the same reservoir were
used
in conjunction with the decline analysis method to determine the Company’s
estimates of proved reserves including developed producing, developed
non-producing and undeveloped. As the Company’s wells are produced over time and
more data is available, the estimated proved reserves will be re-determined
on a
periodic basis and may be adjusted based on that data.
Under
the
full cost method of accounting, capitalized oil and gas property costs, less
accumulated depletion and net of related deferred income taxes, if any, may
not
exceed an amount referred to as the “ceiling.” The ceiling is the sum
of the present value, discounted at 10%, of estimated future net revenues
from
proved oil and gas reserves plus the lower of cost or fair market value of
unproved properties. The present value of estimated future net
revenues is computed by pricing estimated future production of proved reserves
at current period end product prices and then deducting future expenditures
estimated to be incurred in developing and producing the proved reserves
assuming the continuation of existing economic conditions. If the
amount of capitalized costs exceeds the ceiling, a write-down of the capitalized
costs is required unless commodity prices increase subsequent to the end
of the
period such that the deficiency is reduced or eliminated. Once a
write-down has been recorded, it may not be reversed in a subsequent
period.
At
June
30, 2007, the ceiling value of the Company’s reserves was calculated based upon
the average quoted market prices of $4.21 per MMBtu for Colorado Interstate
Gas
(“CIG”) gas and a quoted price of $4.41 per MMBtu for gas delivered to the
Cheyenne Hub. Using this pricing, and Storm Cat’s cash flow hedges of
gas production in place at June 30, 2007, the calculated ceiling value of
the
Company’s reserves exceeds the full cost pool by $0.4
million. Therefore, no ceiling test writedown is
required.
Decreases
in market prices from current levels, as well as changes in production rates,
levels of reserves, the evaluation of costs excluded from amortization, future
development costs and service costs could result in future ceiling test
impairments.
Actual
future production, oil and gas prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable oil and gas
reserves most likely will vary from the Company’s estimates. Any
significant variance could materially affect the quantities and present value
of
the Company’s reserves. For example, a decrease in price of 10%
would result in a decrease in the Company’s June 30, 2007
present value of future net cash flows of approximately
$1.9 million, inclusive of hedges. In addition, the Company may
adjust estimates of proved reserves to reflect production history, acquisitions,
divestitures, ownership interest revisions, results of
exploration and development and prevailing oil
and gas prices. The Company’s reserves may also be susceptible to
drainage by operators on adjacent properties.
Impairment
of Long-lived Assets
The
cost
of
the Company’s unproved properties is
withheld from the depletion base as
described above until such a time as
the properties are either developed or
abandoned. These properties are reviewed periodically for possible
impairment.
Capitalized
Interest
Pursuant
to Financial Accountant Standards Board (“FASB”) Statement No. 34, the Company
is required to capitalize interest costs to natural gas properties on
expenditures made in connection with exploration and development projects
that
are not subject to current depletion. Interest is capitalized only
for the period that activities are in progress to bring these projects to
their
intended use. $120,261 and $256,764 of interest expense was
capitalized in the three and six months ended June 30, 2007,
respectively. No interest was capitalized for the same period in
2006.
Capitalized
Internal Costs
Prior
to
2007, the Company capitalized certain internal costs including salaries,
bonuses
and stock-based compensation on a pro-rata basis for employees directly involved
in capital projects. In the second quarter of 2006, $0.730 million of
internal costs were capitalized. Beginning with the first quarter of
2007, Storm Cat discontinued the capitalization of internal costs, except
for
two employees with direct responsibility for the supervision of capital projects
in the PRB. The salaries of these employees were allocated to the
properties based on a percentage of time spent on each capital
project.
Revenue
Recognition
The
Company’s revenue is derived from the sale of gas from its producing wells. This
revenue is recognized as income when the production is produced and
sold. The Company typically receives its payment for production sold
one to three months subsequent to the month of the sale. For this
reason, the Company must estimate the revenue that has been earned but not
yet
received as of the reporting date. The Company uses actual production
reports to estimate the quantities sold and the CIG spot price, less marketing
and transportation adjustments, to estimate the sales price of the
production. Variances between estimates and the actual amounts
received are recorded in the month the payment is received.
Stock-based
Compensation
Factors
affecting stock-based compensation include estimates of when stock options
might
be exercised, the stock price volatility, forfeiture rates, and the model
used
to calculate value. The timing for exercise of options is out of the
Company’s control and will depend, among other things, upon a variety of factors
including the market value of Company shares and the financial objectives
of the
holders of the options. The Company calculates volatility using
historical data; however, future volatility is inherently
uncertain. As of June 30, 2007, the Company assumed a cumulative
forfeiture rate of 10.0% based on historical forfeitures of stock-based
compensation grants. The Company uses the Black-Scholes model to calculate
the
value of stock-based compensation. The Black-Scholes model is a
widely accepted mathematical model for valuing stock-based compensation,
but is
not the only model available.
Accounting
for Oil and Gas Properties
The
Company’s recorded value of its oil and gas properties is, in all cases, based
on historical costs. The Company is in an industry that is exposed to
a number of risks and uncertainties, including exploration risk, development
risk, commodity price risk, operating risk, ownership and political risk,
funding and currency risk as well as environmental risk. The
Company’s financial statements have been prepared with these risks in
mind. All of the assumptions set out herein are potentially subject
to significant change and out of the Company’s control. Such changes
are not determinable at this time.
Recent
Accounting Pronouncements
In
June 2006, the FASB issued Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”). The interpretation clarifies the
accounting for uncertainty in income taxes recognized in a company’s financial
statements in accordance with Statement of Financial Accounting Standards
(“SFAS”) 109, “Accounting for Income Taxes.” Specifically, the pronouncement
prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected
to be
taken in a tax return. The interpretation also provides guidance on the related
derecognition, classification, interest and penalties, accounting for interim
periods, disclosure and transition of uncertain tax positions. The
interpretation was effective January 1, 2007 for the Company.
The
Company adopted the provisions of FIN 48 on January 1, 2007. FIN 48
provides detailed guidance for the financial statement recognition, measurement
and disclosure of uncertain tax positions recognized in the financial statements
in accordance with SFAS 109. Tax positions must meet a “more-likely-than-not”
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods. The adoption of FIN 48 had an immaterial
impact on the Company’s consolidated financial position and did not result in
unrecognized tax liabilities or benefits being recorded. The Company files
tax
returns in Canada and remains in a net operating loss position. Storm
Cat is delinquent on filing its 2006 Canadian tax return and expects a late
filing penalty at the rate of 0.00005% of the net taxable capital of the
Company
for each month the return is delinquent. This penalty is estimated at
approximately $170 per month of delinquency. The Company also files
income tax returns in the U.S. federal jurisdiction and various states. There
are currently no federal or state income tax examinations underway for these
jurisdictions. Furthermore, the Company is no longer subject to U.S. federal
income tax examinations by the Internal Revenue service for tax years before
2003 and for state and local tax authorities for years before 2002. The Company
does, however, have prior year net operating losses which remain open for
examination.
Note
3. Basic
and Diluted Loss per Share
Basic
loss per share is computed by dividing the net loss available to common
stockholders by the weighted average number of common shares outstanding
during
the period. The shares represented by vested restricted stock units
(“RSUs”) issued to date are included in the calculation of the weighted-average
basic common shares outstanding. Diluted loss per share is calculated
giving effect to the potential dilution that would occur if vested stock
options
and stock purchase warrants were exercised and the Series A Subordinated
Convertible Notes due March 31, 2012 (the “Series A Notes”) and the Series B
Subordinated Convertible Notes due March 31, 2012 (the “Series B
Notes”) were converted to common shares. The dilutive effect of
options, warrants and convertible notes is computed by application of the
treasury stock method which assumes that proceeds from the exercise of
in-the-money options and warrants would be used to repurchase common shares
at
average market prices during the period. Diluted amounts are not
presented when the effects of the computations are anti-dilutive due to net
losses incurred. Accordingly, there is no difference in the amounts
presented for basic and diluted loss per share for the six months ended June
30,
2007 and 2006. Listed below is a table showing both the basic and
diluted shares outstanding at June 30, 2007 and 2006, respectively.
|
|
June
30,
|
|
|
June
30,
|
|
Diluted
Shares Outstanding
|
|
2007
|
|
|
2006
|
|
Shares
outstanding
|
|
|
81,004,820
|
|
|
|
66,635,794
|
|
Options
outstanding
|
|
|
4,760,000
|
|
|
|
5,065,000
|
|
Unvested RSUs outstanding |
|
|
122,500 |
|
|
|
-- |
|
Series
A Notes convertible shares outstanding
|
|
|
15,841,880
|
|
|
|
--
|
|
Series
B Notes convertible shares outstanding
|
|
|
27,059,829
|
|
|
|
--
|
|
Warrants
outstanding
|
|
|
4,649,569
|
|
|
|
6,796,786
|
|
Total
diluted shares outstanding
|
|
|
133,438,598
|
|
|
|
78,497,580
|
|
Note
4. Comprehensive
Loss
Comprehensive
loss consists of net loss, the effects of currency translation, and the change
in fair value of derivatives. Comprehensive loss for the three and
six months ended June 30, 2007 and 2006, respectively, is as
follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
Comprensive
Loss
|
|
June
30,
|
|
|
June
30,
|
|
In
Thousands
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
loss
|
|
$ |
(4,592 |
) |
|
$ |
(1,184 |
) |
|
$ |
(5,939 |
) |
|
$ |
(2,490 |
) |
Effects
of currency translation
|
|
|
2,654
|
|
|
|
639
|
|
|
|
2,966
|
|
|
|
958
|
|
Change
in fair value of derivatives
|
|
|
231
|
|
|
|
--
|
|
|
|
(1,360 |
) |
|
|
--
|
|
Comprehensive
loss
|
|
$ |
(1,707 |
) |
|
$ |
(545 |
) |
|
$ |
(4,333 |
) |
|
$ |
(1,532 |
) |
Note
5. Restricted
Investments
Storm
Cat
is required to post performance bonds in connection with its operations in
Wyoming. The funds are held as insured interest bearing certificates
of deposit at an interest rate of 2.5%, payable annually, and total $527,000
as
of June 30, 2007.
Note
6. Asset
Retirement Obligation
The
estimated fair value of the future costs associated with dismantlement,
abandonment and restoration of oil and gas properties is recorded when the
assets are placed into service, generally through acquisition or completion
of a
well. The net estimated costs are discounted to present values using
a risk-adjusted rate over the estimated economic life of the
properties. Such costs are capitalized as part of the basis of the
related asset and are depleted as part of the applicable full cost
pool. The associated liability is recorded initially as a long-term
liability. Subsequent adjustments to the initial asset and liability
are recorded to reflect revisions to estimated future cash flow
requirements. In addition, the liability is adjusted to reflect
accretion expense, as well as settlements during the period. The
accretion expense is recorded as a component of depreciation, depletion and
amortization expense in the accompanying condensed consolidated financial
statements.
A
reconciliation of the changes in the asset retirement obligation for the
six
months ended June 30, 2007 and 2006, respectively, is as follows:
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
Asset
Retirement Obligation
|
|
|
|
|
|
|
Asset
retirement obligation at beginning of period
|
|
$ |
1,871,393
|
|
|
$ |
793,141
|
|
Adjustment
for revision of estimated life in the Powder River Basin
|
|
|
(400,341 |
) |
|
|
(205,661 |
) |
Additional
liabilities incurred
|
|
|
118,400
|
|
|
|
240,028
|
|
Accretion
expense
|
|
|
97,982
|
|
|
|
51,846
|
|
Foreign
currency translation
|
|
|
33,655
|
|
|
|
--
|
|
Asset
retirement obligation at end of period
|
|
$ |
1,721,089
|
|
|
$ |
879,354
|
|
Note
7. Stock-based
Compensation
Storm
Cat
grants stock options at exercise prices equal to the fair market value of
the
Company’s common shares at the date of the grant and accounts for its options
using the fair value method. The fair value is determined using a
Black-Scholes option-pricing model that takes into account the common share
price at the grant date, the exercise price, the expected life of the option,
the volatility of the underlying shares and the expected dividends and the
risk-free interest rate over the expected life of the option.
The
fair
value of stock-based compensation is expensed, with a corresponding increase
to
contributed surplus. Upon exercise of stock options, the
consideration paid upon exercise is recorded as additional value of common
shares and the amount previously recognized in capital surplus is reclassified
to common shares.
The
Company has reserved a total of 10,000,000 shares in the aggregate for issuance
under the terms of the Storm Cat Energy Corporation Amended and Restated
Share
Option Plan (the “Amended Option Plan”) and the Storm Cat Energy Corporation
Restricted Share Unit Plan (the “Restricted Share Unit Plan” and together the
“Plans”), both approved by the shareholders on June 21, 2007. All
options granted prior to the approval of the Amended Option Plan are included
in
the number of options covered therein.
Of
the
10,000,000 shares authorized for issuance in the aggregate under both plans,
7,458,750 shares have been granted and 1,020,000 shares have been forfeited,
leaving a total of 3,561,250 shares available for issuance under the Plans
as of
June 30, 2007.
A
summary
of the status of the options under the Amended Option Plan and the Restricted
Share Unit Plan as of June 30, 2007 and changes during the six months then
ended
is presented below:
Option
Activity
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price (1)
|
|
Options
outstanding at December 31, 2006
|
|
|
5,470,000
|
|
|
$ |
1.8349
|
|
Options
granted
|
|
|
285,000
|
|
|
$ |
1.1863
|
|
Options
exercised
|
|
|
500,000
|
|
|
$ |
0.3920
|
|
Options
expired/cancelled
|
|
|
495,000
|
|
|
$ |
1.4761
|
|
Options
outstanding at June 30, 2007
|
|
|
4,760,000
|
|
|
$ |
1.9849
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at June 30, 2007
|
|
|
3,306,665
|
|
|
$ |
1.7464
|
|
(1)Exercise
price is in Canadian Dollars.
|
|
|
|
|
|
|
|
|
RSU
Activity
|
|
Number
of
Shares
|
RSUs
outstanding at December 31, 2006
|
|
|
--
|
RSUs
granted
|
|
|
197,500
|
RSUs
vested
|
|
|
75,000
|
RSUs
expired/cancelled
|
|
|
--
|
RSUs outstanding
at June 30, 2007
|
|
|
122,500
|
|
|
|
|
RSUs unvested
at June 30, 2007
|
|
|
122,500
|
Note
8. Non-cash
Items
Non-cash
items excluded from the cash flow are capital accruals related to oil and
gas
asset additions and the associated liability. These amounts totaled
$6.7 million for the six-month period ended June 30, 2007 and $6.2 million
for
the same period in 2006.
Note
9. Bank
Credit Facility
Senior
Credit Facility
On
July
28, 2006, Storm Cat entered into a Credit Agreement, with JPMorgan Chase
Bank,
N.A., as Global Administrative Agent, and the Lenders party thereto (the
“U.S.
Credit Agreement”). Additionally, on July 28, 2006, Storm Cat
entered into a Credit Agreement with JPMorgan Chase Bank, N.A., Toronto Branch
as Canadian Administrative Agent, JPMorgan Chase Bank, N.A., as Global
Administrative Agent, and the Lenders party thereto (the “Canadian Credit
Agreement” and together with the U.S. Credit Agreement, the “Credit
Agreements”). Pursuant to these Credit Agreements, the Company and
its subsidiaries are permitted to borrow up to an aggregate principal amount
of
$250.0 million, to be allocated between them depending on the respective
borrowing base under each such agreement. The Credit Agreements were
amended on January 30, 2007 pursuant to the First Amendment to the Combined
Credit Agreements (the “First Amendment”) to allow for subordinated debt and to
amend the current ratio requirement. A subsequent Letter Agreement
was entered into on February 16, 2007, which established the borrowing base
at
$20.0 million and adjusted the applicable interest rates until a
re-determination on the Company’s reserves and borrowing base was
conducted. The Credit Agreements were amended again on May 24, 2007
pursuant to a Second Amendment to the Combined Credit Agreements (the “Second
Amendment” and together with the Credit Agreements and the First Amendment, the
“Amended Credit Agreements”).
Under
the
terms of the Second Amendment, the borrowing base of the Company increased
to
$35.0 million of which $20.0 million is conforming. Interest on borrowings
under the Amended Credit Agreements accrues at variable interest rates at
either
a Eurodollar rate or an alternative base rate at the Company’s
election. On loans made under the U.S. Credit Agreement, the
Eurodollar rate is calculated at LIBOR plus an applicable margin, which is
2.0%
assuming 100% utilization of the then conforming global borrowing
base. The alternate base rate is calculated as (1) the greater of (a)
the Prime Rate or (b) the Federal Funds Effective Rate plus 0.50%, plus (2)
an
applicable margin of 0.5% assuming 100% utilization of the then conforming
global borrowing base. For loans made under the Canadian Credit
Agreement, the Eurodollar rate is calculated at LIBOR plus an applicable
margin
of 2.0% assuming 100% utilization of the then conforming global borrowing
base. Canadian Prime loans are calculated at the Canadian Prime Rate
plus an applicable margin of 0.5% assuming 100% utilization of the then
conforming global borrowing base. USBR Loans Rates are calculated at
the USBR plus 0.5% and the Bankers Acceptance Stamping Fee is 2.0% assuming
100%
utilization of the then conforming global borrowing base. Storm Cat
elects the basis of the interest rate at the time of each
borrowing. In addition, the Company is obligated to pay a commitment
fee under the Amended Credit Agreements quarterly in arrears based on a
percentage multiplied by the daily amount that the aggregate commitments
exceed
borrowings under the Amended Credit Agreements. The commitment fee
percentage is 0.5% assuming 100% utilization of the then conforming global
borrowing base. Loans made under the Amended Credit Agreements are
secured by mortgages on the Company’s natural gas properties and guaranteed by
its PRB assets.
On
March
31, 2008, the Global Borrowing Base must equal the Conforming Borrowing
Base. The Amended Credit Agreements require the Company to hedge 80%
of is current proved developed producing production as determined on January
1,
2007 for a term of three years. The Amended Credit Agreements require
the Company to comply with financial covenants as follows: (1) a
ratio of current assets to current liabilities (determined at the end of
each
quarter) of not less than 1:1; and (2) a ratio of total funded debt
to EBITDA (as such terms are defined in the Amended Credit Agreement) for
the
most recent quarter, annualized, not to be greater than 4:1 for the fiscal
quarter ending June 30, 2007, and 3:1 for each subsequent
quarter. Quarterly compliance is calculated using a four quarter
rolling methodology and measured against certain targets.
The
Company was not in compliance of the EBITDA covenant as of June 30, 2007
and
projected that it was probable that it would not be in compliance of
the EBITDA
covenant as of September 30, 2007. Waivers were obtained from JPMorgan
for the
quarter ended June 30, 2007 and the quarter ended September 30, 2007.
Pursuant to the provisions of the Emerging Issues Task Force (“EITF”) No. 86-30,
Classifications of Obligations When a Violation is Waived by the Creditor,
the
Company projected that future compliance with existing covenants at year-end
2007 was probable. Therefore, the Company has not reclassified
amounts outstanding under the credit facility as current liabilities.
The
Company is currently working with JPMorgan on an amendment to the credit
facility. This amended credit facility is expected to have revised
covenants, and as these revised covenants are currently unknown, management
is
not able to assess the likelihood of compliance until such time the amended
credit facility is agreed to. Until an agreement is reached, the borrowing
base has been reduced to $27.5MM from $35.0MM.
As
of
June 30, 2007, the Company had $13.2 million outstanding under the Amended
Credit Agreements. An additional $5.0 million was drawn on the line
on July 10, 2007, leaving a balance outstanding of $18.2 million subsequent
to
quarter-end. At the time of the filing of this report, the Company
has approximately $8.3 million available to borrow under the Amended Credit
Agreements after taking into account approximately $1.0 million in letters
of
credit secured by the line.
Note
10. Convertible
Notes
On
January 19, 2007, Storm Cat entered into a Series A Note Purchase Agreement
for
the private placement of the Series A Notes in a total aggregate principal
amount of $18.5 million and a Series B Note Purchase Agreement for the private
placement the Series B Notes in a total aggregate principal amount of $31.7
million. The Series A Notes and the Series B Notes are convertible
into Storm Cat common shares at a price of $1.17 per share, as may be adjusted
in accordance with the terms of the Series A Notes or the Series B Notes
(as
applicable), and the Company may force the conversion of the Series A Notes
or
the Series B Notes (as applicable) at any time 18 months after the closing
date
of the applicable issuance that its common shares trade above $2.05, as may
be
adjusted, for 20 days within a period of 30 consecutive trading
days.
On
January 30, 2007, Storm Cat closed the private placement of Series A Notes
to
qualified institutional and accredited investors in a private placement pursuant
to Regulation D of the Securities Act of 1933, as amended, and exemptions
from
Canadian prospectus and registration requirements under National Instrument
45-106. The Series A Notes will mature on March 31, 2012, unless
earlier converted, redeemed or repurchased. The Series A Notes bear
interest at a rate of 9.25% per annum, commencing on January 30,
2007. Interest on the Series A Notes is payable quarterly in arrears
on March 31, June 30, September 30 and December 31 of each year, beginning
on
June 30, 2007.
On
March
30, 2007, Storm Cat closed on $31.7 million of Series B Notes to qualified
institutional and accredited investors in a private placement pursuant to
Regulation D of the Securities Act of 1933, as amended, and exemptions from
Canadian prospectus and registration requirements under National Instrument
45-106. The Series B Notes will mature on March 31, 2012, unless earlier
converted, redeemed or repurchased. The Series B Notes bear interest
at a rate of 9.25% per annum, commencing on March 30, 2007. Interest
on the Series A Notes is payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year, beginning on June 30,
2007. In April, 2007, the Company collected $17.4 million in proceeds
on the subscription receivable on its Series B Convertible Notes.
In
Canada, any shares issued on conversion of the Series B Notes are also subject
to a four month hold period and may not be traded before July 31, 2007 unless
permitted under applicable securities legislation and the rules of the Toronto
Stock Exchange.
As
part
of the private placements, the Company entered into a registration rights
agreement (the “Registration Rights Agreement”) with the investors requiring the
Company to file with the SEC registration statements covering the common
shares
issuable upon conversion of the Series A Notes and the Series B
Notes. Under the terms of the Registration Rights Agreement, the
Company had thirty days from the day of closing both the Series A Notes
transaction and the Series B Notes transaction to file a Form S-1 registration
statement with the SEC. The Company fulfilled this obligation with
respect to both the Series A Notes and the Series B Notes.
On
June
29, 2007, the Company filed an amended S-1 registration statement for 12,679,486
shares underlying the conversion of the Series A Notes and 8,241,106 shares
underlying the conversion of the Series B Notes. The registration
statement went effective on June 29, 2007. This registration
statement did not include all of the common shares that are issuable upon
conversion of the Series A Notes and the Series B Notes.
The
Company is required to file by September 1, 2007 an additional S-1 registration
statement or, if eligible an S-3 registration statement, to register the
remaining common shares issuable upon conversion of the Series A Notes and
the
Series B Notes. The common shares remaining to be registered under
the Series A Notes total 3,162,394 and under the Series B Notes total
18,818,723. The Company has 150 days from the date of filing the
additional registration statement to have the registration statement declared
effective or pay liquidated damages in the amount of 1.0% of the aggregate
purchase price per month ($257,179) to a maximum of 10.0% of the aggregate
purchase price ($2,571,791). Liquidated damages can, at the option of
the Company, be paid in cash or in fully paid and non-assessable common shares
if all equity conditions outlined in the Form S-1 registration statement
are
met.
Further
detail of the agreement between the Company and the holders of
the Series A Notes and the Series B Notes is disclosed in three
separate Forms 8-K filed by the Company on January 25, February 5, and April
5,
2007.
Note
11. Derivative
Financial Instruments
Oil
and Gas Commodity Hedges
The
table
below summarizes derivative instrument gain (loss) activity:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
Derivative
Instrument Gain (Loss) Activity
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
In
Thousands
|
|
|
|
|
|
|
Derivative
contract settlements realized in hedge gain (loss)
|
|
$ |
1,395
|
|
|
$ |
--
|
|
|
$ |
1,820
|
|
|
$ |
--
|
|
Change
in fair value of derivatives
|
|
|
231
|
|
|
|
--
|
|
|
|
(1,360 |
) |
|
|
--
|
|
Total
derivative instrument gain (loss)
|
|
$ |
1,626
|
|
|
$ |
--
|
|
|
$ |
460
|
|
|
$ |
--
|
|
To
mitigate a portion of the potential exposure to adverse market changes, the
Company has entered into various derivative contracts. As of June 30,
2007, the Company had hedge contracts in place through April 2010 for a total
of
approximately 7,298,800 MMBtu of anticipated production. The Company
anticipates that all forecasted transactions will occur by the end of their
originally specified periods. All contracts are entered into for
other than trading purposes.
As
of
June 30, 2007, all natural gas derivative instruments qualified as cash flow
hedges for accounting purposes. The estimated fair value of natural
gas derivative contracts designated and qualifying as cash flow hedges under
Statement of Financial Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS No. 133”) was a decrease in the
inception-to-date gain in fair value of derivatives of $1.36 million for
the
period ending June 30, 2007. No hedges were in place during the first
quarter of 2006. The inception-to-date estimated fair
value natural gas derivative contracts designated and qualifying as cash
flow
hedges at June 30, 2007 was $2.1 million; $0.3 million of which was classified
as a long-term liability and $2.4 million of which was classified as a
short-term asset.
Realized
gains or losses from the settlement of gas derivative contracts are reported
in
the natural gas revenue line of the consolidated statements of
operations. Changes in the fair value of derivative instruments
designated as cash flow hedges, to the extent they are effective in offsetting
cash flows attributable to the hedged risk, are recorded in other comprehensive
income until the hedged item is recognized in earnings. Any change in
fair value resulting from ineffectiveness is recognized currently in derivative
loss in the consolidated statement of operations.
The
Company has minimized ineffectiveness by entering into gas derivative contracts
indexed to CIG. As the Company’s derivative contracts contain
the same index as the Company’s sale contracts, this results in hedges that are
highly correlated with the underlying hedged item.
Note
12. Foreign
Currency Risk
The
Company is exposed to fluctuations in foreign currencies, primarily through
its
operations in Canada. The Company monitors this exposure but has not entered
into any hedging arrangements to protect itself from currency
fluctuations. Canadian Dollars were converted to U.S. Dollars as of
June 30, 2007 at $0.9443 as found on
www.oanda.com/convert/fxhistory.
Note
13. Commitments
and Contingencies
Operating
Leases
The
Company leases 8,802 square feet of administrative office space in the United
States and 5,495 square feet of administrative office space in Canada under
operating lease arrangements through November 30, 2009 and March 31, 2010,
respectively. A summary of future minimum lease payments under the
non cancelable operating leases as of June 30, 2007 is as follows:
United States
Operating Leases
|
|
|
|
Year
Ending December 31, 2007
|
|
$ |
77,201
|
|
Year
Ending December 31, 2008
|
|
|
156,419
|
|
Year
Ending December 31, 2009
|
|
|
145,233
|
|
Total
U.S. operating lease obligation
|
|
$ |
378,853
|
|
Commitments
relative to Canadian leases are stated in U.S. Dollars utilizing the current
average exchange rate for the period ended June 30, 2007 as reported by
Oanda.com historical currency exchange rates. The rate used for
conversion and applied to the future minimum lease payments is
$0.88199.
Canadian
Operating Leases
|
|
|
|
Year
Ending December 31, 2007
|
|
$ |
56,923
|
|
Year
Ending December 31, 2008
|
|
|
113,845
|
|
Year
Ending December 31, 2009
|
|
|
113,845
|
|
Year
Ending December 31, 2010
|
|
|
28,461
|
|
Total
Canadian operating lease obligation
|
|
$ |
313,074
|
|
Firm
Transportation Commitments
The
Company has a firm transportation agreement with an unaffiliated third party
in
place through April 11, 2013 to transport gas from Cheyenne Plains to ANR
PEPL
(Oklahoma). The agreement calls for the Company to pay $0.34 per Dth
on 2,000 Dth/D or approximately $20,000 per month. The firm
commitment payment is offset by any gathering charges for volumes shipped
on the
Cheyenne Plains pipeline to the ANR PEPL (Oklahoma) delivery
hub. Storm Cat has sold its 2,000 Dth/D capacity commitment for a
period of sixteen months (from November 2006 through February 2008) at the
full
rate and volume commitment.
The
Company also has a firm transportation agreement with an unaffiliated third
party that expires November 30, 2013. The agreement requires the
Company to pay $0.15 per Dth on 100% load basis of 4,000 Dth/D. Gas
is received at Glenrock and WIC (“Wyoming Interstate Company”) delivered to the
Dullknife hub. The Company is currently meeting its volume commitment
relative to this agreement.
Note
14. Differences
Between Canadian and United States Accounting Principles
These
financial statements have been prepared in accordance with U.S. GAAP which
differ in certain respects with those principles and practices that the Company
would have followed had its financial statements been prepared in accordance
with Canadian GAAP.
Differences
between U.S. GAAP and Canadian GAAP impact the Company as follows:
a) Stock-based
Compensation
The
Company grants stock options at exercise prices equal to the fair market
value
of the Company’s common shares at the date of the grant. Under SFAS
No. 123(R) the Company had accounted for its employee stock options under
the
fair value method. The fair value is determined using an option
pricing model that takes into account the share price at the grant date,
the
exercise price, the expected life of the option, the volatility of the
underlying common shares and the expected dividends, and the risk-free interest
rate over the expected life of the option.
There
is
no difference between Canadian GAAP and U.S. GAAP for the six months ended
June
30, 2007.
b) Oil
and Gas Properties
Prior
to
January 2004, there were certain differences between the full cost method
of
accounting for oil and gas properties as applied under Canadian GAAP and
as
applied under U.S. GAAP. The principal difference was in the method
of performing ceiling test evaluations under the full cost method of accounting
rules. Under Canadian GAAP, prior to January 2004, impairment of oil
and gas properties was based on the amount by which a cost center’s carrying
value exceeded its undiscounted future net cash flows from proved reserves
using
period-end, non-escalated prices and costs, less an estimate for future general
and administrative expenses, financing costs and income taxes. Effective
January
2004, Canadian GAAP requires recognition and measurement processes to assess
impairment of oil and gas properties using estimates of future oil and gas
prices and costs plus the cost of unproved properties that have been excluded
from the depletion calculation. In the measurement of the impairment, the
future
net cash flows of a cost center’s proved and probable reserves are discounted
using a risk-free interest rate.
For
U.S.
GAAP purposes, future net cash flows from proved reserves using period-end,
non-escalated prices and costs, are discounted to present value at 10% per
annum
and compared to the carrying value of oil and gas properties. At June
30, 2007 the Company performed a ceiling test in accordance with U.S. GAAP
and
determined that an impairment was not required (see Note 2 “Summary of
Significant Accounting Policies – Oil and Gas Reserves” for further
details).
c) Comprehensive
Loss
U.S.
GAAP
requires disclosure of comprehensive loss which includes net loss under U.S.
GAAP plus the change in cumulative translation adjustment and the unrealized
gain or loss on future volumes Storm Cat has hedged. The Company has
volumes hedged through April 2010 creating a current difference between U.S.
and
Canadian GAAP because the hedge gain or loss amounts are recognized on a
current
basis in the statement of operations under Canadian GAAP.
The
concept of comprehensive loss did not come into effect until fiscal years
beginning on or after October 1, 2006 for Canadian GAAP. Management
does not believe that any recently issued, but not yet effective, accounting
standards if currently adopted could have a material effect on the accompanying
financial statements.
d) Flow-through
Shares
U.S.
GAAP
requires the stated capital on flow-through share issuances to be equal to
the
estimated fair market value of the shares on the date of issue. The
difference between the gross proceeds received on the issuance of the shares
and
the estimated fair market value of the shares is recorded as a liability
(the
“Premium”) until the renunciation of expenditures has occurred. The Company
issued 6,172,839 flow-through share units on September 27, 2006. The
Premium on flow-through share liability related to these share units is
$2,086,233. The June 30, 2007 liability outstanding related to these
shares is $14,608.
Under
Canadian GAAP, the gross proceeds received on flow-through share issuances
are
initially recorded as share capital. When the expenditures are incurred and
the
tax deductions are renounced to subscribers, Canadian GAAP requires that
the
stated capital be reduced and that income tax benefits be recorded for the
estimated future income taxes that were renounced. Under U.S. GAAP,
the initial liability is adjusted to a deferred income tax liability and
as a
result of the recalculation of the Company’s deferred taxes, this amount is
ultimately recorded as an income tax benefit.
The
impact of the above on the financial statements is as follows:
Income
Statement
|
|
Three
Months Ended June 30,
|
|
dollars
in thousands, except per share
|
|
2007
|
|
|
2006
|
|
Net
loss for the year per U.S. GAAP
|
|
$ |
(4,592 |
) |
|
$ |
(1,184 |
) |
Difference
in recovery of future income tax asset
|
|
|
(182 |
) |
|
|
-
|
|
Net
loss for the year per Canadian GAAP
|
|
$ |
(4,774 |
) |
|
$ |
(1,184 |
) |
Basic
and diluted loss per share per Canadian GAAP
|
|
$ |
(0.06 |
) |
|
$ |
(0.02 |
) |
Weighted
average number of shares outstanding per U.S. GAAP
|
|
|
81,045,122
|
|
|
|
66,504,095
|
|
Income
Statement
|
|
Six
Months Ended June 30,
|
|
dollars
in thousands, except per share
|
|
2007
|
|
|
2006
|
|
Net
loss for the year per U.S. GAAP
|
|
$ |
(5,939 |
) |
|
$ |
(2,490 |
) |
Difference
in recovery of future income tax asset
|
|
|
1,544
|
|
|
|
1,663
|
|
Net
loss for the year per Canadian GAAP
|
|
$ |
(4,395 |
) |
|
$ |
(827 |
) |
Basic
and diluted loss per share per Canadian GAAP
|
|
$ |
(0.06 |
) |
|
$ |
(0.01 |
) |
Weighted
average number of shares outstanding per U.S. GAAP
|
|
|
80,816,505
|
|
|
|
66,145,091
|
|
Balance
Sheet
|
|
June
30,
|
|
|
June
30,
|
|
dollars
in thousands
|
|
2007
|
|
|
2006
|
|
Total
assets per U.S. GAAP
|
|
$ |
131,425
|
|
|
$ |
56,368
|
|
Total
assets per Canadian GAAP
|
|
$ |
131,425
|
|
|
$ |
56,368
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities per U.S. GAAP
|
|
|
72,608
|
|
|
|
10,915
|
|
Adjustment
for flow-through share liability
|
|
|
(15 |
) |
|
|
-
|
|
Total
liabilities per Canadian GAAP
|
|
$ |
72,593
|
|
|
$ |
10,915
|
|
Stockholders’
Equity
|
|
June
30,
|
|
|
June
30,
|
|
dollars
in thousands
|
|
2007
|
|
|
2006
|
|
Cummulative
deficit, end of the year, per U.S. GAAP
|
|
$ |
(22,562 |
) |
|
$ |
(12,251 |
) |
Difference
in recovery of future income tax asset
|
|
|
2,822
|
|
|
|
1,663
|
|
Adjustment
for flow-through share liability
|
|
|
(2,071 |
) |
|
|
-
|
|
Deficit,
end of the year, per Canadian GAAP
|
|
|
(21,811 |
) |
|
|
(10,588 |
) |
Adjustment
for tax effects of flow-through share liability
|
|
|
(736 |
) |
|
|
(1,663 |
) |
Share
capital, share subscriptions and contributed surplus, other comprehensive
income per Canadian and U.S. GAAP
|
|
|
81,379
|
|
|
|
57,704
|
|
Stockholders’
equity per Canadian GAAP
|
|
$ |
58,832
|
|
|
$ |
45,453
|
|
Stockholders’
equity per U.S. GAAP
|
|
$ |
58,817
|
|
|
$ |
45,453
|
|
Cash
Flow Statement
|
|
Six
Months Ended June 30,
|
|
dollars
in thousands
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities per U.S. GAAP
|
|
$ |
(7,024 |
) |
|
$ |
1,774
|
|
Difference
in recovery of future income tax asset
|
|
|
(1,544 |
) |
|
|
(1,663
|
) |
Cash
flows from operating activities per Canadian GAAP
|
|
|
(8,568 |
) |
|
|
111
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities per U.S. GAAP
|
|
|
34,274
|
|
|
|
2,093
|
|
Difference
in recovery of future income tax asset
|
|
|
1,544
|
|
|
|
1,663 |
|
Cash
flows from financing activities per Canadian GAAP
|
|
|
35,818
|
|
|
|
3,756
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities per U.S. GAAP
|
|
|
(32,417 |
) |
|
|
(21,992 |
) |
Cash
flows from investing activities per Canadian GAAP
|
|
|
(32,417 |
) |
|
|
(21,992 |
) |
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash per U.S. GAAP and Canadian GAAP
|
|
$ |
(5,167 |
) |
|
$ |
(18,125 |
) |
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Unless
the context otherwise requires, the terms “Storm Cat,”, “the Company”, “SCE”,
“we,” “us,” “our” or “ours” when used herein this Item refer to Storm Cat Energy
Corporation, together with its operating subsidiaries. When the
context requires, the Company refers to these entities separately.
CAUTION
REGARDING FORWARD LOOKING STATEMENTS
This
publication contains certain “forward-looking statements”, as defined in the
United States Private Securities Litigation Reform Act of 1995, and within
the
meaning of Canadian securities legislation, relating to matters such as the
Company’s drilling and other exploration plans and projected well economics.
Forward-looking statements are statements that are not historical facts;
they
are generally, but not always, identified by the words “expects,” “plans,”
“anticipates,” “believes,” “intends,” “estimates,” ”projects,” “aims,”
“potential,” “goal,” “objective,” “prospective,” and similar expressions, or
that events or conditions “will,” “would,” “may,” “can,” “could” or “should”
occur. Forward-looking statements are based on the beliefs, estimates and
opinions of Storm Cat’s management on the date the statements are made;
including production and reserve estimates, and potential benefits to Storm
Cat
of such acquisitions, and they involve a number of risks and uncertainties.
Consequently, there can be no assurances that such statements will prove
to be
accurate and actual results and future events could differ materially from
those
anticipated in such statements. Storm Cat undertakes no obligation to update
these forward-looking statements if management’s beliefs, estimates or opinions,
or other factors, should change. Factors that could cause future results
to
differ materially from those anticipated in these forward-looking statements
include, but are not limited to receipt of necessary approval from regulatory
bodies, the failure to achieve the anticipated benefits of the acquisition,
the
failure to close the acquisition, the volatility of natural gas prices, the
possibility that exploration efforts will not yield economically recoverable
quantities of gas, accidents and other risks associated with gas exploration
and
development operations, the risk that the Company will encounter unanticipated
geological factors, the Company’s need for and ability to obtain additional
financing, the possibility that the Company may not be able to secure permitting
and other governmental clearances necessary to carry out the Company’s
exploration and development plans, and the other risk factors discussed in
greater detail in the Company’s various filings on SEDAR (www.sedar.com) with
Canadian securities regulators and its filings with the U.S. Securities and
Exchange Commission (www.sec.gov), including the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2006.
Overview
Storm
Cat
is an independent oil and gas company focused, primarily, on the exploration,
production and development of large unconventional gas reserves from fractured
shales, coal beds and tight sand formations and, secondarily, from conventional
formations. The Company has producing properties in Wyoming’s Powder River Basin
(“PRB”) and Arkansas’ Arkoma Basin (“Fayetteville Shale”) and exploration and
development acreage in Canada. Storm Cat continues to execute on its long-term
strategy of growth through development and the acquisition of prospective
acreage that compliments its existing assets and exploits the abilities of
the
Company’s technical staff.
Storm
Cat
continued to build on its track record of production growth in the second
quarter of 2007. Total net sales increased 12.6% quarter-to-quarter from
662.6
MMcf in the first quarter 2007 to 745.8 MMcf during the second quarter
2007. Exit rate production for the quarter increased 15.3% from 8.5
MMcf/d at March 31, 2007 to 9.8 MMcf/d at June 30, 2007.
Year-over-year
production increased 218.2% from 234.4 MMcf in the second quarter 2006 to
745.8
MMcf in the second quarter 2007.
The
Company drilled 18 gross wells in the second quarter of 2007, all of which
were
drilled in the PRB. Year-to-date, the Company has drilled 39 wells, 38 of
which
are located in the PRB. Year-to-date 2007 finding and development
costs in the PRB approximate $1.20 per Mcf. Total project capital
expenditures during the second quarter of 2007 were approximately $12.4
million. 2007 year-to-date capital expenditures total $21.4
million.
For
the
remainder of 2007, Storm Cat will continue the development of its four key
operating areas: the PRB, Fayetteville Shale, Elk Valley and Alberta. Management
expects production and proved reserves in the PRB to continue to grow during
the
second half of 2007. If drilling and completion activities in the
Fayetteville Shale are successful, the Company expects to book year-end reserves
for the Fayetteville Shale. De-watering results from the Elk Valley
project are anticipated to provide determinative data by the fourth quarter
of
2007. Finally, Storm Cat is targeting conventional prospects
associated with the Company’s acreage position in Alberta.
2007
Activity in the Powder River Basin
Storm
Cat
owns approximately 41,730 gross acres and 31,905 net acres in the Powder
River
Basin in Wyoming.
During
the second quarter 2007, the Company drilled 18 wells bringing its total
well
count to 355 wells, of which 314 are Company-operated. Production
from the PRB at June 30, 2007 was 18.7 MMcf/d gross and 9.6 MMcf/d
net. The Company plans to add approximately 125 wells in the PRB in
2007.
2007
Activity in the Fayetteville Shale Area of Arkansas
Storm
Cat’s current acreage position is 22,678 gross acres and 17,518 net acres in
the
Fayetteville Shale play in Arkansas. The Company owned or controlled
20,051 gross and 13,982 net acres at December 31, 2006. During the
first half of 2007, Storm Cat added approximately 3,536 net acres in the
Fayetteville Shale which are contiguous to and interspersed with the Company’s
current acreage position.
In
the
second quarter, Storm Cat commenced the drilling of its first of three
Company-operated horizontal wells budgeted in 2007 in the Fayetteville Shale.
The second and third wells budgeted in 2007 are anticipated to be
drilled during the third quarter of 2007. The Company expects to
have initial results from these wells during the second half of 2007. In
addition, Storm Cat is in the final stages of negotiations for the construction
of a sales pipeline to its acreage. Right-of-ways are being secured
and, assuming successful results from the three wells, construction of the
sales
pipeline is expected to begin during late third quarter or early fourth quarter
2007. Finally, in 2007, Storm Cat has elected to participate in 16
non-operated Fayetteville Shale wells. It owns between a 1% and 8%
working interest in these wells, which are at various stages of planning,
drilling, completion or production. Current non-operated production
associated with these wells is 0.2 MMcf/d net.
2007
Activity in British Columbia, Canada (Elk Valley)
Storm
Cat
holds approximately 77,775 gross and net acres in the Company’s Elk Valley
coalbed methane project located in southeastern British Columbia.
Nine
wells, including five wells drilled in 2006, are currently in the
de-watering and evaluation stage. The Company remains encouraged by
water and associated gas production rates that are being observed and expects
to
make a determination as to the economic viability of the project at
year-end 2007.
2007
Activity in Alberta, Canada (Western Canadian Sedimentary
Basin)
Storm
Cat
owns or controls approximately 19,693 gross acres and 17,453 net acres in
the
Western Canadian Sedimentary Basin of Alberta, Canada.
In
2006,
activity focused on evaluating the economic potential of Horseshoe Canyon
and
Mannville Coals. Results have been inconclusive to date. Storm Cat
drilled one Horseshoe Canyon / Belly River sand well during the first quarter
of
2007 in Alberta. Results from this well are pending additional
production testing.
At
present, the Company is exploring conventional prospects that may also present
unconventional opportunities. The Company expects capital
expenditures of up to $4.0 million on these projects in the second half of
2007.
2007
Activity in Alaska
The
Company holds approximately 24,505 gross and net acres in the onshore area
of
the Cook Inlet Region of Alaska and drilled one well on this acreage in
2006. Storm Cat is in the process of evaluating completion potential
and business opportunities associated with its acreage.
Business
Risks
The
exploration for, and acquisition, development, production and sale of
natural gas is highly competitive and capital intensive. As in any commodity
business, the market price of the commodity produced and the costs associated
with finding, acquiring, extracting and financing the operation are critical
to
profitability and long-term value creation for shareholders. Generating
reserve and production growth while containing costs represents an ongoing
focus
for management, and is made particularly important in the Company’s business by
the natural production and reserve decline associated with oil and gas
properties. In addition to developing new reserves, Storm Cat competes to
acquire additional reserves, which involves judgments regarding recoverable
reserves, future gas prices, operating costs and potential environmental
and
other liabilities, title issues and other factors. During periods of high
gas
prices, third party contractor and material cost increases are more prevalent
due to increased competition for goods and services. Other challenges the
Company faces include attracting and retaining qualified personnel, gaining
access to equipment and supplies and maintaining access to capital on
sufficiently favorable terms.
Please
see “Risk Factors” under Item 1A of the Company’s Annual Report on Form 10-K for
the year ended December 31, 2006 for more information about these risks and
others.
Storm
Cat
has taken the following steps to mitigate the business challenges it
faces:
|
·
|
The
Company actively manages its exposure to commodity price fluctuations
by
hedging meaningful portions of expected production through the
use of
derivatives. Detailed hedging policy and procedures are outlined
in the
Company’s Hedging Policy.
|
|
·
|
Storm
Cat has a multi-year inventory of drilling locations associated
with its
CBM and shale assets, allowing it the opportunity to grow reserves
and
replace and expand production
organically.
|
|
·
|
The
Company has put in place a Delegation of Authority policy outlining
the
hierarchy of authorization for expenditures and commitments and
to provide
checks and balances.
|
|
·
|
A
comprehensive Authorization for Expenditure policy allows for the
tracking
of all significant capital expenditures so that budget to actual
integrity
can be monitored and maintained.
|
|
·
|
Storm
Cat uses third party engineering to evaluate acquisitions and estimate
year-end reserves. This provides an unbiased check against the
Company’s
internal evaluations.
|
|
·
|
Employees
and Directors sign a Code of Business Conduct and Ethics which
contains a
Whistle Blower Policy with an anonymous hotline to the Audit Committee
Chair so that fraud or violation of the Company’s policies can be reported
immediately and appropriate action
taken.
|
|
·
|
The
Board of Directors for the Company includes a majority of independent
Board Members. The Audit and Compensation Committees are exclusively
independent directors. The Board and the Audit Committee meet a
minimum of
once each quarter. The Audit Committee meets regularly with the
auditors
in sessions where management is not
present.
|
2007
Capital Budget
Storm
Cat’s Board of Directors approved a $40.0 million capital expenditure program
for 2007 subject to a quarter-by-quarter review and reauthorization by the
Board. The 2007 capital budget includes $20.0 million for drilling
approximately 125 wells in the PRB; $10.0 million for the drilling and
completion of three Storm Cat operated wells in the Fayetteville Shale; and
$10.0 million in Canada to maintain de-watering operations in Elk Valley
and for
drilling and completion activities in other Canadian projects. The $40.0
million capital budget will be funded through cash flow from operations and
cash-on-hand, augmented by the existing $35.0 million reserve-based revolving
line of credit with JPMorgan and the Company’s recent $50.2 million subordinated
debt financing.
The
2007
capital budget may be revised based on the evaluation of all factors affecting
the industry including, without limitation, drilling rig and oilfield service
availability drilling results, operational developments, unanticipated
transaction opportunities, market conditions and commodity price
fluctuations.
LIQUIDITY
AND CAPITAL RESOURCES
At
June
30, 2007, the Company had approximately $2.2 million of working capital,
which
is sufficient to cover all of its short-term obligations. Long-term
obligations include borrowings under the $35.0 million reserve-based revolving
line of credit with JPMorgan and the Series A Notes and the Series B Notes,
currently at $63.4 million. To meet its long-term obligations, the
Company will need to generate internal cash flow or will have to look to
equity
or debt markets for additional capital.
Repayment
of these obligations through growth in cash flow depends upon the successful
development of Storm Cat’s natural gas reserves. There is no
guarantee that the Company will be successful in developing its reserves
or that
commodity prices will remain at a level that makes these assets economically
viable. The Company has entered into financial hedges to protect its cash
flow
(see Note 11 “Derivative Financial Instruments” for further information);
however, as additional gas production is developed and hedges expire, the
Company’s cash flow will be subject to changes in commodity prices.
The
Company does not know of any trends, demands, commitments, events or
uncertainties that will result in, or that are reasonably likely to result
in,
the Company’s liquidity either materially increasing or decreasing in the
foreseeable future. Material increases or decreases in the Company’s liquidity
are substantially determined by the cash flow from natural gas production
from
the Company’s producing properties, the success or failure of the Company’s
exploration programs, and any future acquisition of new project
interests.
The
following table summarizes the Company’s sources and uses of cash for the six
months ended June 30, 2007 and 2006, respectively.
|
|
Six
Months Ended
|
|
Sources
and Uses of Cash
|
|
June
30,
|
|
In Thousands
|
|
2007
|
|
|
2006
|
|
Net
cash provided by (used in) operations
|
|
$ |
(7,024 |
) |
|
$ |
1,774
|
|
Net
cash used in investing activities
|
|
|
(32,417 |
) |
|
|
(21,992 |
) |
Net
cash provided by financing activities
|
|
|
34,274
|
|
|
|
2,093
|
|
Effect
of exchange rate changes on cash
|
|
|
883
|
|
|
|
958
|
|
Net
cash flow
|
|
$ |
(4,284 |
) |
|
$ |
(17,167 |
) |
The
decrease in cash provided by (used in) operations from the second quarter
2006
to the second quarter 2007 is primarily due to a reduction in operating working
capital stemming from a significant reduction in accounts payable that was
on
the books at year-end 2006. The increase in cash used in investing
activities is the result of development and exploration programs undertaken
in
the first half of 2007. Storm Cat also incurred a significant portion
of 2006 budgeted capital expenditures in 2007 which is reflected in cash
flows
from investing activities. The change in cash provided by financing
activities is primarily related to the issuance of the Series A Notes and
the
Series B Notes in the first quarter of 2007.
Working
Capital
At
December 31, 2006 Storm Cat’s current liabilities of approximately $29.1 million
exceeded its current assets of $13.5 million resulting in a working capital
deficit of $15.6 million. This compares to a working capital surplus
of $2.2 million as of June 30, 2007. The working capital surplus in
2007 is directly attributable to the net proceeds received from the sale
of the
Series A Notes and the Series B Notes.
Liquidity
Indicators
|
|
June
30,
|
|
|
December 31,
|
|
In Thousands
|
|
2007
|
|
|
2006
|
|
Accumulated
deficit
|
|
$ |
22,562
|
|
|
$ |
16,623
|
|
Working
capital
|
|
$ |
2,233
|
|
|
$ |
(15,594 |
) |
Bank
Credit Facility
Senior
Credit Facility
On
July
28, 2006, Storm Cat entered into a Credit Agreement, with JPMorgan Chase
Bank,
N.A., as Global Administrative Agent, and the Lenders party thereto (the
“U.S.
Credit Agreement”). Additionally, on July 28, 2006, Storm Cat
entered into a Credit Agreement with JPMorgan Chase Bank, N.A., Toronto Branch
as Canadian Administrative Agent, JPMorgan Chase Bank, N.A., as Global
Administrative Agent, and the Lenders party thereto (the “Canadian Credit
Agreement” and together with the U.S. Credit Agreement, the “Credit
Agreements”). Pursuant to these Credit Agreements, the Company and
its subsidiaries are permitted to borrow up to an aggregate principal amount
of
$250.0 million, to be allocated between them depending on the respective
borrowing base under each such agreement. The Credit Agreements were
amended on January 30, 2007 pursuant to the First Amendment to the Combined
Credit Agreements (the “First Amendment”) to allow for subordinated debt and to
amend the current ratio requirement. A subsequent Letter Agreement
was entered into on February 16, 2007, which established the borrowing base
at
$20.0 million and adjusted the applicable interest rates until a
re-determination of the Company’s reserves and borrowing base was
conducted. The Credit Agreements were amended again on May 24, 2007
pursuant to a Second Amendment to the Combined Credit Agreements (the “Second
Amendment” and together with the Credit Agreements and the First Amendment, the
“Amended Credit Agreements”).
Under
the
terms of the Second Amendment, the borrowing base of the Company increased
to
$35.0 million of which $20.0 million is conforming. Interest on
borrowings under the Amended Credit Agreements accrues at variable interest
rates at either a Eurodollar rate or an alternative base rate, at the Company’s
election. On loans made under the U.S. Credit Agreement, the
Eurodollar rate is calculated at LIBOR plus an applicable margin, which is
2.0%
assuming 100% utilization of the then conforming global borrowing
base. The alternate base rate is calculated as (1) the greater of (a)
the Prime Rate or (b) the Federal Funds Effective Rate plus 0.50%, plus (2)
an
applicable margin of 0.5% assuming 100% utilization of the then conforming
global borrowing base. For loans made under the Canadian Credit
Agreement, the Eurodollar rate is calculated at LIBOR plus an applicable
margin
of 2.0% assuming 100% utilization of the then conforming global borrowing
base. Canadian Prime loans are calculated at the Canadian Prime Rate
plus an applicable margin of 0.5% assuming 100% utilization of the then
conforming global borrowing base. USBR Loans Rates are calculated at
the USBR plus 0.5% and the Bankers Acceptance Stamping Fee is 2.0% assuming
100%
utilization of the then conforming global borrowing base. Storm Cat
elects the basis of the interest rate at the time of each
borrowing. In addition, the Company is obligated to pay a commitment
fee under the Amended Credit Agreements quarterly in arrears based on a
percentage multiplied by the daily amount that the aggregate commitments
exceed
borrowings under the Amended Credit Agreements. The commitment fee
percentage is 0.5% assuming 100% utilization of the then conforming global
borrowing base. Loans made under the Amended Credit Agreements are
secured by mortgages on the Company’s natural gas properties and guaranteed by
its PRB assets.
On
March
31, 2008, the Global Borrowing Base must equal the Conforming Borrowing
Base. The Amended Credit Agreements require the Company to hedge 80%
of is current proved developed producing production as determined on January
1,
2007 for a term of three years. The Amended Credit Agreements require
the Company to comply with financial covenants as follows: (1) a
ratio of current assets to current liabilities (determined at the end of
each
quarter) of not less than 1:1; and (2) a ratio of total funded debt
to EBITDA (as such terms are defined in the Amended Credit Agreement) for
the
most recent quarter, annualized, not to be greater than 4:1 for the fiscal
quarter ending June 30, 2007, and 3:1 for each subsequent
quarter. Quarterly compliance is calculated using a four quarter
rolling methodology and measured against certain targets.
The
Company was not in compliance of the EBITDA covenant as of June
30, 2007 and
projected that it was probable that it would not be in compliance
of the EBITDA
covenant as of September 30, 2007. Waivers were obtained from JPMorgan
for the
quarter ended June 30, 2007 and the quarter ended September 30,
2007.
Pursuant to the provisions of the Emerging Issues Task Force (“EITF”) No. 86-30,
Classifications of Obligations When a Violation is Waived by the
Creditor, the
Company projected that future compliance with existing covenants
at year-end
2007 was probable. Therefore, the Company has not reclassified
amounts outstanding under the credit facility as current liabilities.
The
Company is currently working with JPMorgan on an amendment to the
credit
facility. This amended credit facility is expected to have revised
covenants, and as these revised covenants are currently unknown,
management is
not able to assess the likelihood of compliance until such time
the amended
credit facility is agreed to. Until an agreement is reached, the borrowing
base has been reduced to $27.5MM from $35.0MM.
As
of
June 30, 2007, the Company had $13.2 million outstanding under the
Amended
Credit Agreements. An additional $5.0 million was drawn on the line
on July 10, 2007, leaving a balance outstanding of $18.2 million
subsequent to
quarter-end. At the time of the filing of this report, the Company
has approximately $8.3 million available to borrow under the Amended
Credit
Agreements after taking into account approximately $1.0 million in
letters of
credit secured by the line.
Convertible
Notes
On
January 19, 2007, Storm Cat entered into a Series A Note Purchase Agreement
for
the private placement of the Series A Notes in a total aggregate principal
amount of $18.5 million and a Series B Note Purchase Agreement for the private
placement the Series B Notes in a total aggregate principal amount of $31.7
million. The Series A Notes and the Series B Notes are convertible
into Storm Cat common shares at a price of $1.17 per share, as may be adjusted
in accordance with the terms of the Series A Notes or the Series B Notes
(as
applicable), and the Company may force the conversion of the Series A Notes
or
the Series B Notes (as applicable) at any time 18 months after the closing
date
of the applicable issuance that its common shares trade above $2.05, as may
be
adjusted, for 20 days within a period of 30 consecutive trading
days.
On
January 30, 2007, Storm Cat closed the private placement of Series A Notes
to
qualified institutional and accredited investors in a private placement pursuant
to Regulation D of the Securities Act of 1933, as amended, and exemptions
from
Canadian prospectus and registration requirements under National Instrument
45-106. The Series A Notes will mature on March 31, 2012, unless
earlier converted, redeemed or repurchased. The Series A Notes bear
interest at a rate of 9.25% per annum, commencing on January 30,
2007. Interest on the Series A Notes is payable quarterly in arrears
on March 31, June 30, September 30 and December 31 of each year, beginning
on
June 30, 2007.
On
March
30, 2007, Storm Cat closed on $31.7 million of Series B Notes to qualified
institutional and accredited investors in a private placement pursuant to
Regulation D of the Securities Act of 1933, as amended, and exemptions from
Canadian prospectus and registration requirements under National Instrument
45-106. The Series B Notes will mature on March 31, 2012, unless earlier
converted, redeemed or repurchased. The Series B Notes bear interest
at a rate of 9.25% per annum, commencing on March 30, 2007. Interest
on the Series A Notes is payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year, beginning on June 30,
2007. In April, 2007, the Company collected $17.4 million in proceeds
on the subscription receivable on its Series B Convertible Notes.
In
Canada, any shares issued on conversion of the Series B Notes are also subject
to a four month hold period and may not be traded before July 31, 2007 unless
permitted under applicable securities legislation and the rules of the Toronto
Stock Exchange.
As
part
of the private placements, the Company entered into a registration rights
agreement (the “Registration Rights Agreement”) with the investors requiring the
Company to file with the SEC registration statements covering the common
shares
issuable upon conversion of the Series A Notes and the Series B
Notes. Under the terms of the Registration Rights Agreement, the
Company had thirty days from the day of closing both the Series A Notes
transaction and the Series B Notes transaction to file a Form S-1 registration
statement with the SEC. The Company fulfilled this obligation with
respect to both the Series A Notes and the Series B Notes.
On
June
29, 2007, the Company filed an amended S-1 registration statement for 12,679,486
shares underlying the conversion of the Series A Notes and 8,241,106 shares
underlying the conversion of the Series B Notes. The registration
statement went effective on June 29, 2007. This registration
statement did not include all of the common shares that are issuable upon
conversion of the Series A Notes and the Series B Notes.
The
Company is required to file by September 1, 2007 an additional S-1 registration
statement or, if eligible an S-3 registration statement, to register the
remaining common shares issuable upon conversion of the Series A Notes and
the
Series B Notes. The common shares remaining to be registered under
the Series A Notes total 3,162,394 and under the Series B Notes total
18,818,723. The Company has 150 days from the date of filing the
additional registration statement to have the registration statement declared
effective or pay liquidated damages in the amount of 1.0% of the aggregate
purchase price per month ($257,179) to a maximum of 10.0% of the aggregate
purchase price ($2,571,791). Liquidated damages can, at the option of
the Company, be paid in cash or in fully paid and non-assessable common shares
if all equity conditions outlined in the Form S-1 registration statement
are
met.
Further
detail of the agreement between the Company and the holders of
the Series A Notes and the Series B Notes is disclosed in three
separate Forms 8-K filed by the Company on January 25, February 5, and April
5,
2007.
Additional
Financing
The
Company is constantly investigating participation opportunities in additional
exploration and development projects. If new project interests are
acquired, the Company will require additional funds for acquisition and
exploration and/or development of these new projects.
Off-Balance
Sheet Arrangements
From
time-to-time, Storm Cat enters into off-balance sheet arrangements and
transactions that can give rise to off-balance sheet obligations. As of June
30,
2007, the off-balance sheet arrangements and transactions that Storm Cat
has
entered into include undrawn letters of credit, operating lease agreements
and
gas transportation commitments. The Company does not believe that these
arrangements are reasonably likely to materially affect its liquidity or
availability of, or requirements for, capital resources.
Recent
Developments
Effective
April 9, 2007, J. Scott Zimmerman resigned as President and Chief Executive
Officer of Storm Cat.
On
May
18, 2007, the Company entered into a Separation Agreement with Mr. Zimmerman.
The Separation Agreement provided that the Company pay Mr. Zimmerman $350,000
in
a single lump sum payment on May 26, 2007, subject to statutory and authorized
deductions. The Separation Agreement accelerated the vesting on all stock
options held by Mr. Zimmerman. All unexercised stock options issued
to Mr. Zimmerman continue to be exercisable until the original expiration
date(s). The accelerated options have been fully expensed for a total
of $336,987 as of June 30, 2007. The Separation Agreement also
contains (1) a mutual release and waiver by both parties for matters pertaining
to or arising out of Mr. Zimmerman's employment, (2) a 12-month limited
non-competition covenant by Mr. Zimmerman and (3) provisions related to the
non-disclosure of confidential information, the non-solicitation of certain
employees and mutual non-disparagement.
On
June
21, 2007, the Company announced that Joseph M. Brooker, who had been working
with the Company as an independent consultant since early 2007, had been
named
Chief Executive Officer. Mr. Brooker was also appointed to the Company’s Board
of Directors following its Annual General Meeting of Shareholders on June
21,
2007. He assumed the duties as Chief Executive Officer effective July 2,
2007.
On
the
same day, Storm Cat also announced that Keith Knapstad, who had been serving
as
Acting Chief Executive Officer and President of Storm Cat since March 9,
2007,
had been appointed President and Chief Operating Officer and resigned his
position as Acting Chief Executive Officer and President. Mr. Knapstad will
continue to have oversight and control of all aspects of the Company’s United
States and Canadian operations.
On
July
11, 2007, the Company announced that Don Martin, Vice President of Canadian
and
International Operations, had resigned his position effective July 31, 2007
to
pursue other opportunities.
Results
of Operations
Comparative
Results of Operations for the Six Months Ended June 30, 2007 and
2006
Selected
Operating Data:
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
Net
Sales Volume:
|
|
|
|
|
|
|
Natural
gas (MMcf)
|
|
|
1,408.4
|
|
|
|
457.4
|
|
|
|
|
|
|
|
|
|
|
Oil
and Gas Sales (In Thousands)
|
|
|
|
|
|
|
|
|
Natural
gas
|
|
$ |
7,580
|
|
|
$ |
2,878
|
|
|
|
|
|
|
|
|
|
|
Average
Sales Prices:
|
|
|
|
|
|
|
|
|
Natural
gas (per Mcf)
|
|
$ |
5.38
|
|
|
$ |
6.29
|
|
|
|
|
|
|
|
|
|
|
Additional
Data (per Mcf):
|
|
|
|
|
|
|
|
|
Gathering
and transportation
|
|
$ |
0.68
|
|
|
$ |
1.23
|
|
Lease
operating expenses
|
|
$ |
1.10
|
|
|
$ |
2.13
|
|
Ad
valorem and property taxes
|
|
$ |
0.43
|
|
|
$ |
0.83
|
|
Depreciation,
depletion, amortization and accretion
|
|
$ |
2.49
|
|
|
$ |
2.63
|
|
General
and administrative, net of capitalization
|
|
$ |
3.52
|
|
|
$ |
2.46
|
|
Stock-based
compensation
|
|
$ |
0.84
|
|
|
$ |
3.17
|
|
Natural
Gas Sales. Natural gas sales revenue increased approximately
163.4% from $2.878 million in the first six months of 2006 to $7.580 million
for
the same period in 2007. Sales revenue is a function of sales volumes
and average sales prices. Sales volumes increased 207.9% between
periods. The volume increase resulted primarily from
acquisition and successful drilling activities over the past year that
produced increased sales volumes which more than offset the natural
decline in production. The Company’s average price for natural gas
decreased 14.5% between periods.
Lease
Operating Expenses. Lease operating expenses increased
approximately $0.576 million to $1.548 million in the first six months of
2007
compared to $0.972 million the first six months of 2006. The increase
resulted primarily from costs associated with new property acquisitions and
drilling in the current year. Lease operating expenses as a
percentage of oil and gas sales decreased from 46.9% during the first six
months
of 2006 to 28.5% during the first six months of 2007 as lease operating cost
increases did not keep pace with volume increases. Lease operating
expenses per Mcf decreased 48.3% from $2.13 during the first six months of
2006
to $1.10 during the same period in 2007.
Ad
Valorem and Property Taxes. Ad valorem and property taxes increased
approximately $0.233 million to $0.611 million in the first six months of
2007
compared to $0.378 million the first six months of 2006. The increase
resulted primarily from gas volume increases over the past year. Ad
valorem and property taxes as a percentage of oil and gas sales decreased
from
13.1% during the first six months of 2006 to 8.1% during the first six months
of
2007. This decrease is attributable to lower CIG pricing in the
second quarter of 2007 as compared to 2006. Volatility in gas sales
prices has been normalized by the Company’s hedge contracts, but the valuation
for taxes is based on market price. Ad valorem and property tax per
Mcf decreased 47.5% from $0.83 during the first six months of 2006 to $0.43
during the same period in 2007.
Depreciation,
Depletion and Amortization. Depreciation, depletion and
amortization increased by $2.354 million to $3.415 million during the first
six months of 2007 compared to $1.061 million for the same period in
2006. This increase resulted from increased production generated by
properties recently acquired. The per Mcf rate decreased $0.13 or
5.0% from $2.63 in the first six months of 2006 to $2.49 for the same period
in
2007. The components of depreciation, depletion and
amortization expense were as follows:
Depreciation,
Depletion and Amortization
|
|
Six
Months Ended
June
30,
|
|
In
Thousands
|
|
2007
|
|
|
2006
|
|
Depreciation
|
|
$ |
128
|
|
|
$ |
149
|
|
Depletion
|
|
|
3,287
|
|
|
|
912
|
|
Amortization
|
|
|
--
|
|
|
|
--
|
|
Total
depreciation, depletion and amortization
|
|
$ |
3,415
|
|
|
$ |
1,061
|
|
General
and Administrative Expense. The Company reports general and administrative
expense net of stock-based compensation and capitalized internal
costs. The components of general and administrative expense
were as follows:
General
and Administrative Expense
|
|
Six
Months Ended
June
30,
|
|
In
Thousands
|
|
2007
|
|
|
2006
|
|
General
and administrative expense
|
|
$ |
4,963
|
|
|
$ |
2,240
|
|
Stock-based
compensation
|
|
|
1,189
|
|
|
|
1,451
|
|
Capitalized
internal costs
|
|
|
--
|
|
|
|
(1,114 |
) |
Total
general and administrative expense, net
|
|
$ |
6,152
|
|
|
$ |
2,577
|
|
Net general
and administrative expense increased $3.575 million to $6.152 million
during the initial six months of 2007 compared to $2.577 million during the
same
period in 2006. On a per Mcf basis, net general and
administrative expense increased 43.1% from $2.46 in the first half of 2006
to
$3.52 for the same period in 2007. The period-over-period change is
comprised of several factors, including a lump sum severance payment made
to J.
Scott Zimmerman in the second quarter of 2007 for $0.350
million. Additionally, salaries and related taxes and benefits,
excluding Mr. Zimmerman’s severance payment, totaled $1.550 million in the
first half of 2007 compared to $1.067 million in the first half of 2006;
and
legal fees increased by $0.168 million quarter-over-quarter. General
and administrative expense in the second quarter of 2007 also included
$0.159 million related to the reclassification of reserve audit fees
from lease operating expense to general and
administrative. Bank fees related to alternative financing of $0.300
million were incurred in the first half of 2007, and the amortization of
debt
issuance cost in 2007 was $0.600 million. Beginning with 2007, Storm
Cat discontinued the capitalization of internal costs. In the first
half of 2006, $1.114 million of internal costs were capitalized.
Impairment. There
was no impairment recorded in the six months ended June 30, 2007 or
2006.
Income
Tax. The income tax benefit realized in the first half of 2007
was $1.278 million. This is a tax benefit that is passed on to our
flow-through shareholders. In order to have this tax benefit, the
flow-through shareholders pay a premium above market for their
shares. This premium is reduced in equity and recorded as a
liability. As the capital obligation is spent, the liability is
reduced and an income tax benefit is recorded to the income
statement. A flow-through share liability of $15,000 still remains on
the Company’s balance sheet and the associated capital must be spent by December
31, 2007.
Interest
Expense. Interest expense during the first half of 2007 consists
primarily of interest expense related to the Company’s senior credit facility
with JPMorgan and on the Series A Notes and the Series B Notes. These
obligations were not in place in the first half of 2006.
Known
Future Trends. The Company expects continued increases in its
production, revenue and lease operating expenses and interest expense due
to its
capital expenditure plans and wells coming on production. The
Company also expects ongoing significant capital expenditures in order to
explore and develop its current acreage.
Comparative
Results of Operations for the Three Months Ended June 30, 2007 and
2006
Selected
Operating Data:
|
|
Three
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
Net
Sales Volume:
|
|
|
|
|
|
|
Natural
gas (MMcf)
|
|
|
745.8
|
|
|
|
234.4
|
|
|
|
|
|
|
|
|
|
|
Oil
and Gas Sales (In Thousands)
|
|
|
|
|
|
|
|
|
Natural
gas
|
|
$ |
3,668
|
|
|
$ |
1,599
|
|
|
|
|
|
|
|
|
|
|
Average
Sales Prices:
|
|
|
|
|
|
|
|
|
Natural
gas (per Mcf)
|
|
$ |
4.92
|
|
|
$ |
6.82
|
|
|
|
|
|
|
|
|
|
|
Additional
Data (per Mcf):
|
|
|
|
|
|
|
|
|
Gathering
and transportation
|
|
$ |
0.53
|
|
|
$ |
1.19
|
|
Lease
operating expenses
|
|
$ |
1.31
|
|
|
$ |
2.52
|
|
Ad
valorem and property taxes
|
|
$ |
0.38
|
|
|
$ |
0.78
|
|
Depreciation,
depletion, amortization and accretion
|
|
$ |
2.52
|
|
|
$ |
2.98
|
|
General
and administrative, net of capitalization
|
|
$ |
3.70
|
|
|
$ |
2.03
|
|
Stock-based
compensation
|
|
$ |
0.98
|
|
|
$ |
2.91
|
|
Natural
Gas Sales. Natural gas sales revenue increased approximately
129.4% from $1.599 million in the second quarter of 2006 to $3.668 million
for
the same period in 2007. Sales revenue is a function of sales volumes
and average sales prices. Sales volumes increased 218.2% between
periods. The volume increase resulted primarily from acquisition and
successful drilling activities over the past year that produced increased
sales volumes which more than offset the natural decline in
production. The Company’s average price for natural gas decreased
27.9% between periods.
Lease
Operating Expenses. Lease operating expenses increased
approximately $0.298 million to $1.072 million in the second quarter of 2007
compared to $0.774 million the second quarter of 2006. The increase
resulted primarily from costs associated with new property acquisitions and
drilling in the current year. Lease operating expense as a percentage
of oil and gas sales decreased from 48.4% during the second quarter of 2006
to
34.2% during the second quarter of 2007 as lease operating cost increases
did
not keep pace with volume increases. Lease operating expense per Mcf
decreased 48.2% from $2.52 during the second quarter of 2006 to $1.31 during
the
same period in 2007.
Ad
Valorem and Property Taxes. Ad valorem and property taxes increased
approximately $0.098 million to $0.282 million in the second quarter of 2007
compared to $0.184 million the second quarter of 2006. The increase
resulted primarily from gas volume increases over the past year. Ad
valorem and property taxes as a percentage of oil and gas sales decreased
from
11.5% during the second quarter of 2006 to 7.7% during the second quarter
of
2007. This decrease is attributable to lower CIG pricing in the
second quarter of 2007 as compared to 2006. Volatility in gas sales
prices has been normalized by the Company’s hedge contracts, but the valuation
for taxes is based on market price. Ad valorem and property tax per
Mcf decreased 51.7% from $0.78 during the second quarter of 2006 to $0.38
during
the same period in 2007.
Depreciation,
Depletion and Amortization. Depreciation, depletion and amortization
increased by $1.270 million to $1.843 million during the second quarter of
2007
compared to $0.573 million for the same period in 2006. This increase
resulted from increased production from recent acquisitions and an increase
in
the DD&A rate. The per Mcf rate decreased $0.46 or 15.3% from
$2.98 in the second quarter of 2006 to $2.52 for the same period in
2007. The components of depreciation, depletion and amortization
expense were as follows:
Depreciation,
Depletion and Amortization
|
|
Three
Months Ended
June
30,
|
|
In
Thousands
|
|
2007
|
|
|
2006
|
|
Depreciation
|
|
$ |
54
|
|
|
$ |
73
|
|
Depletion
|
|
|
1,742
|
|
|
|
500
|
|
Amortization
|
|
|
--
|
|
|
|
--
|
|
Total
depreciation, depletion and amortization
|
|
$ |
1,796
|
|
|
$ |
573
|
|
General
and Administrative Expense. The Company reports general and administrative
expense net of stock-based compensation and capitalized internal
costs. The components of general and administrative expense were as
follows:
General
and Administrative Expense
|
|
Three
Months Ended
June
30,
|
|
In
Thousands
|
|
2007
|
|
|
2006
|
|
General
and administrative expense
|
|
$ |
2,763
|
|
|
$ |
1,206
|
|
Stock-based
compensation
|
|
|
728
|
|
|
|
683
|
|
Capitalized
internal costs
|
|
|
--
|
|
|
|
(730 |
) |
Total
general and administrative expense, net
|
|
$ |
3,491
|
|
|
$ |
1,159
|
|
Net
general and administrative expense increased $2.332 million to $3.491 million
during the second quarter of 2007 compared to $1.159 million during the same
period in 2006. On a per Mcf basis, net general and administrative
expense increased 82.4% from $2.03 in the second quarter of 2006 to $3.70
for
the same period in 2007. In the second quarter of 2007, a lump sum
severance payment of $0.350 million was made to J. Scott
Zimmerman. Salaries and related benefits and taxes in the second
quarter of 2007 totaled $0.785 million, excluding the severance payment and
associated taxes made to Mr. Zimmerman. Additionally, debt issuance
costs of $0.453 million (primarily related to the amortized portion of fees
associated with the Series A Notes and the Series B Notes) were recorded
in the
second quarter of 2007. In total, Storm Cat incurred $1.219 million
in one-time general and administrative expenses in the second quarter of
2007
for severance payments and non-recurring fees relative to the registration
of
the Series A Notes and the Series B Notes including debt issuance costs,
legal
fees, registration fees and other related charges. Beginning in 2007,
Storm Cat discontinued the capitalization of internal costs. In the
second quarter of 2006, $0.729 million of internal costs were
capitalized.
Firm
Transportation Commitments
The
Company has a firm transportation agreement in place through April 11, 2013
to
transport gas from Cheyenne Plains to ANR PEPL (Oklahoma). The
agreement calls for the Company to pay $0.34 per Dth on 2,000 Dth/D or
approximately $20,000 per month. The firm commitment payment is
offset by any gathering charges for volumes shipped on the Cheyenne Plains
pipeline to the ANR PEPL (Oklahoma) delivery hub. Storm Cat has sold
its 2,000 Dth/D capacity commitment for a period of sixteen months (from
November 2006 through February 2008) at the full rate and volume
commitment.
The
Company also has a firm transportation agreement with an unaffiliated third
party that expires November 30, 2013. The agreement requires the
Company to pay $0.15 per Dth on 100% load basis of 4,000 Dth/D. Gas
is received at Glenrock and WIC and delivered to the Dullknife
hub. The Company is currently meeting its volume commitment relative
to this agreement.
Outstanding
Share Data
As
of
June 30, 2007, the Company had 81,004,820 shares issued and
outstanding, and 4,649,569 share purchase, finder fee and agent warrants
outstanding. Also at June 30, 2007, there were 4,760,000
common share options outstanding under the Company’s Amended and Restated Share
Option Plan and 122,500 unvested RSUs outstanding under the Company's Restricted
Share Unit Plan. The total amount of common shares reserved for
issuance under the Amended and Restated Share Option Plan and the Restricted
Share Unit Plan as of June 30, 2007 was 4,882,500 common
shares. There were also 15,841,880 common shares reserved for
issuance upon conversion of the Series A Notes and 27,059,829 common shares
reserved for issuance upon conversion of the Series B Notes.
During
the six months ended June 30, 2007, 500,000 options were exercised for gross
proceeds of $169,145; and 75,000 RSUs vested generating an expense to the
Company of $79,061. No warrants were exercised during this six-month
period.
Related
Party Transactions
The
Company has an agreement with Beatty & Wozniak, P.C., a law firm of which
Mr. Wozniak is a partner, for retainer and legal fees of a minimum of
$10,000 per month plus reasonable expenses. The Company paid Beatty
& Wozniak $153,236 in legal fees and expenses in the first six months of
2007. Storm Cat’s Board of Directors approved these transactions,
with Mr. Wozniak abstaining.
The
Company closed its private offerings of the Series A Notes and the
Series B Notes on January 30, 2007 and March 30, 2007,
respectively. Trapeze Asset Management Inc. and Trapeze Capital
Corp., two related entities that, together with a group including 1346049
Ontario Limited and Randall Abramson, beneficially own more than 5% of the
Company's common shares, participated in both the Company's Series A Note
and
Series B Note offerings. The two entities purchased $3.7 million in
Series A Notes, convertible at a rate of $1.17 per share into 3,162,394 common
shares, and $13.1 million in Series B Notes, convertible at a rate of $1.17
per
share into 11,196,581 common shares.
Both
the
Series A Notes and the Series B Notes accrue interest at a rate of 9.25%
per
annum, which the Company pays quarterly in arrears. Storm
Cat's Board of Directors approved the transactions with Trapeze Asset
Management Inc. and Trapeze Capital Corp.
The
following directors or officers participated in the Series B Note offering
in
the following amounts: J. Scott Zimmerman - $30,000; Paul Wiesner -
$25,000; Robert J. Clark - $50,000; David G. Wight - $3,000; and Michael
O’Byrne
- $10,000.
Glossary
of Natural Gas Terms
The
following is a description of the meanings of some of the oil and natural
gas industry terms used in this Quarterly Report on Form 10-Q.
Bcf.
Billion cubic feet of natural gas.
Btu
or
British Thermal Unit. The quantity of heat required to raise the temperature
of one pound of water by one degree Fahrenheit.
“CIG”
Colorado Interstate Gas. CIG is a major transporter of natural
gas in the Rocky Mountain region. The Colorado Interstate Gas system is
connected to nearly every major supply basin in the Rocky Mountains as well
as
production areas in the Texas Panhandle, western Oklahoma, western Kansas,
and
Wyoming. Storm Cat’s PRB gas is priced at the CIG index
price.
Completion.
The installation of permanent equipment for the production of natural
gas or oil.
Condensate.
Liquid hydrocarbons associated with the production of a primarily natural
gas
reserve.
Developed
acreage. The number of acres that are allocated or assignable to productive
wells or wells capable of production.
Development
well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be
productive.
Dth.
Decatherms.
Dth/D.
Decatherms per day.
Dry
hole. A well found to be incapable of producing hydrocarbons in sufficient
quantities such that proceeds from the sale of such production exceed production
expenses and taxes.
Exploratory
well. A well drilled to find and produce natural gas or oil reserves
not classified as proved, to find a new reservoir in a field
previously found to be productive of natural gas or oil in another reservoir
or
to extend a known reservoir. Generally, an exploratory well is any well that
is
not a development well, a service well, or a stratigraphic test
well.
Farm-in
or farm-out. An agreement under which the owner of a working interest in
a oil and natural gas lease assigns the working interest or a
portion of the working interest to another party who desires to drill on
the
leased acreage. Generally, the assignee is required to drill one or
more wells in order to earn its interest in the acreage. The assignor
usually retains a royalty or reversionary interest in the lease. The
interest received by an assignee is a “farm-in” while the interest transferred
by the assignor is a “farm-out.”
Field.
An area consisting of either a single reservoir or multiple reservoirs, all
grouped on or related to the same
individual geological structural feature and/or stratigraphic
condition.
Gross
acres or gross wells. The total acres or wells, as the case may be, in which
a working interest is owned.
Lead.
A specific geographic area which, based on supporting geological, geophysical
or
other data, is deemed to have potential for the discovery of commercial
hydrocarbons.
MBtu.
Thousand British Thermal Units.
Mcf.
Thousand cubic feet of natural gas.
Mcfe.
Thousand cubic feet equivalent, determined using the ratio of six Mcf of
natural
gas to one Bbl of crude oil, condensate or natural gas liquids.
MMBtu.
Million British Thermal Units.
MMcf.
Million cubic feet of natural gas.
MMcf/d. MMcf
per day.
MMcfe.
Million cubic feet equivalent, determined using the ratio of six Mcf of natural
gas to one Bbl of crude oil, condensate or natural gas liquids.
Net
acres or net wells. The sum of the fractional working interest owned in
gross acres or wells, as the case may be.
Net
feet of pay. The true vertical thickness of reservoir rock estimated to both
contain hydrocarbons and be capable of contributing to producing
rates.
PRB.
Powder River Basin. The region covers Southeast Montana and Northern
Wyoming and is approximately 120 miles East to West and 200 miles North to
South. Major cities in this area include Gillette and Sheridan,
Wyoming. Storm Cat operates only in Wyoming.
Present
value of future net revenues or present value or PV-10. The
pre-tax present value of estimated future revenues to be generated
from the production of proved reserves calculated in accordance with SEC
guidelines, net of estimated production and future development costs,
using prices and costs as of the date of estimation without future escalation,
without giving effect to non-property related expenses such as general and
administrative expenses, debt service and depreciation, depletion and
amortization, and discounted using an annual discount rate of 10%.
Productive
well. A well that is found to be capable of producing hydrocarbons in
sufficient quantities such that proceeds from the sale of the
production exceed production expenses and taxes.
Prospect.
A specific geographic area which, based on supporting geological,
geophysical or other data and also preliminary economic analysis using
reasonably anticipated prices and costs, is deemed to have potential for
the
discovery of commercial hydrocarbons.
Proved
area. The part of a property to which proved reserves have been specifically
attributed.
Proved
developed oil and gas reserves. Reserves that can be expected to be
recovered through existing wells with existing equipment and operating
methods. Additional oil and gas expected to be obtained through the
application of fluid injection or other improved recovery techniques for
supplementing the natural forces and mechanisms of primary recovery should
be
included as “proved developed reserves” only after testing by a pilot project or
after the operation of an installed program has confirmed through
production responses that increased recovery will be achieved.
Proved
oil and gas reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions, i.e.,
prices and costs as of the date the estimate is made. Reservoirs are
considered proved if economic producibility is supported by either actual
production or conclusive formation test. The area of a reservoir
considered proved includes (a) that portion delineated by drilling and defined
by gas-oil and/or oil-water contacts, if any, and (b) the immediately
adjoining portions not yet drilled, but which can be reasonably
judged as economically productive on the basis of available geological and
engineering data. In the absence of information on fluid contacts,
the lowest known structural occurrence of hydrocarbons controls the lower
proved
limit of the reservoir. Reserves which can be produced economically
through application of improved recovery techniques (such as fluid injection)
are included in the “proved” classification when successful testing by a pilot
project, or the operation of an installed program in the reservoir,
provides support for the engineering analysis on which the project or program
was based. Estimates of proved reserves do not include the
following: (a) oil that may become available from known reservoirs
but is classified separately as “indicated additional reserves”; (b)
crude oil, natural gas and natural gas liquids, the recovery of which
is subject to reasonable doubt because of uncertainty as to geology, reservoir
characteristics or economic factors; (c) crude
oil, natural gas and natural gas liquids that may occur in
undrilled prospects; and (d) crude oil, natural gas and natural gas
liquids that may be recovered from oil shales, coal, gilsonite and
other such sources.
Proved
properties. Properties with proved reserves.
Proved
undeveloped reserves. Reserves that are expected to be recovered from new
wells on undrilled acreage or from existing wells where a relatively major
expenditure is required for recompletion. Reserves on undrilled
acreage are limited to those drilling units offsetting productive units that
are
reasonably certain of production when drilled. Proved reserves for
other undrilled units can be claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation. Proved undeveloped reserves may not include estimates
attributable to any acreage for which an application of fluid injection or
other
improved recovery technique is contemplated, unless such techniques have
been
proved effective by actual tests in the area and in the same
reservoir.
Reservoir.
A porous and permeable underground formation containing a natural accumulation
of producible natural gas and/or oil that is confined by impermeable rock
or
water barriers and is separate from other reservoirs.
Service
well. A well drilled or completed for the purpose of supporting production
in an existing field. Specific purposes of service wells include gas
injection, water injection, steam injection, air injection, salt-water disposal,
water supply for injection, observation, or injection for in-situ
combustion.
Spud. The
initial phase of drilling a well.
Unconventional
resources/reserves. Reserves from fractured shales, coal beds and tight sand
formations.
Undeveloped
acreage. Lease acreage on which wells have not been drilled or completed to
a point that would permit the production of commercial quantities of oil
and natural gas regardless of whether such acreage contains proved
reserves.
Unproved
properties. Properties with no proved reserves.
Working
interest. The operating interest that gives the owner the right to drill,
produce and conduct operating activities on the property and receive a share
of
production.
|
Item
3. Quantitative and Qualitative Disclosures About
Market Risk
|
The
Company manages exposure to commodity price fluctuations by periodically
hedging
a portion of estimated natural gas production. The graph below
details the rate of return for new wells drilled on the Company’s existing
properties, realized at various natural gas price points for each of the
Company’s geographic producing areas.
As
of
June 30, 2007, the Company had an inception-to-date unrealized gain on hedges
of
$2.1 million; of which $0.3 million was classified as a long-term liability
and
$2.4 million was classified as a current asset. All of Storm Cat’s
natural gas derivative instruments qualified as cash flow hedges for accounting
purposes under SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” as of this date.
Realized
gains or losses from the settlement of gas derivative contracts are reported
in
the total operating revenues section of the consolidated statements of
operations. Changes in the fair value of derivative instruments
designated as cash flow hedges, to the extent they are effective in offsetting
cash flows attributable to the hedged risk, are recorded in other comprehensive
income until the hedged item is recognized in earnings. Any change in
fair value resulting from ineffectiveness is recognized currently in derivative
loss in the consolidated statement of operations.
The
Company has minimized ineffectiveness by entering into gas derivative contracts
indexed to CIG. As the Company’s derivative contracts contain the
same index as the Company’s sale contracts, this results in hedges that are
highly correlated with the underlying hedged item.
At
the
June 30, 2007, Storm Cat had the following commodity swaps in
place:
Natural
Gas
|
|
From
|
|
To
|
|
Qtrly.
Vol. (MMBtu)
|
Contract
#1 - $7.16 per MMBtu
|
|
Jul-07
|
|
Sep-07
|
|
138,000
|
|
|
Oct-07
|
|
Dec-07
|
|
138,000
|
|
|
Jan-08
|
|
Mar-08
|
|
136,500
|
|
|
Apr-08
|
|
Jun-08
|
|
136,500
|
|
|
Jul-08
|
|
Sep-08
|
|
138,000
|
|
|
Oct-08
|
|
Dec-08
|
|
138,000
|
|
|
Jan-09
|
|
Mar-09
|
|
135,000
|
|
|
Apr-09
|
|
Jun-09
|
|
136,500
|
|
|
Jul-09
|
|
Jul-09
|
|
46,500
|
|
|
|
|
|
|
|
Contract
#2 - $7.27 per MMBtu
|
|
Jul-07
|
|
Sep-07
|
|
184,000
|
|
|
Oct-07
|
|
Dec-07
|
|
184,000
|
|
|
Jan-08
|
|
Mar-08
|
|
182,000
|
|
|
Apr-08
|
|
Jun-08
|
|
182,000
|
|
|
Jul-08
|
|
Sep-08
|
|
184,000
|
|
|
Oct-08
|
|
Dec-08
|
|
184,000
|
|
|
Jan-09
|
|
Mar-09
|
|
180,000
|
|
|
Apr-09
|
|
Jun-09
|
|
182,000
|
|
|
Jul-09
|
|
Aug-09
|
|
124,000
|
|
|
|
|
|
|
|
Contract
#3 - $5.12 per MMBtu
|
|
Jul-07
|
|
Sep-07
|
|
220,800
|
|
|
Oct-07
|
|
Dec-07
|
|
220,800
|
|
|
|
|
|
|
|
Contract
#4 - $5.22 per MMBtu
|
|
Jul-07
|
|
Sep-07
|
|
42,000
|
|
|
Oct-07
|
|
Dec-07
|
|
100,000
|
|
|
|
|
|
|
|
Contract
#5 - $6.61 per MMBtu
|
|
Jan-08
|
|
Mar-08
|
|
109,200
|
|
|
Apr-08
|
|
Jun-08
|
|
109,200
|
|
|
Jul-08
|
|
Sep-08
|
|
110,400
|
|
|
Oct-08
|
|
Dec-08
|
|
110,400
|
|
|
|
|
|
|
|
Contract
#6 - $7.14 per MMBtu
|
|
Jan-08
|
|
Mar-08
|
|
343,000
|
|
|
Apr-08
|
|
Jun-08
|
|
389,000
|
|
|
Jul-08
|
|
Sep-08
|
|
365,000
|
|
|
Oct-08
|
|
Dec-08
|
|
332,000
|
|
|
|
|
|
|
|
Contract
#7 - $7.38 per MMBtu
|
|
Jan-09
|
|
Mar-09
|
|
383,000
|
|
|
Apr-09
|
|
Jun-09
|
|
305,000
|
|
|
Jul-09
|
|
Sep-09
|
|
385,000
|
|
|
Oct-09
|
|
Dec-09
|
|
488,000
|
|
|
|
|
|
|
|
Contract
#8 - $7.75 per MMBtu
|
|
Jan-10
|
|
Mar-10
|
|
427,000
|
|
|
Apr-10
|
|
Apr-10
|
|
130,000
|
The
commodity swaps shown above were established in conjunction with the credit
facility to allow the Company access to the funds needed to explore and develop
its existing acreage and to make acquisitions. The swaps are hedged
at CIG prices.
A
10%
increase/decrease in CIG gas prices will result in a +/- change of
$2.7 million in the value of unrealized derivatives.
Item
4. Controls
and Procedures
Evaluation
of disclosure controls and procedures. In accordance with Rule
13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), management evaluated, with the participation of the Chief Executive
Officer and the Chief Financial Officer, the effectiveness of the design
and
operation of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act) as of June 30, 2007. Based
upon their evaluation of these disclosures controls and procedures, the Chief
Executive Officer and the Chief Financial Officer concluded that the disclosure
controls and procedures were effective as of June 30, 2007.
Changes
in internal control over financial reporting. There were no
changes in internal controls over financial reporting that occurred during
the
quarter ended June 30, 2007 which have materially affected, or are reasonably
likely to materially affect, the Company’s internal controls over financial
reporting.
PART
II-OTHER INFORMATION
No
legal
proceedings are pending against the Company as of the filing date of this
Quarterly Report on Form 10-Q.
There
have been no material changes from the risk factors as previously disclosed
in
our Annual Report on Form 10-K for the year ended December 31,
2006.
Item
4. Submission of Matters to a Vote of
Security Holders
The
Annual General Meeting of Shareholders of Storm was held on June 21, 2007.
The
following matters were voted on at the meeting:
(i)
the
election of six (6) directors, (ii) the ratification of the appointment of
Hein
& Associates, LLP to serve as the independent registered public accounting
firm for Storm Cat for fiscal year 2007, (iii) the approval of an amendment
to
the Company’s Amended and Restated Share Option Plan with respect to blackout
period option expiration dates, (iv) the approval of an amendment to the
Company’s Amended and Restated Share Option Plan to include more detailed
provisions regarding director discretionary authority to amend the Amended
and
Restated Share Option Plan or an outstanding option without shareholder approval
and (v) the approval of an amendment to the Company’s Restricted Share Unit Plan
to include more detailed provisions regarding director discretionary authority
to amend the Restricted Share Unit Plan or an outstanding restricted share
unit
without shareholder approval.
(i)
The
entire nominated Board of Directors was elected and the Inspector of Election
certified that the votes cast for or withheld with respect to the election
of
each Director were as follows:
Name
|
|
Number
of Votes Cast For
|
|
Number
of Votes Withheld
|
|
Robert
J. Clark
|
|
49,813,918
|
|
1,174,665
|
|
Michael
O'Byrne
|
|
49,804,075
|
|
1,184,508
|
|
Robert
Penner
|
|
49,834,813
|
|
1,153,768
|
|
Jon
Whitney
|
|
49,832,005
|
|
1,156,578
|
|
David
Wight
|
|
49,661,574
|
|
1,327,009
|
|
Michael
J. Wozniak
|
|
49,406,208
|
|
1,582,375
|
(ii)
The
Inspector of Election certified that the votes cast for, against or abstentions
with respect to the ratification of the appointment of Hein & Associates,
LLP to serve as the independent registered public accounting firm for Storm
Cat
for fiscal year 2007 were as follows:
For:
|
|
Against:
|
|
Abstentions:
|
50,550,236
|
|
199,221
|
|
234,126
|
(iii)
The
Inspector of Election certified that the votes cast for, against or abstentions
with respect to the approval of an amendment to the Company’s Amended and
Restated Share Option Plan with respect to blackout period option expiration
dates:
For:
|
|
Against:
|
|
Abstentions:
|
24,845,496
|
|
1,258,535
|
|
0
|
(iv)
The
Inspector of Election certified that the votes cast for, against or abstentions
with respect to the approval of an amendment to the Company’s Amended and
Restated Share Option Plan to include more detailed provisions regarding
director discretionary authority to amend the Amended and Restated Share
Option
Plan or an outstanding option without shareholder approval:
For:
|
|
Against:
|
|
Abstentions:
|
24,453,807
|
|
4,235,206
|
|
0
|
(v)
The
Inspector of Election certified that the votes cast for, against or abstentions
with respect to the approval of an amendment to the Company’s Restricted Share
Unit Plan to include more detailed provisions regarding director discretionary
authority to amend the Restricted Share Unit Plan or an outstanding
restricted share unit without shareholder approval:
For:
|
|
Against:
|
|
Abstentions:
|
24,560,557
|
|
4,123,726
|
|
0
|
The
exhibits listed in the accompanying exhibit index are filed as part of this
Quarterly Report on Form 10-Q.
10.1
|
|
Amended
and Restated Share Option Plan dated June 21, 2007 (incorporated
by
reference to Exhibit 10.1 to Storm Cat Energy Corporation’s Current Report
on Form 8-K filed on June 26, 2007 (Commission File No.
001-32628))
|
|
|
|
10.2
|
|
Restricted
Share Unit Plan dated June 21, 2007 (incorporated by reference
to Exhibit
10.2 to Storm Cat Energy Corporation’s Current Report on Form 8-K filed on
June 26, 2007 (Commission File No. 001-32628))
|
|
|
|
10.3
|
|
Storm
Cat Energy Corporation Director Compensation Policy (incorporated
by
reference to Exhibit 10.3 to Storm Cat Energy Corporation’s Current Report
on Form 8-K filed on June 26, 2007 (Commission File No.
001-32628))
|
|
|
|
10.4
|
|
Second
Amendment to Combined Credit Agreements, dated as of May 24, 2007,
by and
among Storm Cat Energy, Storm Cat Energy (USA) Corporation, JPMorgan
Chase
Bank, N.A. and JPMorgan Chase Bank, N.A., Toronto Branch and the
Lenders
thereto (incorporated by reference to Exhibit 10.1 to Storm Cat
Energy
Corporation’s Current Report on Form 8-K filed on May 31, 2007 (Commission
File No. 001-32628))
|
|
|
|
31.1
|
|
Certification
by the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act.
|
|
|
|
31.2
|
|
Certification
by the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act.
|
|
|
|
32.1
|
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section
1350.
|
|
|
|
32.2
|
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section
1350.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
STORMCAT
ENERGY CORPORATION
|
|
|
|
Date:
August 9, 2007
|
By
|
/s/
Joseph M. Brooker
|
|
|
Joseph
M. Brooker
|
|
|
Chief
Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
Date:
August 9, 2007
|
By
|
/s/
Paul Wiesner
|
|
|
Paul
Wiesner
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial and Accounting Officer)
|
Exhibits
The
exhibits listed in the accompanying exhibit index are filed as part of this
Quarterly Report on Form 10-Q.
10.1
|
|
Amended
and Restated Share Option Plan dated June 21, 2007 (incorporated
by
reference to Exhibit 10.1 to Storm Cat Energy Corporation’s Current Report
on Form 8-K filed on June 26, 2007 (Commission File No.
001-32628))
|
|
|
|
10.2
|
|
Restricted
Share Unit Plan dated June 21, 2007 (incorporated by reference
to Exhibit
10.2 to Storm Cat Energy Corporation’s Current Report on Form 8-K filed on
June 26, 2007 (Commission File No. 001-32628))
|
|
|
|
10.3
|
|
Storm
Cat Energy Corporation Director Compensation Policy (incorporated
by
reference to Exhibit 10.3 to Storm Cat Energy Corporation’s Current Report
on Form 8-K filed on June 26, 2007 (Commission File No.
001-32628))
|
|
|
|
10.4
|
|
Second
Amendment to Combined Credit Agreements, dated as of May 24, 2007,
by and
among Storm Cat Energy, Storm Cat Energy (USA) Corporation, JPMorgan
Chase
Bank, N.A. and JPMorgan Chase Bank, N.A., Toronto Branch and the
Lenders
thereto (incorporated by reference to Exhibit 10.1 to Storm Cat
Energy
Corporation’s Current Report on Form 8-K filed on May 31, 2007 (Commission
File No. 001-32628))
|
|
|
|
31.1
|
|
Certification
by the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act.
|
|
|
|
31.2
|
|
Certification
by the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act.
|
|
|
|
32.1
|
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section
1350.
|
|
|
|
32.2
|
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section
1350.
|