STORM
CAT ENERGY CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(stated
in thousands and U.S. dollars)
|
|
For
the Nine Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
|
(36,654 |
) |
|
|
(6,212 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Recovery
of future income tax asset from flow-through shares
|
|
|
(1,318 |
) |
|
|
(731
|
) |
Stock-based
compensation
|
|
|
607
|
|
|
|
2,238
|
|
Depreciation,
depletion, and amortization
|
|
|
5,985
|
|
|
|
1,807
|
|
Accretion
of asset retirement obligation
|
|
|
144 |
|
|
|
146 |
|
Asset
impairment
|
|
|
27,773 |
|
|
|
2,000 |
|
Gain
on disposition of properties
|
|
|
--
|
|
|
|
185
|
|
Amortization
of debt issuance costs
|
|
|
522 |
|
|
|
-- |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
467 |
|
|
|
(427 |
) |
Prepaid
costs and other current assets
|
|
|
(563
|
) |
|
|
(844
|
) |
Accounts
payable
|
|
|
122 |
|
|
|
(3,784 |
) |
Accrued
interest and other current liabilities
|
|
|
(790 |
) |
|
|
3,284
|
|
Net
cash used in operating activities
|
|
|
(3,705 |
) |
|
|
(2,338
|
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
147 |
|
|
|
(260 |
) |
Capital
expenditures - oil and gas properties
|
|
|
(48,563 |
) |
|
|
(56,445 |
) |
Capital
expenditures - other assets
|
|
|
(39 |
) |
|
|
(145 |
) |
Net
cash used in investing activities
|
|
|
(48,455 |
) |
|
|
(56,850 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Flow-through shares |
|
|
-- |
|
|
|
1,950 |
|
Issuance
of common stock
|
|
|
243
|
|
|
|
19,483
|
|
Debt
issuance costs
|
|
|
(3,417 |
) |
|
|
--
|
|
Proceeds
from bank debt
|
|
|
2,369 |
|
|
|
27,500
|
|
Proceeds
from Series A & B Convertible Notes
|
|
|
50,195
|
|
|
|
--
|
|
Net
cash provided by financing activities
|
|
|
49,390
|
|
|
|
48,933
|
|
Effect
of exchange rate changes on cash
|
|
|
2,216 |
|
|
|
892
|
|
Net
decrease in cash and cash equivalents
|
|
|
(554 |
) |
|
|
(9,363 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
5,299
|
|
|
|
29,502
|
|
Cash
and cash equivalents at end of period
|
|
$ |
4,745
|
|
|
$ |
20,139
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest (net of amount capitalized)
|
|
$ |
3,616
|
|
|
$ |
--
|
|
Supplemental schedule of non-cash investing and financing
activities: |
|
|
|
|
|
|
|
|
Accruals
of oil and gas properties
|
|
$ |
7,070 |
|
|
$ |
15,841 |
|
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 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 September 30,
2007, results of operations for the three and nine months ended September
30,
2007 and 2006, and cash flows for the nine months ended September 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 natural gas and other
factors.
Because
a
precise determination of many assets and liabilities is dependent upon future
events, the preparation of consolidated financial statements 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 unaudited 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 consolidated financial
statements involve considerable judgment and are, or could be, significantly
affected by factors that are outside 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 cost center, on a country-by-country basis, referred to as a “full cost
pool.” Storm Cat currently has two full cost pools; one in the United
States and one in Canada. Depreciation, depletion and amortization of
oil and gas properties is computed using the units-of-production method based
upon estimated proved oil and gas reserves. Under the full cost
method of accounting, costs to be amortized shall include (A) all capitalized
costs, less accumulated depletion, depreciation, amortization and impairment,
other than the cost of properties; (B) the cost of investments in unproved
properties and major projects excluded from capital costs to be amortized;
(C)
the estimated future expenditures (based on current costs) to be incurred
in
developing proved reserves; and (D) estimated dismantlement and abandonment
costs, net of estimated salvage values. Capitalized oil and gas property
costs may not exceed an amount equal to the sum of the present value, discounted
at 10%, of estimated future net revenues from proved oil and gas reserves,
the
lower of the estimated fair value of evaluated properties, the cost of
unevaluated properties, and the tax effects of the difference between book
and
tax basis of the evaluated and unevaluated properties. Should
capitalized costs, within a cost center, less related deferred income
taxes, exceed this ceiling, the excess shall be charged to expense with the
offset directly to the full cost pool.
Costs
of
acquiring and evaluating unproved properties are initially excluded from
depreciation, depletion and amortization 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 depreciation, depletion and
amortization. When an unproved property is considered to be
impaired, the costs are subject to depreciation, depletion and
amortization expense. Proceeds from sales, if any, of oil
and 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 estimates are used in providing a measure of the
Company’s overall value. These estimates are also used in the
quarterly calculations of depreciation, depletion and impairment of the
Company’s proved oil and gas properties.
Proved
oil and gas reserves are 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. Prices include consideration of
changes in existing prices provided only by contractual arrangements, but
not on
escalations based upon future conditions. Estimating oil and gas
reserves 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
Securities and Exchange Commission ("SEC"), relative to 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 historical
production, 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 developed producing, developed non-producing and
undeveloped reserves. 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.
The
Company calculated the ceiling value of its proved reserves based
upon the
September 30, 2007 market price for natural gas of $1.9855 per MMBtu
at the
Colorado Interstate Gas (“CIG”) – Mainline index and the impact of the
Company’s natural gas hedges as of September 30, 2007. At that date, the
Company’s full cost pool exceeded this calculated ceiling value by $25.0
million.
The
SEC
permits a remeasurement, under certain criteria, if prices recover
subsequent to
the end of the reporting period. While the market price did, in fact,
exceed the price necessary to avoid an impairment for a short time
during such period, the Company is of the opinion that a recovery of price
was not sustained sufficiently to warrant avoidance of the
impairment. There are indicators suggesting a sustained improvement of
market prices in the Rocky Mountain producing region upon the commencement
of
natural gas deliveries on the Rockies Express pipeline that is scheduled
to
commence service in January 2008, however, the timing of such recovery does
not warrant the avoidance of an impairment as of September 30, 2007.
Therefore,
the Company has recognized an impairment of $25.0 million against
the book value
of its proved properties.
In
the
third quarter of 2007, the Company evaluated and moved all $4.9
million of its
unproved Alaskan costs into the U.S. full cost pool, which also
then became
subject to the ceiling test.
Also
in
the third quarter of 2007, the Company has evaluated a portion of its
Alberta,
Canada unproved properties. Using the lower of cost basis or market
value test, the Company recognized an impairment of $2.8 million against
its book value of its unproved Alberta properties.
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 gas sales prices of 10%
would result in a decrease in the Company’s September 30, 2007
present value of future net cash flows of approximately
$2.6 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.
Capitalized
Interest
Pursuant
to Financial Accountant Standards Board (“FASB”) Statement of Financial
Accounting Standards (“SFAS”) Statement No. 34, Capitalization of Interest
("SFAS 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 depreciation,
depletion or amortization. Interest is capitalized only for the
period that activities are in progress to bring these projects to their intended
use. For the three and nine months ended September 30,
2007, $0.28 million and $0.57 million of interest expense was
capitalized, respectively. No interest was capitalized for the same
periods 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. $0.46 million and $1.57 million of internal
costs were capitalized in the three and nine months ended September 30, 2006,
respectively. 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 natural gas from its producing
wells. This revenue is recognized when natural gas is produced
and sold. The Company typically receives 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 relevant market
price, less marketing and transportation, compression and quality 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
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 using the Black-Scholes pricing
model. The Black-Scholes model is a widely accepted mathematical
model for valuing stock-based compensation, but is not the only model
available. The Black-Scholes model takes into account the common
share price at the grant date, the exercise price, the volatility of the
underlying shares and the expected dividends and the risk-free interest
rate
over the expected life of the option to determine fair value.
In
accordance with SFAS No. 123 "Accounting for Stock-Based
Compensation", the Company uses the following two accounting
methods to record stock-based compensation:
•
|
The
liability method to account for options granted to U.S. employees.
The Company began using this method in 2007. Under this
method, Storm Cat records a liability for vested
options as calculated by the Black-Scholes model using the
option exercise price and the fair value per share of the common
stock
underlying the option as of the measurement
date.
|
•
|
The
equity method to account for options granted to Canadian employees.
The Company calculates the expense under this method based on the
Black-Scholes value of the option at the date of the
grant. This expense is recorded in equal amounts as the
options vest; typically over two years.
|
The
fair
value of stock-based compensation is expensed, with a corresponding increase
to
additional paid-in capital for the equity method, or the stock-based
compensation liability for the liability method. Upon exercise of
stock options, the consideration paid upon exercise is recorded as additional
value of common shares and the amount previously recognized in additional
paid-in capital is reclassified to common stock.
Both
of
the aforementioned methods of calculating stock-based compensation require
the Company to make several estimates including 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 outside the
Company’s control and depends upon a variety of factors including the
market value of Company shares and the financial objectives of the holders
of
the options, among other factors. The Company calculates volatility
using historical data; however, future volatility is inherently
uncertain. As of September 30, 2007, the Company assumed a cumulative
forfeiture rate of 10.0% based on historical forfeitures of stock-based
compensation grants.
Foreign
Currency Risk
Storm
Cat conducts business in both U.S. and Canadian dollars and,
thus, 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. As such, Storm Cat is subject to foreign currency
exchange rate risk on cash flows related to sales, expenses, financing,
and
investing transactions. Substantially all of the
Company's Canadian revenues and costs are denominated in Canadian dollars.
While the value of the Canadian dollar does fluctuate in relation to the
U.S.
dollar, management believes that any currency risk associated with its
Canadian operations would not have a material impact on its results of
operations.
For
the
nine months ended September 30, 2007, balances in the statement of
operations were converted from Canadian to U.S. dollars at a weighted
average exchange rate of $0.90685 CDN to $1.00 U.S., and balance
sheet amounts were converted at a rate of $1.0081 CDN to $1.00 U.S. based
on the exchange rate on September 30, 2007.
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 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 de-recognition,
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. 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.
In
September 2006 the FASB issued SFAS 157, Fair Value Measurements (“SFAS
157”). SFAS 157 clarifies the principle that fair value should be based on
the
assumptions market participants would use when pricing an asset or liability
and
establishes a fair value hierarchy that prioritizes the information used
to
develop those assumptions. SFAS 157 is effective for financial statements
issued
for fiscal years beginning after November 15, 2007 and interim periods
within
those fiscal years, with early adoption permitted. The Company is currently
evaluating the impact of adopting this Statement.
In
February 2007 the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”), which permits an entity to
measure certain financial assets and financial liabilities at fair value.
The
Statement’s objective is to improve financial reporting by allowing entities to
mitigate volatility in reported earnings caused by the measurement of related
assets and liabilities using different attributes, without having to apply
complex hedge accounting provisions. Under SFAS 159, entities that elect
the
fair value option will report unrealized gains and losses in earnings at
each
subsequent reporting date. The fair value option may be elected on an
instrument-by-instrument basis, with a few exceptions, as long as it is
applied
to the instrument in its entirety. The fair value option election is
irrevocable, unless a new election date occurs. The new Statement establishes
presentation and disclosure requirements to help financial statement readers
understand the effect of the entity’s election on its earnings, but does not
eliminate disclosure requirements of other accounting standards. Assets
and
liabilities that are measured at fair value must be displayed on the face
of the
balance sheet. Statement 159 is effective as of the beginning of an entity’s
first fiscal year begining after November 15, 2007. Early adoption is permitted
as of the beginning of the previous fiscal year provided that the entity
(1)
makes that choice in the first 120 days of that fiscal year, (2) has not
yet
issued financial statements, and (3) elects to apply the provisions of
SFAS 157,
Fair Value Measurements. The Company is currently evaluating the impact of
adopting this Statement.
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, RSUs 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, RSUs, 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 nine months ended
September 30, 2007 and 2006. Listed below is a table showing the
potentially dilutive shares outstanding as of September 30, 2007 and 2006,
respectively, which have been excluded from the diluted earnings per share
calculation.
|
|
September
30,
|
|
|
2007
|
|
|
2006
|
Options
|
|
|
4,783,333
|
|
|
|
5,205,000
|
Unvested RSUs |
|
|
108,750 |
|
|
|
-- |
Series
A Convertible Notes
|
|
|
15,841,880
|
|
|
|
--
|
Series
B Convertible Notes
|
|
|
27,059,829
|
|
|
|
--
|
Warrants
|
|
|
4,649,569
|
|
|
|
8,923,968
|
Total
potentially dilutive shares excluded
|
|
|
52,443,361
|
|
|
|
14,128,968
|
Note
4. Other
Comprehensive Income (Loss)
Other
comprehensive income (loss) consists of net loss, the effects of currency
translation, and the change in fair value of derivatives. Other
comprehensive income (loss) for the three and nine months ended September
30,
2007 and 2006 is as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
In
Thousands
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
loss
|
|
$ |
(30,715 |
) |
|
$ |
(3,763 |
) |
|
$ |
(36,654 |
) |
|
$ |
(6,212 |
) |
Effects
of currency translation
|
|
|
2,245
|
|
|
|
50
|
|
|
|
5,211
|
|
|
|
996
|
|
Change
in fair value of derivatives
|
|
|
3,120
|
|
|
|
2,948
|
|
|
|
1,760 |
|
|
|
2,948
|
|
Net
change in foreign currency translation and fair value of
derivatives
|
|
|
5,365 |
|
|
|
2,998 |
|
|
|
6,971 |
|
|
|
3,944 |
|
Other
comprehensive income (loss)
|
|
$ |
(25,350 |
) |
|
$ |
(765 |
) |
|
$ |
(29,683 |
) |
|
$ |
(2,268 |
) |
Note
5. Restricted
Cash
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 $0.38
and $0.51 million as of September 30, 2007 and December 31, 2006,
respectively.
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. Such costs are capitalized as part of the basis
of the related asset and are depreciated, depleted or amortized 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 flows. In addition, the liability is adjusted to reflect
accretion expense, as well as settlements during the
period. Accretion expense is recorded as a component of depreciation,
depletion and amortization expense in the accompanying
unaudited consolidated financial statements.
A
reconciliation of the changes in the asset retirement obligation for the
nine
months ended September 30, 2007 and 2006, respectively, is as
follows:
|
|
Nine
Months Ended
|
|
In
Thousands |
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
Asset
retirement obligation at January 1
|
|
$ |
1,871
|
|
|
$ |
793
|
|
Adjustment
for revision of estimated life and interest rate in the Powder
River
Basin
|
|
|
(721 |
) |
|
|
(206 |
) |
Additional
liabilities incurred
|
|
|
180
|
|
|
|
912
|
|
Accretion
expense
|
|
|
144
|
|
|
|
146
|
|
Foreign
currency translation
|
|
|
67
|
|
|
|
--
|
|
Asset
retirement obligation at September 30
|
|
$ |
1,541
|
|
|
$ |
1,645
|
|
Note
7. Stock-based
Compensation
Under
the
Company’s 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, stock options, stock appreciation rights ("SARs"), restricted
stock and restricted stock units, performance awards, stock or property,
stock
awards and other stock-based awards may be granted to any employee, consultant,
independent contractor, director or officer of the Company. All options
granted prior to the approval of the Amended Option Plan are included in
the
number of options covered therein.
The
Company has reserved a total of 10,000,000 shares in the aggregate for
issuance
under the Plans. Of
the
10,000,000 shares authorized for issuance in the aggregate under both
plans, 7,723,750 shares have been granted and 1,201,667 shares have
been forfeited, leaving a total of 3,475,417 shares available for issuance
under the Plans as of September 30, 2007.
A
summary
of the status of the options under the Amended Option Plan and the
Restricted
Share Unit Plan as of September 30, 2007 and changes during the nine
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
|
|
|
485,000
|
|
|
$ |
1.1920
|
Options
exercised
|
|
|
500,000
|
|
|
$ |
0.3920
|
Options
expired/cancelled
|
|
|
671,667
|
|
|
$ |
1.6705
|
Options
outstanding at September 30, 2007
|
|
|
4,783,333
|
|
|
$ |
1.9436
|
|
|
|
|
|
|
|
|
Options
exercisable at September 30, 2007
|
|
|
3,753,327
|
|
|
$ |
1.9051
|
(1)Exercise
price is in Canadian dollars.
|
|
|
|
|
|
|
|
RSU
Activity
|
|
Number
of
Shares
|
RSUs
outstanding at December 31, 2006
|
|
|
--
|
RSUs
granted
|
|
|
262,500
|
RSUs
vested
|
|
|
148,750
|
RSUs
expired/cancelled
|
|
|
5,000
|
RSUs outstanding
at September 30, 2007
|
|
|
108,750
|
|
|
|
|
RSUs unvested
at September 30, 2007
|
|
|
108,750
|
Storm
Cat accounts for stock-based compensation in accordance with SFAS
No. 123(R), "Stock Based Compensation", using the
liability method to account for options granted to U.S. employees and
the equity method to account for options granted to Canadian
employees. SFAS No. 123(R) paragraph B129 "Equity Instruments with
Exercise Prices Denominated in a Foreign Currency" requires that all
equity instruments with exercise prices denominated in a currency other
than the
currency of the market in which the underlying equity instrument primarily
trades be accounted for as liabilities. Because Storm Cat's options are
priced in Canadian dollars and its stock is primarily traded on the
American Stock Exchange ("AMEX"), the liability method is required realtive
to
all U.S. employees. The Company began using the liability method in
2007.
The
following table summarizes our stock-based compensation expense under
each
method:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
In
Thousands |
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Stock-based
compensation expense (income) under the liability
method
|
|
$ |
58
|
|
|
$ |
--
|
|
|
$ |
199
|
|
|
$ |
--
|
|
Stock-based
compensation expense under the equity method
|
|
|
(640
|
) |
|
|
786
|
|
|
|
408 |
|
|
|
2,238
|
|
Stock-based
compensation expense
|
|
$ |
(582
|
) |
|
$ |
786
|
|
|
$ |
607
|
|
|
$ |
2,238
|
|
The
credit of $0.64 million for the three months ended September 30, 2007
includes a
one-time year-to-date adjustment to reclassify certain stock-based
compensation
from the equity method to the liability method. The liability associated
with stock-based compensation using the liability method has been classifed
as a current liability on the Company's balance sheet.
Note
8. Bank
Credit Facility
On
July
28, 2006, Storm Cat entered into two credit agreements with JPMorgan
Chase Bank,
N.A. ("JPMorgan") to finance its activities in the U.S. and
Canada. The U.S. Credit Agreement is with JPMorgan Chase Bank, N.A.,
as Global Administrative Agent (the “U.S. Credit
Agreement”). The Canadian Credit Agreement is with JPMorgan
Chase Bank, N.A., Toronto Branch as Canadian Administrative Agent,
JPMorgan
Chase Bank, N.A., as Global Administrative Agent (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. Both Credit Agreements have
been amended since July 28, 2006 with the latest amendment dated September
25,
2007 (the “Amended Credit Agreements”).
Under
the
terms of the Amended Credit Agreements, the current borrowing base of the
Company is $35.0 million of which $20.0 million is conforming to JPMorgan's
credit guidelines and $15 million is non-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. The Company has elected thus far to price interest at the
Eurodollar rate. The Eurodollar rate is calculated at LIBOR plus an
applicable margin beginning at 1.25% and increasing to a maximum of 4.00%
depending upon the utilization of the then conforming global borrowing
base. Currently, based on its utilization of the borrowing base,
Storm Cat is accruing interest at LIBOR plus 4.00%. In addition, the
Company is obligated to pay a 0.50% commitment fee on the amount commitments
exceed borrowings. Loans made under the Amended Credit Agreements are
secured by mortgages on the Company’s natural gas properties in the PRB and all
loan amounts thus far have been allocated under the U.S. Credit
Agreement.
On
March
31, 2008, the borrowing base will be re-determined by JPMorgan and the
aggregate
borrowings at that time must be fully conforming. A
condition of the Amended Credit Agreements requires the Company to hedge
80% of
its proved developed producing production as determined on January 1, 2007
for a
term of three years. The Amended Credit Agreements contain the
following financial covenants: ratio of current assets to current liabilities,
determined at the end of each quarter, of not less than 1:1; and a ratio of
total funded debt to annualized quarterly EBITDA not to be greater than
3:1
beginning with the quarter ending March 31, 2008. The Company is
required to report within 20 days after the end of each month, commencing
with
the month ending September 30, 2007, information and reports regarding
the
Company’s operations, in form and substance satisfactory to
JPMorgan.
As
of
September 30, 2007, the Company had $29.2 million outstanding under the
Amended
Credit Agreements.
Note
9. 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 notes were bifurcated into two series because a
shareholder vote was required for issuance of any convertible notes above
the
amount issued under the Series A Notes. The Series A Notes and the
Series B Notes are convertible into Storm Cat common shares at a price
of $1.17
(U.S.) 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 (U.S.), as may be adjusted, for 20 days
within a
period of 30 consecutive trading days. On the day of the agreement,
the $1.17 (U.S.) conversion price was at premium to the Company's closing
stock
price of $1.00 (U.S.).
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
29, 2007 the Company held an extraordinary general meeting in which shareholders
authorized the issuance of the underlying shares of the Series B convertible
notes. 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.
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.
On
October 30, 2007, the Company filed an additional S-1 registration
statement covering 21,857,185 common shares issuable upon conversion
of the Series A Notes and the Series B Notes. Storm Cat 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 ($255,729)
to a maximum
of 10.0% of the aggregate purchase price ($2,557,291). 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. The Company is required to file an
additional registration statement by April 30, 2008 covering an additional
123,932 common shares.
In
Canada, any shares issued on conversion of the Series A and Series B Notes
are
subject to a four month hold period before they can be traded on the Toronto
Stock Exchange. No registration statement equivalent to an S-1 or S-3
is required.
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
10. Derivative
Financial Instruments
Oil
and Gas Commodity Hedges
To
mitigate a portion of the potential exposure to adverse market changes,
the
Company has entered into various derivative contracts. As of
September 30, 2007, the Company had hedge contracts in place
through December 2010 for a total of approximately 7,452,000 MMBtu of
anticipated production from its PRB properties (see Item 3. Quantitative
and
Qualitative Disclosures About Market Risk for a detailed listing of the
Company's commodity swaps). 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
September 30, 2007, all natural gas derivative instruments qualified as
cash
flow hedges for accounting purposes under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities.
Realized
gains or losses from the settlement of gas derivative contracts are
reported as natural gas revenues in 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 in the consolidated balance sheet. Any change in
fair value resulting from ineffectiveness is recognized currently in
derivative
loss in the consolidated statement of operations.
The
table
below summarizes derivative instrument gain activity:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
In
Thousands |
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Derivative
contract settlements reflected in natural gas revenue
|
|
$ |
1,949
|
|
|
$ |
305
|
|
|
$ |
3,769
|
|
|
$ |
305
|
|
Change
in fair value of derivatives reflected in other comprehensive
income
|
|
|
3,120
|
|
|
|
2,948
|
|
|
|
1,760 |
|
|
|
2,948
|
|
Total
derivative instrument gain
|
|
$ |
5,069
|
|
|
$ |
3,253
|
|
|
$ |
5,529
|
|
|
$ |
3,253
|
|
The
Company's natural gas hedges are inherently effective because
they have been indexed to the first of the month CIG
index. The CIG index is the same index that determines the actual
natural gas revenue received by Storm Cat for its PRB production.
Therefore, the hedges are highly correlated to changes in cash flows from
natural gas sales.
Note
11. Related
Party Transactions
The
Company paid the law firm of Beatty & Wozniak $216,448 in fees and
expenses in the first nine 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 (U.S.) per share into 3,162,394
common shares, and $13.1 million in Series B Notes, convertible at a rate
of
$1.17 (U.S.) 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.
Additionally,
certain directors or officers participated in the Series B Note offering
for a
total aggregate participation of $145,000.
Note
12. Commitments
and Contingencies
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, Wyoming and WIC (“Wyoming Interstate Company”) and
delivered to the Dullknife hub. The Company is currently meeting its
volume commitment relative to this agreement.
Please
see "Recent Developments" in Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations for commitments and contingencies incurred after September 30,
2007.
Note
13. 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) Oil
and Gas Properties
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.
b) 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 December 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.
c) 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 related to the flow-through shares was $2.09
million. The liability outstanding related to these shares was $0 and
$1.23 million at September 30, 2007 and December 31, 2006,
respectively.
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.
d)
Stock-based compensation
U.S.
GAAP, under SFAS No. 123(R) paragraph B129 "Equity Instruments with Exercise
Prices Denominated in a Foreign Currency," requires that all equity
instruments with exercise prices denominated in a currency other than the
currency of the market in which the underlying equity instrument primarily
trades be accounted for as liabilities. This is not applicable under
Canadian GAAP.
The
impact of the above differences on the financial statements is as follows
(in
thousands):
Statement
of Operations
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
loss for the year per U.S. GAAP
|
|
$ |
(30,715 |
) |
|
$ |
(3,763 |
) |
|
$ |
(36,654 |
) |
|
$ |
(6,212 |
) |
Difference
in liability and equity method for stock-based
compensation
|
|
|
(1,275 |
) |
|
|
-- |
|
|
|
(1,275 |
) |
|
|
-- |
|
Difference
in full cost pool impairment |
|
|
25,000 |
|
|
|
-- |
|
|
|
25,000 |
|
|
|
-- |
|
Difference
in recovery of future income tax asset
|
|
|
(40 |
) |
|
|
--
|
|
|
|
1,584
|
|
|
|
932
|
|
Net
loss for the year per Canadian GAAP
|
|
$ |
(7,030 |
) |
|
$ |
(3,763 |
) |
|
$ |
(11,345 |
) |
|
$ |
(5,280 |
) |
Basic
and diluted loss per share per Canadian GAAP
|
|
$ |
(0.09 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.08 |
) |
Weighted
average number of shares outstanding per U.S. GAAP
|
|
|
81,029,861
|
|
|
|
68,581,241
|
|
|
|
80,857,105
|
|
|
|
67,060,208
|
|
Balance
Sheet
|
|
September
30,
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Total
assets per U.S. GAAP
|
|
$ |
123,908
|
|
|
$ |
111,964
|
|
Difference
in full cost pool impairment
|
|
|
25,000 |
|
|
|
-- |
|
Total
assets per Canadian GAAP
|
|
$ |
148,908
|
|
|
$ |
111,964
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Total
liabilities per U.S. GAAP
|
|
|
91,835
|
|
|
|
50,282
|
|
Adjustment
for stock-based compensation liability
|
|
|
(608 |
) |
|
|
-- |
|
Adjustment
for flow-through share liability
|
|
|
-- |
|
|
|
(1,233
|
) |
Total
liabilities per Canadian GAAP
|
|
$ |
91,227
|
|
|
$ |
49,049
|
|
Balance
Sheet (Continued)
|
|
September
30,
|
|
|
December
31,
|
|
STOCKHOLDERS'
EQUITY
|
|
2007
|
|
|
2006
|
|
Cummulative
deficit, end of the year, per U.S. GAAP
|
|
$ |
(53,277 |
) |
|
$ |
(16,623 |
) |
Difference
in recovery of future income tax asset
|
|
|
2,902
|
|
|
|
1,663 |
|
Adjustment
for stock-based compensation expense
|
|
|
(1,275 |
) |
|
|
-- |
|
Difference
in full cost pool impairment
|
|
|
25,000 |
|
|
|
-- |
|
Adjustment
for flow-through share liability
|
|
|
(2,086 |
) |
|
|
(853
|
) |
Deficit,
end of the year, per Canadian GAAP
|
|
|
(28,736 |
) |
|
|
(15,813 |
) |
Adjustment
for tax effects of flow-through share liability
|
|
|
(816 |
) |
|
|
423 |
|
Adjustment
for reclass of stock-based compensation from liability to
equity
|
|
|
1,883 |
|
|
|
-- |
|
Share
capital, share subscriptions and contributed surplus, other
comprehensive
income per Canadian and U.S. GAAP
|
|
|
85,350
|
|
|
|
78,305
|
|
Stockholders’
equity per Canadian GAAP
|
|
$ |
57,681
|
|
|
$ |
62,915
|
|
Stockholders’
equity per U.S. GAAP
|
|
$ |
32,073
|
|
|
$ |
61,682
|
|
Statement
of Cash Flows
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities per U.S. GAAP
|
|
$ |
(3,705 |
) |
|
$ |
(2,338
|
) |
Difference
in recovery of future income tax asset
|
|
|
(1,584 |
) |
|
|
(932 |
) |
Cash
flows from operating activities per Canadian GAAP
|
|
|
(5,289 |
) |
|
|
(3,270)
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities per U.S. GAAP
|
|
|
49,390
|
|
|
|
48,933
|
|
Difference
in recovery of future income tax asset
|
|
|
1,584
|
|
|
|
932
|
|
Cash
flows from financing activities per Canadian GAAP
|
|
|
50,974
|
|
|
|
49,865
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities per U.S. GAAP
|
|
|
(48,455 |
) |
|
|
(56,850 |
) |
Cash
flows from investing activities per Canadian GAAP
|
|
|
(48,455 |
) |
|
|
(56,850 |
) |
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash per U.S. GAAP and Canadian GAAP
|
|
$ |
(2,770 |
) |
|
$ |
(10,255 |
) |
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 PRB and Arkansas’
Arkoma Basin and exploration and development assets 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.
During
the third quarter, Storm Cat built upon its first half production growth,
but
was impacted negatively by production curtailment on a portion of its
PRB gas
production due to force majeure events on important components of the Rocky
Mountain pipeline infrastructure. The
force
majeure events related to a September 16, 2007 fire on the Cheyenne
Plains gas pipeline which reduced Rockies take-away capacity, resulting
in
extraordinarily low natural gas prices. The pipeline operator has announced
that
it expects capacity constraints through mid-November 2007. In light
of this situation, the Company curtailed partially its production in
the
PRB. The Company is monitoring the situation and anticipates
returning to an un-curtailed production rate when market conditions
warrant.
Notwithstanding
the aforementioned events, total net sales for the quarter increased
8.5%
quarter-to-quarter from 745.0 MMcf in the second quarter 2007 to 808.2
MMcf
during the third quarter 2007. Year-over-year production
increased 117.6% from 371.5 MMcf in the third quarter 2006 to 808.2
MMcf in the
third quarter 2007.
The
Company drilled 28 gross wells in the third quarter of 2007, 25
of which were
drilled in the PRB, two of which were drilled in the Fayetteville
Shale in
Arkansas and one which drilled on the Company’s Alberta acreage. Year-to-date,
the Company has drilled 67 wells, 63 of which are located in the
PRB.
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. If
drilling and completion activities in the Fayetteville Shale are
successful, the
Company anticipates reporting proved year-end reserves for the Fayetteville
Shale. The Company anticipates disclosing the progress of de-watering
results from the Elk Valley project at the end of the fourth quarter
of
2007. Finally, Storm Cat is targeting conventional prospects
associated with the Company’s acreage position in Alberta.
2007
Year-to-Date Drilling Activity
|
|
2007
Drilling Activity (# of Gross Wells)
|
Area
|
|
1st
Quarter
|
|
|
2nd
Quarter
|
|
|
3rd
Quarter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
PRB
|
|
|
20.0
|
|
|
|
18.0
|
|
|
|
25.0
|
|
|
|
63.0
|
Fayetteville
Shale
|
|
|
-
|
|
|
|
-
|
|
|
|
2.0
|
|
|
|
2.0
|
Elk
Valley
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
Alberta
|
|
|
1.0
|
|
|
|
-
|
|
|
|
1.0
|
|
|
|
2.0
|
Total
2007 gross wells drilled
|
|
|
21.0
|
|
|
|
18.0
|
|
|
|
28.0
|
|
|
|
67.0
|
Powder
River Basin
During
the third quarter 2007, the Company drilled 25 wells bringing its
total well
count to 380 wells, of which 339 are Company-operated. Curtailed production
from the PRB at September 30, 2007 was 14.7 MMcf/d gross and 7.7 MMcf/d
net. Coming out of curtailment, production currently is 21.5
MMcf/d gross and 11.85 MMcf/d net. Because of the price environment
and curtailment, Storm Cat made the decision to delay additional
well completions and pipeline hookups. Barring those elections,
production from the PRB would currently be 23.65 MMcf/d gross and
13.35 MMcf/d
net.
Fayetteville
Shale Area of Arkansas
During
the third quarter, Storm Cat successfully drilled and began completion
operations on the first two of its three Company-operated horizontal
wells
budgeted in 2007 in the Fayetteville Shale. The third well commenced
drilling during the third quarter and completion is expected in the
fourth quarter. The Company expects to have initial results from all three
wells during the fourth quarter of 2007. In addition, in early October,
Storm Cat reached an agreement with an unrelated third
party gatherer for the construction of field gathering, compression
and a transportation lateral to connect to the Ozark pipeline. The
pipeline is expected to be completed and operational in March 2008
(see "Recent
Developments" in Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for further information). Storm
Cat is participating in 16 non-operated Fayetteville Shale wells. The
Company owns between a 1% and 8% working interest in these wells, which are
at various stages of planning, drilling, completion or production. Current
net production associated with these non-operated wells is 0.3 MMcf/d
net.
British
Columbia, Canada (Elk Valley)
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
disclose its progress on the project at year-end 2007.
Alberta,
Canada (Western Canadian Sedimentary Basin)
Storm
Cat
drilled one Horseshoe Canyon / Belly River Sand well during the first
quarter of
2007 in Alberta. During the third quarter, the Company drilled one
Mannville section well targeting the Ellerslie Sand which has been
completed and
is undergoing production and pressure testing. At present, the Company is
exploring additional conventional prospects that may also present unconventional
opportunities.
In
the
third quarter of 2007, the Company evaluated its Alberta, Canada unproved
properties. Using the lower of cost basis or market value test, the
Company recognized an impairment of $2.8 million against its book value of
its unproved Alberta properties.
Alaska
Storm
Cat
drilled one well in 2006 and is in the process of evaluating completion
potential and business opportunities associated with its acreage.
Also
in
the third quarter of 2007, the Company evaluated and moved all $4.9
million of
its unproved Alaskan costs into the U.S. full cost pool, which also
then became
subject to the ceiling test.
Hedging
The
Company hedges its gas production in order to limit downside risk
to its capital
budget and cash flows. For the remainder of 2007 Storm Cat has
approximately 80% of its mid-year 2007 PRB forecasted proved
developed reserves hedged at a CIG index price of $6.16 /
MMBtu. For the full year 2008 the Company has approximately 80% of
its mid-year 2007 PRB forecasted proved developed reserves hedged
at CIG index price of $6.91 / MMBtu. See Note 10
"Derivative Financial Instruments" for further information on the
Company's
hedging practices.
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 $40.0 million capital budget will be funded by a combination of
cash flow, the $35.0 million reserve-based revolving line of credit
with
JPMorgan and the Company’s $50.2 million subordinated debt
financing. The 2007 capital budget is allocated $20.0 million the
PRB; $10.0 million to the Fayetteville Shale; and $10.0 million to
Canada as
follows:
§
|
$20.0
million in the PRB will be directed toward drilling 110 wells,
capital
maintenance on existing wells, purchases of infill acreage,
and
pre-drilling costs associated with continued development
of the PRB into
2008.
|
§
|
$10.0
million in the Fayetteville Shale will be directed toward
the drilling and
completion of three Company-operated wells, costs associated
with its
non-operated interests, and the costs of coring up acreage
around the
Company’s current lease holdings.
|
§
|
$10.0
million in Canada will be directed toward de-watering and
evaluation
activities in Elk Valley and drilling and completion activities
on the
Company’s Alberta acreage.
|
The
2007
capital budget may be revised based on the evaluation of factors affecting
the
industry including, without limitation, drilling rig and oilfield service
availability, drilling results, operational developments, unanticipated
transactional opportunities, market conditions and commodity price
fluctuations.
Liquidity
and Capital Resources
Material
increases or decreases in the Company’s liquidity are determined by the cash
flow from the Company’s producing properties, the success or failure of the
Company’s drilling programs, and its ability to access debt or equity
capital markets.
There
is
no guarantee that the Company will be successful in developing its reserves
or
that commodity prices will remain at a level that permits economic
viability. The Company has entered into natural gas hedges to protect
its cash flow (see Note 10 “Derivative Financial Instruments” for further
information); however, as additional gas production is developed and hedges
expire, fluctuations in commodity prices will have a greater impact on
the
Company’s cash flows.
The
Company’s PRB production was curtailed due to force majeure events
on important components of the Rocky Mountain pipeline infrastructure. The
pipeline operator has announced that it expects capacity constraints to
continue
through mid November 2007. This event negatively affected the
Company's cash flow late in the third quarter and continuing into the fourth
quarter through lower production rates and lower commodity prices on unhedged
production.
The
Company had approximately $4.4 million of working capital as of September
30,
2007, which was sufficient to cover its short-term
obligations.
Long-term
obligations include $29.2 million in borrowings under the $35.0 million
reserve-based revolving line of credit with JPMorgan and the $50.2 million
subordinated debt financing. Long-term borrowings amounted to $79.4
million as of September 30, 2007. The Company estimates that by
year-end it will fully draw upon its $35.0 million borrowing base bringing
total
long-term borrowings to approximately $85.2 million.
The
Company anticipates its borrowing capacity will grow as reserves are
developed.
The expanded borrowing capacity will be directed toward capital projects
in
2008, however, reserves and their economic value are heavily dependent upon
operational success and commodity prices. Low commodity prices and/or
the
inability of the Company to develop its reserves could result in the
stagnation
of or a reduction in the Company’s borrowing capacity. This would limit the
amount of capital available to direct towards future development. In
addition, the Company may be forced to direct cash flow towards the reduction
of
long-term obligations, further limiting its development programs.
The
following table summarizes the Company’s sources and uses of cash for the nine
months ended September 30, 2007 and 2006, respectively.
|
|
Nine
Months Ended
|
|
In
Thousands
|
|
September
30,
|
|
|
|
|
2007
|
|
|
|
2006
|
|
Net
cash used in operating activities
|
|
$ |
(3,705 |
) |
|
$ |
(2,338
|
) |
Net
cash used in investing activities
|
|
|
(48,455 |
) |
|
|
(56,850 |
) |
Net
cash provided by financing activities
|
|
|
49,390
|
|
|
|
48,933
|
|
Effect
of exchange rate changes on cash
|
|
|
2,216
|
|
|
|
892
|
|
Net
decrease in cash and cash equivalents
|
|
$ |
(554 |
) |
|
$ |
(9,363 |
) |
Operating
activities. Net cash used in operating activities increased by $1.37
million during the nine months ended September 30, 2007 as compared to
the
corresponding period in 2006. The change is primarily due to interest
expense incurred in 2007. Total year-to-date interest
expense through the third quarter was $3.28 million in 2007 as compared to
$0.32 million in 2006.
Investing
activities. Net cash used in investing activities decreased $8.40
million from the nine months ended September 30, 2006 to the
corresponding period in 2007. Capital spending was higher in 2006 due to a
$30.6 million acquisition in Wyoming during the third quarter of
2006.
Financing
activities. Net cash provided by financing activities
increased $0.46 million from the nine months ended September 30,
2006 to the corresponding period in 2007. The increase is
primarily the result of proceeds received from the issuance of
convertible notes issued in 2007 in the amount of $50.2 million. In
2006, bank debt of $27.5 million was drawn to fund the Wyoming acquisition
and a
private placement of 13,767,776 common shares was completed in September
2006 for proceeds of $19.3 million.
Working
Capital
The
working capital surplus in 2007 is directly attributable to net proceeds
received from the sale of the Series A Notes and the Series B Notes.
Listed below are certain liquidity indicators for the periods ended September
30, 2007 and December 31, 2006, respectively:
In
Thousands
|
|
September
30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Accumulated
deficit
|
|
$ |
(53,277
|
) |
|
$ |
(16,623
|
) |
Working
capital surplus (deficit)
|
|
$ |
3,794
|
|
|
$ |
(15,594 |
) |
Bank
Credit Facility
On
July
28, 2006, Storm Cat entered into two credit agreements with JPMorgan Chase
Bank,
N.A. ("JPMorgan") to finance its activities in the U.S. and
Canada. The U.S. Credit Agreement is with JPMorgan Chase Bank, N.A.,
as Global Administrative Agent (the “U.S. Credit
Agreement”). The Canadian Credit Agreement is with JPMorgan
Chase Bank, N.A., Toronto Branch as Canadian Administrative Agent, JPMorgan
Chase Bank, N.A., as Global Administrative Agent (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. Both Credit Agreements have
been amended since July 28, 2006 with the latest amendment dated September
25,
2007 (the “Amended Credit Agreements”).
Under
the
terms of the Amended Credit Agreements, the current borrowing base of the
Company is $35.0 million of which $20.0 million is conforming to JPMorgan's
credit guidelines and $15.0 million is
non-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. The Company has
elected thus far to price interest at the Eurodollar rate. The
Eurodollar rate is calculated at LIBOR plus an applicable margin beginning
at
1.25% and increasing to a maximum of 4.00% depending upon the utilization
of the
then conforming global borrowing base. Currently, based on its
utilization of the borrowing base, Storm Cat is accruing interest at LIBOR
plus
4.00%. In addition, the Company is obligated to pay a 0.50%
commitment fee on the amount commitments exceed borrowings. Loans made
under the Amended Credit Agreements are secured by mortgages on the Company’s
natural gas properties in the PRB and all loan amounts thus far have been
allocated under the U.S. Credit Agreement.
On
March
31, 2008, the borrowing base will be re-determined by JPMorgan and the
aggregate borrowings at that time must be fully
conforming. A condition of the Amended Credit Agreements
requires the Company to hedge 80% of its proved developed producing production
as determined on January 1, 2007 for a term of three years. The
Amended Credit Agreements contain the following financial covenants: ratio
of
current assets to current liabilities, determined at the end of each quarter,
of
not less than 1:1; and a ratio of total funded debt to annualized quarterly
EBITDA not to be greater than 3:1 beginning with the quarter ending March
31,
2008. The Company is required to report within 20 days after the end
of each month, commencing with the month ending September 30, 2007, information
and reports regarding the Company’s operations, in form and substance
satisfactory to JPMorgan.
As
of
September 30, 2007, the Company had $29.2 million outstanding under
the Amended
Credit Agreements. At the time of the filing of this report, the
Company has approximately $30.7 million outstanding and $1.3 million
available
to borrow under the Amended Credit Agreements after taking into account
approximately $3.0 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 notes were bifurcated into two series because a
shareholder vote was required for issuance of any convertible notes above
the
amount issued under the Series A Notes. The Series A Notes and the
Series B Notes are convertible into Storm Cat common shares at a price
of $1.17
(U.S.) 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 (U.S.), as may be adjusted, for 20 days
within a
period of 30 consecutive trading days. On the day of the agreement,
the $1.17 (U.S.) conversion price was at premium to the Company's closing
stock
price of $1.00 (U.S.).
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
29, 2007 the Company held an extraordinary general meeting in which
shareholders authorized the issuance of the underlying shares of the Series
B
convertible notes. 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.
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.
On
October 30, 2007, the Company filed an additional S-1 registration
statement covering 21,857,185 common shares issuable upon conversion
of the Series A Notes and the Series B Notes. Storm Cat 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 ($255,729)
to a maximum
of 10.0% of the aggregate purchase price ($2,557,291). 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. The Company is required to file an
additional registration statement by April 30, 2008 covering an additional
123,932 common shares.
In
Canada, any shares issued on conversion of the Series A and Series
B Notes are
subject to a four month hold period before they can be traded on the
Toronto
Stock Exchange. No registration statement equivalent to an S-1 or S-3
is required.
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.
Outstanding
Share Data
As
of
September 30, 2007, the Company had 81,078,570 shares issued and
outstanding, and 4,649,569 share purchase, finder fee and agent
warrants outstanding. Also at September 30, 2007, there
were 4,783,333 common share options outstanding and reserved for issuance
under the Company’s Amended Option Plan and 111,250 unvested RSUs
outstanding under its Restricted Share Unit Plan. 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 nine months ended September 30, 2007, 500,000 options were exercised
for
gross proceeds of $0.17 million; and 148,750 RSUs vested generating an
expense
to the Company of $0.08 million.
No
warrants were exercised during this nine-month period. See "Recent
Developments" in Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for information concerning warrants
that expired subsequent to September 30, 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
September 30, 2007, these off-balance sheet arrangements and
transactions included unawn 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.
Change
in Control Severance Pay Plan
On
September 19, 2007, the Company's Board of Directors, upon the recommendation
of
and approval by the Compensation Committee, adopted and approved a Change
in
Control Severance Pay Plan (the “Change in Control Plan”). The Change in
Control Plan benefits all employees and can be read in its
entirety on the Current Report on Form 8-K, Exhibit 10.1, as
filed with the SEC on September 25, 2007 (File No.
001-32628).
Recent
Developments
On
October 4, 2007, Storm Cat entered into an additional commodity swap with
JPMorgan Chase for a total of 949,000 MMBtu from November 2007 through December
2008 at a price of $6.14 per MMBtu.
Fayetteville
Shale Activity
The
Company has successfully drilled and completed the first two of its three
planned wells on its Fayetteville Shale project. Well cleanup and post-frac
productivity testing is now being conducted.
On
October 11, 2007, the Company completed the drilling and casing of a third
well to its planned vertical and horizontal total depth. Plans are
to complete and test this well during the fourth quarter.
On
October 10, 2007, the Company entered into a fee-based Gas Gathering
and
Compression Services Agreement with an unrelated third party for the
provision
of field gathering, treating, compression and high pressure transport
of natural
gas to be produced from the Company's Fayetteville Shale project. The
agreement obligated the Company to post a $2.0 million letter of credit
to
secure the acquisition of rights-of-way, pipe, compression, associated
equipment and services related to the project. The Company has
posted the letter of credit and the acquisition of such materials and
services is underway. Upon delivery of flow test information from the
initial wells drilled and completed by the Company, both the Company
and the
gatherer will have the option to continue with the implementation of the
project. If the election by either party is not to continue, the Company
will be responsible to the third party for all mitigated costs incurred,
which
costs are secured by the $2.0 million letter of credit. If the election by
the Company and the gatherer is to proceed, the gatherer will commence
construction activities. At such time, the gatherer will return the $2.0
million letter of credit and the Company will assign the gatherer
a 2% overriding royalty interest, proportionately reduced, in the
Fayetteville project interests as of October 5, 2007 where the gatherer is
providing gathering and compression services. The Company will be
obligated to deliver sufficient volumes to generate fees totaling $19.0
million
over a four-year period. The gatherer estimates that the facilities will
be operational by the end of the first quarter 2008.
Expiration
of Warrants
On
October 25, 2007, 2,522,987 warrants expired without being exercised.
2,126,582 warrants remain outstanding, all of which must be exercised
on or
before their expiration date of March 19, 2008.
Results
of Operations
Comparative
Results of Operations for the Nine Months Ended September 30, 2007 and
2006
Selected
Operating Data:
|
|
Nine
Months Ended September 30
|
|
|
2007
|
|
|
2006
|
|
|
$
Change
|
|
|
%
Change
|
|
Net Natural
Gas Sales Volume (MMcf)
|
|
|
2,224.7
|
|
|
|
828.9
|
|
|
|
1,395.8
|
|
|
|
168.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Sales (In Thousands)
|
|
$ |
11,761
|
|
|
$ |
5,060
|
|
|
$ |
6,701
|
|
|
|
132.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Sales Price (per Mcf)
|
|
$ |
5.29
|
|
|
$ |
6.10
|
|
|
$ |
(0.81 |
) |
|
|
(13.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Data (per Mcf):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
and transportation
|
|
$ |
0.69
|
|
|
$ |
1.14
|
|
|
$ |
(0.45 |
) |
|
|
(39.4 |
%) |
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating expenses
|
|
$ |
1.37
|
|
|
$ |
1.67
|
|
|
$ |
(0.30 |
) |
|
|
(18.1 |
%) |
Ad
valorem and property taxes
|
|
$ |
0.38
|
|
|
$ |
0.74
|
|
|
$ |
(0.36 |
) |
|
|
(49.0 |
%) |
Asset
impairment
|
|
$ |
12.48 |
|
|
$ |
2.41 |
|
|
$ |
10.07 |
|
|
|
417.4 |
% |
Depreciation,
depletion, amortization and accretion expense
|
|
$ |
2.75
|
|
|
$ |
2.36
|
|
|
$ |
0.39 |
|
|
|
16.9 |
% |
General
and administrative expense, excluding stock-based compensation
and
capitalized overhead
|
|
$ |
2.77
|
|
|
$ |
3.58
|
|
|
$ |
(0.81
|
) |
|
|
(22.6 |
%) |
Stock-based
compensation
|
|
$ |
0.27
|
|
|
$ |
2.70
|
|
|
$ |
(2.43 |
) |
|
|
(89.9 |
%) |
Natural
Gas Sales. Increased natural gas sales are a direct result of
increased production from the Company’s successful drilling activities over the
past year and from an acquisition made in the third quarter of
2006. Volume increases offset the industry-wide decline in natural
gas prices and declining production from existing wells.
Lease
Operating Expenses. Total lease operating expenses increased by
$1.89 million. The increase is primarily a result of additional wells
added from the Company’s successful drilling program and from an
acquisition made in the third quarter 2006. On a per Mcf basis, lease
operating expenses decreased by 18.1% as a result of higher production
on a per
well basis and from the economies of scale created through the opportunity
to
spread costs over more wells.
Ad
Valorem and Property Taxes. Ad valorem and property taxes increased
approximately $0.23 million to $0.84 million in the first nine months of
2007
compared to $0.61 million the first nine 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
by
41.1% during the first nine months of 2007 compared to 2006. This
decrease is attributable to lower CIG pricing in 2007. Volatility in
gas sales prices has been normalized by the Company’s hedge contracts, but the
valuation for taxes is based on market price.
Asset
Impairment. The
Company calculated the ceiling value of its proved reserves based upon
the
September 30, 2007 market price for natural gas of $1.9855 per MMBtu
at the
Colorado Interstate Gas (“CIG”) – Mainline index and the impact of the Company’s
natural gas hedges as of September 30, 2007. At that date, the Company’s
full cost pool exceeded this calculated ceiling value by $25.0 million.
Therefore, the Company recognized an impairment of $25.0 million against
the book value of its proved properties.
In
the
third quarter of 2007, the Company evaluated and moved all
$4.9 million of its
unproved Alaskan costs into the U.S. full cost pool, which
also then became
subject to the ceiling test.
Also
in
the third quarter of 2007, the Company evaluated its Alberta, Canada
unproved properties. Using the lower of cost basis or market value
test, Storm Cat recognized an impairment of $2.8 million against the book
value of its unproved Alberta properties.
General
and Administrative Expense. The Company reports general and administrative
expense inclusive of stock-based compensation and net capitalized internal
costs. The components of general and administrative expense
were as follows:
|
|
Nine
Months Ended September 30,
|
|
|
2007
|
|
|
2006
|
|
|
$
Change
|
|
|
%
Change
|
|
General
and administrative expense, excluding stock-based compensation
and
capitalized overhead
|
|
$ |
6,166
|
|
|
$ |
4,542
|
|
|
$ |
1,624
|
|
|
|
35.7 |
% |
Stock-based
compensation
|
|
|
607
|
|
|
|
2,238
|
|
|
|
(1,631
|
) |
|
|
(72.9 |
%) |
Capitalized
overhead
|
|
|
--
|
|
|
|
(1,575 |
) |
|
|
1,575
|
|
|
|
(100.0 |
%) |
General
and administrative expense, net
|
|
$ |
6,773
|
|
|
$ |
5,205
|
|
|
$ |
1,568
|
|
|
|
30.1 |
% |
The
period-over-period change is comprised of several factors. The
Company's total employee count increased from 22 at the end of the third
quarter 2006 to 25 at the same period in 2007 in order to manage the
Company's increased well count. This increase, coupled with an increase
in total accrued employee bonuses, produced additional salaries and
related costs of $0.68 million in 2007. The Company incurred $0.36
million in 2007 relative to a severance agreement with its former
President and CEO, J. Scott Zimmerman. General
and administrative expense in the second quarter of 2007 included
$0.16 million related to the reclassification of reserve audit fees
from lease operating expense to general and administrative
expense. Also, bank fees of $0.50 million related to alternative
financing were incurred in 2007, and directors and officers
insurance increased by $0.10 million.
While
stock-based compensation decreased
overall from the nine months ended September 30, 2006 to the same
period in 2007 due to the full expensing of legacy stock options in 2006
and the reclassification of certain stock-based compensation from the equity
method to the liability method in 2007, the Company incurred an additional
one-time expense of $0.23 million for stock-based compensation in
relation to the accelerated vesting of J. Scott Zimmerman's options
relative to the severance agreement.
In
the first nine months of 2006, $1.58
million of internal costs were capitalized. Beginning in 2007,
Storm Cat discontinued the capitalization of internal costs.
Income
Tax. The income tax benefit realized in the first nine
months of 2007 was $1.32 million. This is a tax benefit that is
passed on to the Company's flow-through shareholders. The
flow-through shareholders pay a premium above market for their shares in
order
to have this tax benefit. 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.
Interest
Expense. Interest expense during the first nine months of 2007
relates primarily to the Company’s senior credit facility with JPMorgan
and the Series A Notes and the Series B Notes. The convertible
notes were not in place in 2006, and the JPMorgan credit facility
was not established until late August 2006.
Known
Future Trends. The Company expects continued increases
in revenue, lease operating expenses and interest
expense resulting from planned capital expenditures 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 September 30, 2007 and
2006
Selected
Operating Data:
|
|
Three
Months Ended September 30
|
|
|
2007
|
|
|
2006
|
|
|
$
Change
|
|
|
%
Change
|
|
Net
Natural Gas Sales Volume (MMcf)
|
|
|
808.2
|
|
|
|
371.5
|
|
|
|
436.7
|
|
|
|
117.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural
Gas Sales (In Thousands)
|
|
$ |
4,181
|
|
|
$ |
2,181
|
|
|
$ |
2,000
|
|
|
|
91.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Sales Price (per Mcf)
|
|
$ |
5.17
|
|
|
$ |
5.87
|
|
|
$ |
(0.70 |
) |
|
|
(11.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Data (per Mcf):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gathering
and transportation
|
|
$ |
0.72
|
|
|
$ |
1.05
|
|
|
$ |
(0.33 |
) |
|
|
(31.5 |
%) |
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
operating expenses
|
|
$ |
1.77
|
|
|
$ |
0.93
|
|
|
$ |
0.84 |
|
|
|
90.7 |
% |
Ad
valorem and property taxes
|
|
$ |
0.37
|
|
|
$ |
0.81
|
|
|
$ |
(0.44 |
) |
|
|
(53.9 |
%) |
Asset
impairment
|
|
$ |
34.36 |
|
|
$ |
5.38 |
|
|
$ |
29.98 |
|
|
|
538.3 |
% |
Depreciation,
depletion, amortization and accretion expense
|
|
$ |
3.24
|
|
|
$ |
2.26
|
|
|
$ |
0.98 |
|
|
|
43.2 |
% |
General
and administrative expense, excluding stock-based compensation
and
capitalized overhead
|
|
$ |
1.49
|
|
|
$ |
4.83
|
|
|
$ |
(3.34
|
) |
|
|
(69.2 |
%) |
Stock-based
compensation
|
|
$ |
(0.72
|
) |
|
$ |
2.12
|
|
|
$ |
(2.84 |
) |
|
|
(134.0 |
%) |
Natural
Gas Sales. Natural gas sales revenue in the third quarter of
2007 increased 91.7% over the same quarter in 2006. This increase
was strictly due to the increase in sales volume. The volume increase is
a
direct result of increased production from the Company’s successful drilling
activities over the past year and an acquisition the Company made in the
third quarter of 2006. Increased sales volumes more than offset the
natural decline in production and an industry-wide decline in natural
gas
prices. Storm Cat’s average natural gas sales price declined
from $5.87 per Mcf in 2006 to $5.17 per Mcf in 2007.
Lease
Operating Expenses. Lease operating expenses increased
approximately $1.08 million to $1.73 million in the third quarter of
2007 from
$0.65 million the third quarter of 2006. This increase resulted
primarily from additional wells added through the Company’s successful drilling
program and from an acquisition the Company made in the third quarter
of
2006. On a per Mcf basis, lease operating expenses increased by
90.7% from the third quarter of 2006 to the third quarter of
2007. The higher costs are primarily related to fuel and generator
costs associated with new wells in development areas where
the electrical infrastructure is not yet installed. These
higher operating costs are anticipated to be short lived as the electrical
grid is built out to the well locations.