Storm Exploration Inc.
TSX : SEO

Storm Exploration Inc.

August 13, 2009 23:25 ET

Storm Exploration Inc. Is Pleased to Announce Its Financial and Operating Results for the Three and Six Months Ended June 30, 2009

CALGARY, ALBERTA--(Marketwire - Aug. 13, 2009) - Storm Exploration Inc. (TSX:SEO)



Three Three Six Six
Highlights - Months Months Months Months
Thousands of $CDN, to to to to
except volumetric and June 30, June 30, June 30, June 30,
per share amounts 2009 2008 2009 2008
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Financial
Gas sales 14,026 29,547 (1) 35,633 55,788
NGL sales 2,028 3,239 3,904 5,628
Oil sales 3,097 (1) 5,906 5,972 (1) 11,051
Royalty income 47 196 114 395
----------------------------------------------
Production revenue 19,198 38,888 45,623 72,862
----------------------------------------------

Funds from operations (2) 8,460 23,250 22,180 42,768
Per share - basic ($) 0.18 0.52 0.48 0.96
Per share - diluted ($) 0.18 0.50 0.47 0.93

Net income (loss) (2,192) 9,465 (942) 15,889
Per share - basic ($) (0.05) 0.21 (0.02) 0.36
Per share - diluted ($) (0.05) 0.20 (0.02) 0.34

Capital expenditures, net of
dispositions 3,843 5,780 35,334 32,555

Debt, including working capital
deficiency 93,473 (3) 75,144 (3) 93,473 (3) 75,144

Weighted average common shares
outstanding (000s)
Basic 46,553 44,634 45,888 44,610
Diluted 47,637 46,179 46,959 46,101

Common shares outstanding
(000s)
Basic 46,554 44,657 46,554 44,657
Fully diluted 49,012 47,026 49,012 47,026

Operations
Oil equivalent (6:1)
Barrels of oil equivalent
(000s) 742 558 1,502 1,149
Barrels of oil equivalent per
day 8,153 6,130 8,296 6,315
Average selling price ($CDN
per BOE) 25.81 (1) 69.36 (1) 30.31 (1) 63.05

Gas production
Thousand cubic feet (000s) 3,839 2,893 7,752 5,943
Thousand cubic feet per day 42,185 31,786 42,831 32,656
Average selling price ($CDN
per mcf) 3.65 10.22 (1) 4.60 9.39

NGL Production
Barrels (000s) 49 28 97 59
Barrels per day 533 313 538 323
Average selling price ($CDN
per barrel) 41.77 113.64 40.11 95.69
Oil Production
Barrels (000s) 54 47 112 100
Barrels per day 589 519 620 549

Average selling price ($CDN
per barrel) 57.76 (1) 124.97 53.22 (1) 110.56

Wells drilled
Gross 0.0 0.0 4.0 11.0
Net 0.0 0.0 2.8 10.1

(1) Includes results of hedging activities
(2) Funds from operations and funds from operations per share are non-GAAP
measurements. See MD&A.
(3) Excludes unrealized liability related to financial instruments


HIGHLIGHTS for the Quarter Ended June 30, 2009

- Production increased to 8,153 Boe per day, a 33% increase from production of 6,130 Boe per day in the same period one year ago. This is a per share increase of 28% using basic shares outstanding at quarter end. Approximately 600 Boe per day was shut-in or curtailed for economic reasons during the quarter and another 120 Boe per day was shut-in as a result of the scheduled maintenance turnaround of the Ft Nelson Gas Plant in June. Start-up of two new Montney horizontal wells at Parkland was delayed until later in the second quarter with both currently producing a total of 1,600 Boe per day (net).

- Activity during the quarter was low due to road use restrictions imposed every spring (road bans) that prevent mobilization of rigs until late June and, also as a result of reducing activity levels in response to the decline in natural gas prices which has reduced cash flow available for re-investment. No wells were drilled or completed in the second quarter.

- Cash flow for the quarter was $8.5 million or $0.18 per diluted share, a decrease of 64% from $0.50 per diluted share in the prior year second quarter. Not surprisingly, this was the result of lower commodity prices with the year-over-year decline of 65% in the per Boe sales price more than offsetting 28% growth in production per share.

- The second quarter cash flow netback of $11.40 per Boe represents a decline of 73% from the cash flow netback of $41.69 per Boe in the year earlier period and, again, this was due to the 63% decline in the per Boe sales price over the same period. Total cash costs including operating expense, interest expense, transportation costs, and general and administrative averaged $9.95 per Boe in the quarter representing a 22% decline from the year earlier period which did offset some of the commodity price decline. Notably, operating costs were $5.61 per Boe in the quarter, a decline of 21% from the previous year.

- Storm incurred a net loss for the quarter of $2.2 million, or a loss of $0.05 per diluted share which represents the first quarterly loss since we commenced operations five years ago. This has been and continues to be a challenging and very difficult business environment. Charges for depletion, depreciation and accretion at $14.43 per Boe were 16% lower year over year but, this improvement was more than offset by the decline in commodity prices over the same period.

- Capital investment totaled $3.8 million in the quarter, leaving bank debt and working capital deficiency at $93.5 million or 2.8 times annualized second quarter cash flow. Year over year, total debt has increased by 24% which is in proportion to production per share growth of 28%.

Boe Presentation - For the purpose of calculating unit revenues and costs, natural gas is converted to a barrel of oil equivalent ("Boe") using six thousand cubic feet ("Mcf") of natural gas equal to one barrel of oil unless otherwise stated. Boe may be misleading, particularly if used in isolation. A Boe conversion ratio of six Mcf to one barrel ("bbl") is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. All Boe measurements and conversions in this report are derived by converting natural gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil. Mboe means 1,000 Boe.

CORE AREA REVIEW

Parkland/Fort St. John Area, North East British Columbia

This area includes our Montney discovery and is the largest of Storm's core areas, with net production averaging 6,016 Boe per day in the second quarter. During the quarter, approximately 500 Boe per day was shut in or curtailed due to low natural gas prices. Current production is approximately 6,100 Boe per day with 500 Boe per day shut in.

During the second quarter, two Montney horizontal wells at Parkland that were completed and tied in during the first quarter, began producing in mid-May and early June (both 100% working interest). Each is currently being produced at a restricted rate of approximately 4.5 Mmcf per day which represents 800 Boe per day of net sales per well. Planned activity at Parkland over the remainder of the year includes drilling three horizontal development wells (2.4 net) in our Montney discovery, three vertical Montney step-outs (3.0 net), and one exploratory Montney vertical well (1.0 net) to further evaluate a new pool Montney lead.

Development of our Montney discovery continues to progress as expected. We are currently producing about 27 Mmcf per day of gross raw gas from 14 horizontal Montney gas wells plus 3 Mmcf per day of gross raw gas from 11 Montney vertical wells. The first year average rate from our horizontal wells continues to be approximately 2.3 Mmcf per day of raw gas, which represents 400 Boe per day of sales gas per well.

Geological mapping suggests that our Montney discovery could be as large as 15 to 17 net sections. The 2008 year-end reserve evaluation completed by Paddock Lindstrom & Associates Ltd. recognized an areal extent of 11 sections (7,040 acres) based on 13 successful vertical Montney gas wells. This resulted in estimated Discovered Petroleum Initially in Place ("DPIIP") or gross Original Gas in Place(1) ("OGIP") for our Montney discovery to be 409 Bcf. Estimated DPIIP relies on a porosity cut-off of 6% on a sandstone scale which is somewhat conservative in comparison to what is being used by other reserve evaluators in the area. The areal extent of our discovery is likely to have increased by one to two net sections based on results from the one successful vertical Montney step-out we drilled in the first quarter and the recompletion of two suspended wells in the first and third quarters. During the remainder of 2009, three additional step-outs are planned in an effort to further expand the areal extent of our Montney discovery.

In 2009, a total of $16 million has been budgeted to expand our infrastructure at Parkland. In the first quarter, $4 million was invested in completing a second facility which is currently capable of processing 12 Mmcf per day and has been designed to be readily expandable to 50 Mmcf per day of capacity. Later this year, we plan to expand this facility to 25 Mmcf per day of capacity and a liquids extraction plant (refridge) will be added at an estimated cost of $12 million. We have started ordering and taking delivery of equipment and expect to start construction in late October, with completion expected by early December. The refridge plant is expected to result in liquids recoveries increasing from 16 to 45 barrels per Mmcf of sales gas which would increase liquids production by 400 to 600 barrels per day and will add two to three million barrels of natural gas liquids to our proven plus probable reserves (based on the DPIIP and recoverable raw gas recognized in the 2008 year-end reserve evaluation).

In the second quarter, the field netback realized at our Parkland property was $16.03 per Boe, production was 6,016 Boe per day (87.3% natural gas), and operating costs were $3.93 per Boe.

1 When used in this press release, original gas in place ("OGIP") means Discovered Petroleum Initially in Place which is defined in the COGEH handbook as the quantity of hydrocarbons that are estimated to be in place within a known accumulation. OGIP is used here as it is a more commonly used industry term when referring to gas accumulations. Discovered Petroleum Initially in Place is divided into recoverable and unrecoverable portions, with the estimated future recoverable portion classified as reserves and contingent resources. There is no certainty that it will be economically viable or technically feasible to produce any portion of this Discovered Petroleum Initially in Place except for those portions identified as proved or probable reserves.

Grande Prairie Area, North West Alberta

Production from this area averaged 1,470 Boe per day in the second quarter which is a decline of 17% from production of 1,773 Boe per day in the year earlier period. Approximately 100 Boe per day was shut in during the quarter due to low natural gas prices. Current production is approximately 1,400 Boe per day with 100 Boe per day still shut in. Third quarter production from this area is expected to be reduced by approximately 100 Boe per day as result of planned facility maintenance turnarounds in September. Declines from this area continue to moderate which is indicative of the higher quality nature of this more mature asset.

In order to benefit from Alberta`s recently announced royalty incentive programs, we are planning to drill two locations (75% average working interest) in the fourth quarter. Additional wells are likely to be drilled in 2010 to further benefit from the royalty incentive programs. The locations are mainly lower risk infills or twins of existing wells and the royalty incentive programs will offset 50% to 75% of the cost to drill these wells.

Cabin-Kotcho-Junior Area, North East British Columbia

Net production from this area averaged 620 Boe per day in the second quarter, a decline of 36% from the year earlier period. Production during the quarter was affected by the scheduled 21 day maintenance shut-down of the Ft Nelson Gas Plant which reduced production by 120 Boe per day for the quarter. Current production is approximately 575 Boe per day and we have shut-in 150 Boe per day due to low natural gas prices.

We are currently finalizing plans for a winter drilling program involving two to four horizontal wells plus a small facility expansion to test the productivity of the Jean Marie formation in the Junior area. Based on mapping and proximity to offsetting producing Jean Marie horizontals, we have 33 net sections in the area which have the greatest potential for development with horizontal wells. Our estimated average cost to drill, complete, and tie-in a horizontal well is approximately $2.1 million. Based on offsetting wells in the immediate area, first year rates could average 800 to 1,400 Mcf per day and 1.0 to 1.5 Bcf of gross raw gas could be recovered with each horizontal well. Drilling density would be one horizontal well per section.

Horn River Basin ("HRB"), North East British Columbia

Since early 2008, Storm has jointly acquired 64 gross sections of undeveloped land in the HRB at a 40% working interest (16,400 net acres) prospective for Devonian shale gas. This land position has been acquired at an average cost of $400 per acre. The lands were purchased in partnership with Storm Gas Resource Corp. ("SGR") which owns the remaining 60% working interest. Combined with Storm's 22% ownership position in SGR, our exposure to this unconventional shale gas play is approximately 53%.

In the first quarter, two vertical wells (60% SGR, 40% Storm) were drilled in the HRB to prove the productivity of our lands. The first well was cored, completed and flow tested in the Muskwa and Otter Park shales. Results were encouraging but inconclusive in terms of determining the exploitation potential with multi-stage frac horizontal wells. Both of the vertical test wells are within a central project area encompassing 35 gross sections (14.0 net) containing an estimated 2.6 Tcf of gross DPIIP (internal estimate prepared by Storm Management). Our estimate of DPIIP is based on information and data from various sources including wells in the immediate area and assumes:

- average gross pay of 60 to 110 metres with 3.7% average porosity (both the Muskwa and Otter Park shales),

- average gas saturation of 80%,

- average reservoir pressure of 25,200 kPaa,

- average gas content of 40 to 80 scf per ton,

- the calculated adsorbed gas volume represents 45% of estimated DPIIP.

The Klua/Evie shale was not included in the DPIIP estimate because less information is available regarding the productivity of this shale in the area.

The next step in advancing this play is drilling horizontal wells to obtain production data (initial rates, declines, estimates of potential recoverable reserves) as well as operational experience which we can then use in determining the economic viability of larger scale exploitation with multi-stage frac horizontal wells. We are currently estimating that the cost to drill a horizontal well is $4 million with the cost of a 10 frac completion being $10 million. The completions may be done in the summer of 2010 in order to eliminate the significant cost associated with storing large quantities of water in tanks and heating them during the winter. Cost of drilling and completing horizontal wells may be lower than this as part of a larger scale development program; however, the actual cost reduction is difficult to quantify at this time given that we have not yet drilled any horizontal wells in the HRB. The initial test horizontals would potentially be tied in and producing early in 2011. We are currently working with SGR to finalize plans for 2010 which will potentially include drilling and completing one to two horizontal wells, completing the second standing vertical well drilled last winter, drilling and coring one more vertical delineation well, recording 3-D seismic, and constructing associated roads, facilities, and pipelines. Initial estimates of the gross cost are between $35 and $45 million (incurred between early 2010 and early 2011) depending on the number of horizontal wells drilled and also completed. The potential economic returns associated with full scale development of the HRB shales are not expected to be known until after we have several months of production history from the horizontal wells which is likely to be up to two years in the future. This remains an early stage project with a high level of associated economic risk.

STORM GAS RESOURCE CORP.

Storm Gas Resource Corp was formed in June 2007, to pursue unconventional gas opportunities in the HRB and elsewhere. During 2008, SGR completed a private equity issue and raised $38.2 million (net of share issue costs) at a price of $6.50 per share. Storm's investment to date in SGR totals $6.2 million and our share ownership position is 2.05 million shares, representing 22% ownership of SGR. Currently, SGR's land position in the HRB totals 123 gross sections or 70 net sections.

Our investment in SGR and partnership in the HRB are at an early stage in terms of information and results and we don't expect to have an indication regarding upside potential for at least two to three years.

STORM VENTURES INTERNATIONAL INC.

Storm owns 4.5 million shares of Storm Ventures International Inc. ("SVI"), a Calgary based, private energy company focused on international exploration and exploitation opportunities. Our share position has a notional value of $28 million or $0.60 per fully diluted Storm share using the price of a rights offering completed in August 2008 which was $6.25 per share. At the end of 2008, SVI's independently reviewed proven plus probable reserves totaled 36.4 million Boe. SVI is primarily focused on advancing three major development projects including the Vulcan project in the North Sea with potentially 320 to 360 Bcf of original gas in place, the Remada Sud light oil discovery in Tunisia with Stock Tank Original Oil in Place ('STOOIP') independently estimated at 170 million barrels in the Ordovician formation, and the Cosmos fallow discovery offshore Tunisia with estimated STOOIP of 25 million barrels.

SVI's production averaged 12.9 Mmcf per day in the first quarter generating field cash flow of Cdn$7.4 million with field cash flow for 2009 estimated to be Cdn$26 million (before interest and general and administrative expenses). Estimated field cash flow for 2009 is supported by a hedge on 5.9 Mmcf per day with a floor price of $11.00 per Mcf. SVI ended the first quarter with cash of Cdn$38 million and with Cdn$36 million drawn on a loan facility with the Royal Bank of Scotland.

Early in the second quarter of 2009, SVI commenced an extended production test of an Ordovician light oil discovery at Remada Sud in Tunisia which had been drilled and completed early in 2008. Results to date are encouraging with the well flowing 225 barrels per day of light oil at a 3% watercut. SVI is applying to extend the test from 90 to 180 days and will submit a preliminary development plan before year end for execution in 2010. This plan is expected to include a 3-D seismic survey and two additional appraisal/development wells to assess the commercial potential of this discovery.

Three higher impact exploratory wells are expected to be drilled before the end of 2009 with SVI being the operator of all three wells. Two are in Tunisia with one being the Fushia prospect offshore in the Gulf of Hammamet targeting a 100 Mmbbl prospect (pay 38.75% and retain a 65% interest) and the other being onshore targeting a 25 Mmbbl prospect in the Silurian Acacus formation on the Jenein Centre block (pay 30% and retain a 65% interest). The third is the Coriander prospect in the North Sea, which is part of the Vulcan project area containing fallow discoveries and prospects with prospective gas in place totaling 1 Tcf.

OUTLOOK

Storm's capital investment plan for 2009 is being reduced to reflect lower than budgeted cash flow. Capital investment for the year will be reduced to $67 million which still includes $16 million to be invested in expanding our infrastructure at Parkland. This will be funded primarily with cash flow which is expected to total $45 to $50 million assuming average 2009 prices of $4.00 per GJ at AECO for natural gas and $56.00 per barrel for oil at Edmonton. The equity issue completed in March funds the remainder, which allowed us to complete the first quarter acquisition of a gross overriding royalty at Parkland for $9 million and has also provided certainty on being able to fund the addition of a refridge plant at Parkland to increase recovery of higher value natural gas liquids. Our 2009 drilling program will now total 13 gross wells (10.7 net). In the second half of 2009, we plan to drill three Montney horizontal wells (2.4 net) at Parkland, four Montney verticals (4.0 net), and two wells (1.5 net) in the Grande Prairie area.

Guidance will be impacted by the reduction to capital investment and we now expect exit production or production for the final quarter of 2009 to be approximately 8,400 to 8,600 Boe per day, an increase of 5% over 2008 fourth quarter production. This results in year over year production growth of 15% to 20% (average 2008 production was 6,975 Boe per day). Operating costs for the remainder of 2009 are forecast to be $5.50 per Boe which is somewhat lower than previous guidance as a result of shutting in higher cost wells and increased production from our Parkland property. General and administrative costs for the year are still expected to be $1.25 per Boe (unchanged) and the corporate royalty rate, giving effect to the New Royalty Framework's effect on Alberta production, is expected to average 19% in 2009 (down from our previous estimate of 21%).

Our capital is expected to go a little further through the remainder of this year with the cost of drilling and completing wells potentially declining by 10% to 15% based on information available at this time. This is primarily the result of lower steel costs, reductions in day rates for drilling rigs and reduced bid levels on fracture treatments.

Corporate production is currently approximately 8,100 Boe per day with 750 Boe per day shut in as a result of low natural gas prices. At current natural gas prices, we expect to maintain corporate production at this level through the third quarter.

In the current depressed natural gas price environment, our focus remains on accretive growth in net asset value which will be accomplished by:

- shutting in higher cost wells or properties so that reserves are not produced at a loss.

- drilling fewer horizontal Montney gas wells given that the increase in forward strip pricing encourages us to defer drilling wells with high initial rates and steep initial declines.

- continuing to drill Montney vertical step-outs which add horizontal locations and new reserves but do not have a meaningful impact on production.

- advancing our knowledge of the HRB Devonian shale play by drilling multi-stage frac horizontal wells as well as additional vertical delineation wells.

- testing the development potential of the Jean Marie formation on our large land position in the Junior area.

This will impact production growth in the near term. Production growth will remain subdued until natural gas prices recover to a level where an acceptable economic return can be generated and where our cash flow is large enough to support funding both a development program as well as growth initiatives (approximately $5 per GJ at AECO). Given our control of infrastructure at Parkland and inventory of horizontal Montney development locations which have been defined with vertical well control, we expect to be able to rapidly increase corporate production when the price of natural gas inevitably recovers.

At Parkland, considerable upside potential remains associated with:

- expanding the areal extent of our Montney discovery which could cover as many as 15 to 17 net sections with up to 54 undrilled horizontal locations (four horizontal wells per section) representing potential future production additions of as much as 21,600 Boe per day.

- separate, new pool Montney leads on the 72 net sections of Montney rights that we own which will be further tested with at least one vertical well this year and we will also monitor the progress of competitors in the immediate area.

- recognizing a higher recovery factor and/or a lower porosity cut-off which would increase DPIIP (gas in place) on our existing lands and potentially add to the inventory of horizontal locations.

- Additional facility expansions to further increase recovery of natural gas liquids ('NGLs').

Although reserves at Parkland have increased significantly over the last two years, this is far from being a mature asset.

On August 6th, the Province of British Columbia announced an oil and gas stimulus package to boost investment which included four royalty initiatives. Three of these initiatives are expected to provide an immediate benefit to Storm including:

- The two percent Royalty Relief Program which applies to the first 12 months of production for wells spudded before the end of June 2010.

- The 15% increase in the royalty deductions available to wells that qualify for the Deep Well Credit program.

- The qualification of horizontal wells drilled between 1,900 and 2,300 metres of true vertical depth into the Deep Well Credit program which would include most of the horizontal wells drilled in the Montney at Parkland.

The total benefit of all three initiatives amounts to approximately $1.0 to $1.2 million per Montney horizontal at Parkland using natural gas prices of $5.30 per GJ (2010 futures price) to $6.15 per GJ (2011 futures price). This should increase Storm's cash flow in both the short term (two percent Royalty Relief Program) and long term (Deep Well Credit Program) which should correspondingly allow us to increase our planned level of expenditures in British Columbia. For example, instead of drilling nine horizontals at Parkland in 2010 (preliminary plan), we should be able to fund the drilling of eleven horizontal wells. Any additional wells we drill should increase employment in the short term and should result in incremental growth in our natural gas production which, longer term, provides the Province with additional royalty revenue. Thankfully, British Columbia is willing to be realistic in their assessment of industry conditions and is trying to ensure that their fiscal regime is fair and will also encourage investment during the current difficult and challenging business environment. Ultimately, we expect this to result in increased prosperity for British Columbians as additional capital is invested in the Province with some of this capital coming from the equity markets (investors will direct additional capital into companies active in British Columbia) and some being attracted away from areas with less favorable fiscal regimes (Alberta).

Natural gas prices remain at relatively depressed levels making it challenging for us to fund growth in production from cash flow while also making a significant investment in infrastructure at Parkland. Although production growth is deferred in the short term, the additional investment in our infrastructure at Parkland provides an immediate benefit in the form of increased production and is also a key step in our efforts to maximize the future economic value of this important asset. Despite the current difficult environment, we are very optimistic about our future growth potential given the high quality of our asset base, which contains several years of low risk development opportunities as well as exposure to what could potentially be a very high impact gas project in the HRB. Our low cost structure does leave us with more flexibility than most and we do expect to show accretive growth in net asset value this year.

Sincerely,

Brian Lavergne, President and Chief Executive Officer

August 13, 2009

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009

Set out below is management's discussion and analysis ("MD&A") of financial and operating results for Storm Exploration Inc. ("Storm" or the "Company") for the three and six months ended June 30, 2009. It should be read in conjunction with the unaudited consolidated financial statements for the three and six months ended June 30, 2009, the audited consolidated statements for the year ended December 31, 2008 and other operating and financial information included in this press release. In addition, readers are directed to the discussion below regarding Forward-Looking Statements, Boe Presentation and Non-GAAP Measurements.

This management's discussion and analysis is dated August 13, 2009.

Introduction and Limitations:

Basis of Presentation - Financial data presented below have largely been derived from the Company's unaudited consolidated financial statements for the three and six months ended June 30, 2009, prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). Accounting policies adopted by the Company are set out in footnote 2 to the unaudited consolidated financial statements for the three and six months ended June 30, 2009 and in footnote 2 to the Company's audited consolidated financial statements for the year ended December 31, 2008. The reporting and the measurement currency is the Canadian dollar. Unless otherwise indicated, tabular financial amounts, other than per share and per Boe amounts, are in thousands.

Forward-Looking Statements - Certain information set forth in this document, including management's assessment of Storm's future plans and operations, contains forward-looking information (within the meaning of applicable Canadian securities legislation). Such statements or information are generally identifiable by words such as "anticipate", "believe", "intend", "plan", "expect", "estimate", "budget", "outlook", "forecast" or other similar words and include statements relating to or associated with individual wells, regions or projects. Any statements regarding the following are forward-looking statements:

- future crude oil or natural gas prices;

- future production levels;

- future capital expenditures and their allocation to exploration and development activities;

- future drilling of new wells;

- future earnings;

- future asset acquisitions or dispositions;

- future sources of funding for capital program;

- future debt levels;

- availability of committed credit facilities;

- development plans;

- ultimate recoverability of reserves or resources;

- expected finding and development costs and operating costs;

- estimates on a per share basis;

- dates by which certain areas will be developed; and

- changes to any of the foregoing.

Statements relating to "reserves" or "resources" are forward-looking statements, as they involve the implied assessment, based on estimates and assumptions, that the reserves and resources described exist in the quantities predicted or estimated, and can be profitably produced in the future.

The forward-looking statements are subject to known and unknown risks and uncertainties and other factors which may cause actual results, levels of activity and achievements to differ materially from those expressed or implied by such statements. Such factors include the material risks described in Storm's Annual Information Form and this MD&A under "Risk Assessment" and the material assumptions disclosed in the "Production and Revenue" section hereof under the headings "Production Profile and Per Unit Prices" and "Royalties"; under "Field Netback", "Interest" and "General and Administrative Costs"; under the "Investment and Financing" section hereof, under the headings "Bank Debt, Liquidity and Capital Resources"; and "Asset Retirement Obligation"; industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources, either in this document or in the Company's MD&A contained in its annual report for the year ended December 31, 2008. All of these caveats should be considered in the context of current economic conditions, in particular reduced commodity prices and the distressed condition of financial institutions and markets, each of which is outside the control of the Company. Readers are advised that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Storm's actual results, performance or achievement, could differ materially from those expressed in, or implied by, these forward-looking statements. Storm disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required under securities law. References to forward-looking information are made in the press release dated August 13, 2009 this MD&A forms part of. The forward-looking statements contained herein are expressly qualified by this cautionary statement.

Boe Presentation - For the purpose of calculating unit revenues and costs, natural gas is converted to a barrel of oil equivalent ("Boe") using six thousand cubic feet ("Mcf") of natural gas equal to one barrel of oil unless otherwise stated. Boe may be misleading, particularly if used in isolation. A Boe conversion ratio of six Mcf to one barrel ("Bbl") is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. All Boe measurements and conversions in this report are derived by converting natural gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil.

Non-GAAP Measurements - Within management's discussion and analysis, references are made to terms which are not recognized under GAAP in Canada. Specifically, "funds from operations", "funds from operations per share", and "netbacks" do not have any standardized meaning as prescribed by GAAP in Canada and are regarded as non-GAAP measures. It is likely that these non-GAAP measurements may not be comparable to the calculation of similar amounts for other entities. In particular, funds from operations is not intended to represent, or be equivalent to, cash flow from operating activities calculated in accordance with Canadian GAAP which appears on the Company's consolidated statements of cash flows. Funds from operations and similar non-GAAP terms are used to benchmark operations against prior periods and peer group companies. Funds from operations is also used to determine leverage for the purposes of establishing interest costs under the Company's banking agreement.



A reconciliation of funds from operations to cash flows from operating
activities is as follows:

----------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Cash flow from operating
activities $ 9,092 $ 24,890 $ 23,725 $ 41,770
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Net change in non-cash working
capital items (632) (1,640) (1,545) 998
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----------------------------------------
Funds from operations $ 8,460 $ 23,250 $ 22,180 $ 42,768
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OPERATIONAL AND FINANCIAL RESULTS

PRODUCTION AND REVENUE

Average Daily Production

----------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Natural gas (Mcf/d) 42,185 31,786 42,831 32,656
----------------------------------------------------------------------------
Natural gas liquids (Bbls/d) 533 313 538 323
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Crude oil (Bbls/d) 589 519 620 549
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Total (Boe/d) 8,153 6,130 8,296 6,315
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Total Boe production in the second quarter of 2009 increased by 33% when compared to the same quarter in 2008 and fell by 3% when compared to the first quarter of 2009. The year-over-year production increase is largely attributable to increased gas production from the Company's core Parkland area. Within the Parkland area, Montney gas production approximated 5,000 Boe per day in the second quarter of 2009, compared to 2,000 Boe in the same quarter of 2008.

Production, averaging 700 Boe per day, was shut in during the second quarter of 2009 due to low natural gas prices. Additional production may be shut in if product prices continue to fall. Year-to-date, production shut in has averaged 500 Boe.

Production per million shares outstanding in the second quarter of 2009 averaged 175 Boe per day, compared to 137 Boe per day for the second quarter of 2008, an increase of 28%.

For the six months ended June 30, 2009 production increased by 31% when compared to the equivalent period in 2008, or an increase of 28% per million shares outstanding for each period.



Production Profile and Per Unit Prices

----------------------------------------------------------------------------
Three Months to June 30, Three Months to June 30,
2009 2008
----------------------------------------------------------------------------
Average Selling Average Selling
Percentage Price Before Percentage Price Before
of Total Boe Transportation of Total Boe Transportation
Production Costs Production Costs
----------------------------------------------------------------------------
Natural gas
- Mcf 86% $ 3.65 86% $ 10.49
----------------------------------------------------------------------------
Natural gas
liquids - Bbl 7% $ 41.77 5% $ 113.64
----------------------------------------------------------------------------
Crude oil - Bbl 7% $ 63.63 9% $ 124.97
----------------------------------------------------------------------------
Per Boe $ 26.23 $ 70.80
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Six Months to June 30, 2009 Six Months to June 30, 2008
----------------------------------------------------------------------------
Average Selling Average Selling
Percentage Price Before Percentage Price Before
of Total Boe Transportation of Total Boe Transportation
Production Costs Production Costs
----------------------------------------------------------------------------
Natural gas
- Mcf 86% $ 4.60 86% $ 9.53
----------------------------------------------------------------------------
Natural gas
liquids - Bbl 7% $ 40.11 5% $ 95.69
----------------------------------------------------------------------------
Crude oil - Bbl 7% $ 56.49 9% $ 110.56
----------------------------------------------------------------------------
Per Boe $ 30.55 $ 63.75
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Per unit prices do not include adjustments for hedging gains or losses.


Storm's production base is largely natural gas and associated liquids. In addition, Storm's prospect inventory is largely focused on natural gas and, based on exploitation of the Company's existing asset base, in the short and medium term crude oil will not materially increase as a percentage of Boe production.

Storm's gas production in both Alberta and British Columbia is sold at prices which reflect both AECO daily index pricing and Station 2 daily index pricing. The average AECO daily index price for the second quarter of 2009 was $3.27 per GJ, compared to $9.67 per GJ for the second quarter of 2008, a year-over-year reduction of 66%. Compared to $4.67 per GJ for the first quarter of 2009, second quarter pricing was lower by 30%. In addition, for the second quarter of 2009 the average Station 2 daily index price, which applied to approximately 60% of Storm's gas production in the quarter, was 7% lower than the average AECO daily index price. Storm's corporate average realized price for natural gas for the second quarter of 2009 was approximately 12% higher than the AECO daily index price. This pricing premium is attributable to high heat content natural gas delivered from the Montney formation at Parkland. In addition to superior heat content, Montney natural gas has a natural gas liquids content of approximately 16 barrels per Mmcf, which has resulted in an approximate 70% increase in natural gas liquids production in 2009 over 2008.



Production by Area - Boe per Day

----------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Fort St John/Parkland - BC 6,016 3,333 6,060 3,422
----------------------------------------------------------------------------
Grande Prairie Area - AB 1,470 1,773 1,535 1,907
----------------------------------------------------------------------------
Cabin-Kotcho-Junior - BC 620 962 649 924
----------------------------------------------------------------------------
Other 47 62 52 62
----------------------------------------------------------------------------
Total 8,153 6,130 8,296 6,315
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The above sets out the average production from each of Storm's core areas. The Company's focus on the Parkland area has resulted in 80% year-over-year production growth from this area. Correspondingly, reduced investment in Alberta is evidenced by an approximate 17% reduction in year-over-year production.



Production Revenue

----------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Natural gas $ 14,026 $ 30,349 $ 35,633 $ 56,590
----------------------------------------------------------------------------
Natural gas liquids 2,028 3,239 3,904 5,628
----------------------------------------------------------------------------
Crude oil 3,412 5,906 6,339 11,051
----------------------------------------------------------------------------
Hedging losses (315) (802) (367) (802)
----------------------------------------------------------------------------
Revenue from product sales 19,151 38,692 45,509 72,467
----------------------------------------------------------------------------
Royalty income 47 196 114 395
----------------------------------------------------------------------------
Total production revenue $ 19,198 $ 38,888 $ 45,623 $ 72,862
----------------------------------------------------------------------------
----------------------------------------------------------------------------


A reconciliation of revenue from product sales between the quarters ended
June 30, 2009 and 2008 is as follows:

----------------------------------------------------------------------------
Natural
Natural Gas Crude
Gas Liquids Oil Total
----------------------------------------------------------------------------
Revenue from product sales - second
quarter 2008 $29,547 3,239 5,906 $ 38,692
----------------------------------------------------------------------------
Contribution from increased
production 9,920 2,278 798 12,996
----------------------------------------------------------------------------
Effect of reduced product prices (26,243) (3,489) (3,292) (33,024)
----------------------------------------------------------------------------
Gain (loss) from hedging activities 802 - (315) 487
----------------------------------------------------------------------------
Revenue from product sales - second
quarter 2009 $14,026 2,028 3,097 $ 19,151
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The collapse in revenues for 2009 is largely due to the fall in natural gas prices. Using December 2008 as a baseline value, AECO daily index prices in 2009 have been as follows:



----------------------------------------------------------------------------
Month Average Index Price Month Average Index Price
----------------------------------------------------------------------------
December 100 April 56
----------------------------------------------------------------------------
January 91 May 58
----------------------------------------------------------------------------
February 75 June 49
----------------------------------------------------------------------------
March 66 July 46
----------------------------------------------------------------------------


Hedging

Storm entered into a fixed price sale agreement in respect of 350 barrels of crude oil per day, at a price of $59.40 per barrel for the period April 1 to June 30, 2009 and collars for the same volume for each of the last two quarters of 2009, at prices of $60 - $65/Bbl and $60 - $70/Bbl, respectively. During the three and six month periods to June 30, 2009, the Company realized a hedging loss of $0.3 million and $0.4 million, respectively. At June 30, 2009 the Company had an unrealized mark-to-market loss of $1.1 million on these derivative contracts.



ROYALTIES

----------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Charge for period $ 3,360 $ 8,504 $ 8,613 $ 15,406

Royalties as a percentage of revenue
from product sales before royalties
- Crown 16.9% 20.3% 18.5% 20.1%
- Other 0.4% 1.2% 0.3% 1.1%
----------------------------------------------------------------------------
Total 17.3% 21.5% 18.8% 21.2%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per Boe $ 4.53 $ 15.24 $ 5.74 $ 13.40
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Royalties are paid primarily to the provincial governments in Alberta and British Columbia. The year-over-year reduction in the effective rate, and the per Boe reduction, are, in part, a result of falling commodity prices. Additionally, under the new Royalty Framework in Alberta, royalty rates have fallen below those applicable under the pre-existing royalty regime. Recently announced changes to the New Royalty Framework in Alberta will have no effect on existing royalties, but the extension of the royalty holiday by one year may benefit future quarters and provides the Company with more flexibility regarding the timing of future drilling in Alberta.



PRODUCTION COSTS

----------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Charge for period $ 4,160 $ 3,978 $ 8,621 $ 8,426
----------------------------------------------------------------------------
Percentage of revenue from product
sales before hedging 21.4% 10.1% 18.8% 11.5%
----------------------------------------------------------------------------
Per Boe $ 5.61 $ 7.13 $ 5.74 $ 7.33
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Although production grew by more than 30% year-over-year for both the three and six months ended June 30, 2009, cost reduction initiatives and increasing volumes of lower operating cost natural gas from the Company's Parkland property resulted in only modest increases in total production costs. Per Boe, the effect was to reduce costs by more than 20% in each of the three and six month periods.

Storm's cash costs per Boe, which comprise transportation, production, general and administrative and interest costs, amounted to $9.95 for the second quarter of 2009, compared to $9.81 for the first quarter of 2009 and to $12.78 for the second quarter of 2008.

For the six month periods to June 30, per Boe cash costs amounted to $9.87 in 2009 and $12.77 in 2008.



TRANSPORTATION COSTS

----------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Charge for period $ 1,125 $ 1,258 $ 2,527 $ 2,666
Percentage of revenue from product
sales before hedging 5.8% 3.2% 5.5% 3.6%
----------------------------------------------------------------------------
Per Boe $ 1.52 $ 2.26 $ 1.68 $ 2.32
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Total transportation costs were largely the same over each of the comparative periods above, in spite of production increases. Increased gas production from the Parkland area resulted in lower per unit costs year-over-year. Storm's low per unit production and transportation costs reflects Storm's high level of operatorship as well as facility control and ownership.



FIELD NETBACKS

Details of field netbacks per commodity unit are as follows:

----------------------------------------------------------------------------
Three Months to June 30, 2009
----------------------------------------------------------------------------
CrudeOil Natural Gas Natural Gas Total
($/Bbl) Liquids ($/Bbl) ($/Mcf) ($/Boe)
----------------------------------------------------------------------------
Product sales $ 63.63 $ 41.77 $ 3.65 $ 26.23
----------------------------------------------------------------------------
Hedging loss (5.87) - - (0.42)
----------------------------------------------------------------------------
Royalty income 0.17 0.07 0.01 0.07
----------------------------------------------------------------------------
Royalties (9.23) (9.65) (0.62) (4.53)
----------------------------------------------------------------------------
Production costs (1) (7.76) - (0.98) (5.61)
----------------------------------------------------------------------------
Transportation (5.36) (3.73) (0.17) (1.52)
----------------------------------------------------------------------------
Field netback $ 35.58 $ 28.46 $ 1.89 $ 14.22
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Three Months to June 30, 2008
----------------------------------------------------------------------------
CrudeOil Natural Gas Natural Gas Total
($/Bbl) Liquids ($/Bbl) ($/Mcf) ($/Boe)
----------------------------------------------------------------------------
Product sales $ 124.97 $ 113.64 $ 10.49 $ 70.80
----------------------------------------------------------------------------
Hedging loss - - (0.27) (1.44)
----------------------------------------------------------------------------
Royalty income 0.79 0.43 0.04 0.35
----------------------------------------------------------------------------
Royalties (21.71) (25.42) (2.33) (15.24)
----------------------------------------------------------------------------
Production costs (1) (8.42) - (1.24) (7.13)
----------------------------------------------------------------------------
Transportation (5.87) (1.83) (0.32) (2.25)
----------------------------------------------------------------------------
Field netback $ 89.76 $ 86.82 $ 6.37 $ 45.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Six Months to June 30, 2009
----------------------------------------------------------------------------
CrudeOil Natural Gas Natural Gas Total
($/Bbl) Liquids ($/Bbl) ($/Mcf) ($/Boe)
----------------------------------------------------------------------------
Product sales $ 56.49 $ 40.11 $ 4.60 $ 30.55
----------------------------------------------------------------------------
Hedging loss (3.27) - - (0.24)
----------------------------------------------------------------------------
Royalty income 0.14 0.08 0.01 0.08
----------------------------------------------------------------------------
Royalties (8.35) (9.22) (0.87) (5.74)
----------------------------------------------------------------------------
Production costs (1) (7.68) - (1.00) (5.74)
----------------------------------------------------------------------------
Transportation (5.20) (3.81) (0.20) (1.68)
----------------------------------------------------------------------------
Field netback $ 32.13 $ 27.16 $ 2.54 $ 17.23
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Six Months to June 30, 2008
----------------------------------------------------------------------------
CrudeOil Natural Gas Natural Gas Total
($/Bbl) Liquids ($/Bbl) ($/Mcf) ($/Boe)
----------------------------------------------------------------------------
Product sales $ 110.56 $ 95.69 $ 9.53 $ 63.75
----------------------------------------------------------------------------
Hedging loss - (0.14) (0.70)
----------------------------------------------------------------------------
Royalty income 1.25 0.46 0.04 0.33
----------------------------------------------------------------------------
Royalties (18.08) (21.26) (2.06) (13.40)
----------------------------------------------------------------------------
Production costs (1) (8.43) - (1.28) (7.33)
----------------------------------------------------------------------------
Transportation (5.56) (2.66) (0.33) (2.32)
----------------------------------------------------------------------------
Field netback $ 79.74 $ 72.23 $ 5.76 $ 40.33
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Production costs for natural gas liquids are included with natural gas
costs.


Field netbacks for the second quarter of 2009 fell 68% year-over-year as a result of a 63% reduction in per Boe revenue. Direct costs, principally price-sensitive royalties, fell by 70% year-over-year, but the decline was insufficient to offset the collapse in revenue. For the six months to June 30, 2009, field netbacks fell by 57% year-over-year. Storm will continue to shut in production if individual wells are not providing a high enough economic return, which may result in lower production levels in future quarters.

Based on an all-in proved plus probable finding cost for 2008 of $11.10, Storm's recycle ratio (field netback divided by finding costs) for the second quarter of 2009 was 1.3.



INTEREST

----------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Charge for period $ 824 $ 944 $ 1,402 $ 2,005
----------------------------------------------------------------------------
Per Boe $ 1.11 $ 1.69 $ 0.93 $ 1.74
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Interest is paid on Storm's revolving bank facility. The Company normally borrows using bankers' acceptances plus a stamping fee. Although interest paid on bankers' acceptances has fallen year-over-year, the stamping fee payable by the Company increased considerably upon the renewal of the Company's banking agreement effective April 30, 2009. The consequence is that borrowing costs for the second quarter of 2009 increased by 43% over borrowing costs for the first quarter of the year, with similarly increased borrowing costs expected for the remainder of 2009.



GENERAL AND ADMINISTRATIVE COSTS

Total costs:

----------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Gross general and administrative
costs $ 1,436 $ 1,397 $ 3,305 $ 2,755
----------------------------------------------------------------------------
Capital and operating recoveries (167) (443) (1,025) (1,164)
----------------------------------------------------------------------------
Net general and administrative
costs $ 1,269 $ 954 $ 2,280 $ 1,591
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Costs per Boe:

----------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Gross general and administrative
costs $ 1.94 $ 2.50 $ 2.20 $ 2.40
----------------------------------------------------------------------------
Capital and operating recoveries (0.23) (0.79) (0.68) (1.02)
----------------------------------------------------------------------------
Net general and administrative
costs $ 1.71 $ 1.71 $ 1.52 $ 1.38
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Increases in gross general and administrative costs for the quarter and six months ended June 30, 2009, when compared to the prior year, were primarily due to an increased staff count, as well as higher year-over-year compensation. Seasonally lower field activity in the second quarter of each year, particularly in 2009, results in lower capital recoveries. Net general and administrative costs per Boe for the three and six months to June 30, 2009 are higher, due to the effect of lower year-over-year recoveries.

Storm does not capitalize general and administrative costs. General and administrative costs per Boe for future quarters should be lower, due to higher capital and operating recoveries.



STOCK BASED COMPENSATION COSTS

----------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Charge for period $ 405 $ 395 $ 801 $ 731
----------------------------------------------------------------------------
Per Boe $ 0.55 $ 0.71 $ 0.53 $ 0.64
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Stock-based compensation costs are non cash charges which reflect the estimated value of stock options issued to Storm's directors and employees. The value of the award is recognized as an expense over the period from the grant date to the date of vesting of the award. The increase in the charge in the second quarter and for the first half of 2009, when compared to the prior year, relates to the issue of additional stock options to new employees in 2008.



DEPLETION DEPRECIATION AND ACCRETION

----------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Depreciation and depletion charge
for period $ 10,587 $ 9,470 $ 21,754 $ 19,527
----------------------------------------------------------------------------
Accretion charge for period 122 123 241 244
----------------------------------------------------------------------------
Total $ 10,709 $ 9,593 $ 21,995 $ 19,771
----------------------------------------------------------------------------
Total per Boe $ 14.43 $ 17.20 $ 14.65 $ 17.20
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The increase in the total charge for depletion, depreciation and accretion for the second quarter and first half of 2009 compared to the equivalent period in the prior year, is a consequence of higher production volumes.

The decrease in the charge for depletion and depreciation per Boe for the second quarter and first half of 2009 when compared to the equivalent periods of 2008 is approximately 16%. The reduction is attributable to proved oil and gas reserves being added, effective January 1, 2009, at a cost considerably lower than in prior periods. Accretion is the increase for the reporting period in the present value of the Company's asset retirement obligation, which is discounted using an interest rate of 8%.

INCOME AND OTHER TAXES

For the three months ended June 30, 2009, Storm recorded a recovery of future income taxes of $0.9 million compared to a provision for future income taxes of $3.8 million for the quarter ended June 30, 2008. For the six month periods ended June 30, 2009 the future income tax recovery amounted to $0.8 million compared to a future income tax provision of $6.4 million for the same period of 2008. Deferral of taxes to future periods largely results from resource pool deductions exceeding the accounting charge for depletion, depreciation and accretion. The statutory combined federal and provincial rate applicable to income in 2009 is 29%, compared to 30% for 2008.

At June 30, 2009, Storm had tax pools carried forward estimated to be $216 million. In addition, Storm has a capital loss in the amount of $10 million available for application against future capital gains.

NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE

The Company incurred a net loss of $2.2 million for the quarter ended June 30, 2009, compared to net income of $9.5 million for the quarter ended June 30, 2008. Net income for the first quarter of 2009 amounted to $1.3 million. For the six months ended June 30, 2009 the net loss amounted to $0.9 million compared to net income of $15.9 million for the same period in the prior year.



----------------------------------------------------------------------------
Three Months to Three Months to Six Months to Six Months to
June 30, 2009 June 30, 2008 June 30, 2009 June 30, 2008
----------------------------------------------------------------
Per Per Per Per
diluted diluted diluted diluted
share share share share
----------------------------------------------------------------------------
Net income
(loss) $(2,192) $(0.05) $ 9,465 $0.20 $(942) $(0.02) $15,889 $0.34
----------------------------------------------------------------------------


NON-GAAP FUNDS FROM OPERATIONS AND FUNDS FROM OPERATIONS PER SHARE

----------------------------------------------------------------------------
Three Months to Three Months to Six Months to Six Months to
June 30, 2009 June 30, 2008 June 30, 2009 June 30, 2008
-----------------------------------------------------------------
Per Per Per Per
diluted diluted diluted diluted
share share- share- share-
----------------------------------------------------------------------------
Funds from
operations $8,460 $ 0.18 $ 23,250 $0.50 $ 22,180 $0.47 $ 42,768 $0.93
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Non-GAAP funds from operations is not a measure recognized by GAAP in Canada, although it is widely used by analysts and other financial statement users. It is also used by the Company's bankers to measure cash flow to debt ratios, which determines stamping fees under the Company's banking agreement. The most directly comparable measure under GAAP is cash flows from operating activities, as set out below.



CASH FLOWS FROM OPERATING ACTIVITIES AND CASH FLOWS FROM OPERATING
ACTIVITIES PER SHARE

----------------------------------------------------------------------------
Three Months to Three Months to Six Months to Six Months to
June 30, 2009 June 30, 2008 June 30, 2009 June 30, 2008
-----------------------------------------------------------------
Per Per Per Per
diluted diluted diluted diluted
share- share- share- share-
----------------------------------------------------------------------------
Cash flows
from
operating
activities $ 9,092 $ 0.19 $ 24,890 $0.54 $ 23,725 $0.51 $ 41,770 $0.91
----------------------------------------------------------------------------
----------------------------------------------------------------------------


INVESTMENT AND FINANCING

Working Capital

Receivables comprise production revenue receivables and accruals, and receivables in respect of operating and capital costs. Prepaid and other costs include unamortized insurance premiums, deposits, prepayments and certain inventory equipment items.

Accounts payable and accrued liabilities include operating, administrative and capital costs payable. Net payables in respect of cash calls issued to partners regarding capital projects and estimates of amounts owing but not yet invoiced to the Company have been included in accounts payable.

Excluding an unrealized financial instrument provision, Storm had a working capital deficiency of $1.5 million at June 30, 2009, compared to $8.7 million at June 30, 2008 and $16.9 million at December 31, 2008. The working capital deficiency at each period end reflects the Company's preference to act as operator and the seasonality of its field operations. The Company's working capital deficiency is cyclical and is highest at the end of the first quarter of each year and lowest at the end of second quarter.



Capital Expenditures

Capital costs incurred were as follows:

----------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Land and lease, net 1,013 1,004 1,819 2,697
----------------------------------------------------------------------------
Seismic 478 23 1,142 23
----------------------------------------------------------------------------
Drilling and completions 571 6,936 16,373 27,843
----------------------------------------------------------------------------
Facilities and equipment 1,651 1,929 8,417 4,887
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Field expenditures 3,713 9,892 27,751 35,450
----------------------------------------------------------------------------
Property acquisitions 130 - 9,145 528
----------------------------------------------------------------------------
Property dispositions - (1,061) (1,562) (2,653)
----------------------------------------------------------------------------
Royalty recoveries - (3,051) - (770)
----------------------------------------------------------------------------
Total 3,843 5,780 35,334 32,555
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Bank Debt, Liquidity and Capital Resources

Storm has a revolving borrowing base bank credit facility which is renewable annually. The facility was renewed effective May 1, 2009 and resulted in the facility increasing from $110 million to $120 million. The amount drawn on the facility at June 30, 2009 amounted to $91.9 million, or 77% of the available facility. Total debt, including working capital deficiency (less unrealized financial instrument losses), amounted to $93.5 million at June 30, 2009, resulting in a ratio of debt to annualized funds from operations for the first half of 2009 of 2.1 times.

The Company normally funds its borrowing by drawing bankers' acceptances plus a stamping fee. The renewed banking facility included a large increase in stamping fees, standby fees and other costs. Nevertheless, year-over-year, the core bankers' acceptance rate has fallen considerably, such that year-over-year total borrowing costs have fallen. In this circumstance, Storm has fixed its bankers' acceptance rate, before application of stamping fees, for $60 million through a swap mechanism at a cost of 69.5 basis points for a period of twelve months, beginning May 2009.

Storm funds its field capital programs through cash flow and bank borrowings. The decline in natural gas prices has severely reduced cash flows in 2009 resulting in reductions to the Company's capital programs and further reductions may follow in the second half of 2009, in the absence of a material recovery in commodity prices. Acquisitions are funded by a combination of debt and, if required, equity. Field capital programs tend to be concentrated in the winter months, with the result that, in the ordinary course, capital expenditures in the first and fourth quarters of the year will exceed cash flow, compensated by lower capital expenditures in the second and third quarters. In quarters of high field activity, Storm operates with a substantial working capital deficit, which is paid down in quarters of lower field activity.

In March 2009, Storm issued 1,850,000 common shares at a price of $10.60 per share for total proceeds of $19.6 million, before commission and expenses. Proceeds from the offering were initially used to reduce bank indebtedness.



Capital programs were funded as follows:

----------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Non-GAAP Funds from operations 8,460 23,250 22,180 42,768
----------------------------------------------------------------------------
Non cash working capital (11,460) (3,173) (15,354) (1,480)
----------------------------------------------------------------------------
Issue of common shares - net of
expenses (204) - 18,471 -
----------------------------------------------------------------------------
Issue of common shares - option
proceeds 172 575
----------------------------------------------------------------------------
Increase (decrease) in bank
indebtedness 7,047 (13,636) 10,037 (8,058)
----------------------------------------------------------------------------
Proceeds on property sales - 1,061 1,562 2,653
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash available for investment 3,843 7,674 36,896 36,458
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Field expenditures 3,713 6,841 27,751 34,680
----------------------------------------------------------------------------
Property acquisitions 130 - 9,145 528
----------------------------------------------------------------------------
Investment in Storm Gas Resource
Corp. - 833 - 1,250
----------------------------------------------------------------------------
------------------------------
Total cost of investment programs 3,843 7,674 36,896 36,458
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Investments

Storm Gas Resource Corp.

Storm Gas Resource Corp. ("SGR") was incorporated to identify and participate in unconventional natural gas opportunities, initially a shale gas resource in the Horn River Basin of northeastern British Columbia. Storm's initial investment in SGR at $1.00 per share in June, 2007, was satisfied by a cash contribution of $833,000 and the transfer of undeveloped lands with a value of $417,000. In July 2008, Storm subscribed for an additional 200,000 common shares in SGR at a price of $5.20 per share, and also participated in a private placement, subscribing for 600,000 common shares at a price of $6.50. The private placement resulted in SGR issuing 5,880,000 common shares at a price of $6.50 per share, for total proceeds after commission and expenses, of $38,220,000. As the private placement involved the sale of shares by SGR at a price higher than Storm's initial investment cost, the Company recognized a dilution gain in 2008 of $3.5 million. Storm's ownership position in SGR is 22%. Including the dilution gain, the carrying amount of Storm's 2,050,000 common shares of SGR is $4.74 per share. This amount should not be regarded as representative of the value of Storm's investment in SGR. Total cash invested plus property transferred to SGR, amounts to $6.19 million or $3.02 per SGR share. In addition to its investment in SGR, Storm has a direct 40% working interest in undeveloped lands jointly acquired with SGR in the Horn River Basin of northeastern British Columbia. This interest, together with Storm's investment in SGR, provides the Company with 53% exposure to the potential upside in the Horn River Basin lands.

Storm provides management services to SGR at cost. Amounts charged by Storm to SGR for the three months and six months ended June 30, 2009 were $65,000 and $130,000, respectively. No intercompany charges were applied in 2008.

Storm Ventures International Inc.

At June 30, 2009, the Company's investment in Storm Ventures International Inc. ("SVI") represented a 6% ownership position, comprising 4,500,000 common shares. The carrying amount of SVI on Storm's consolidated balance sheet approximates $2.34 per SVI share, and comprises Storm's investment cost, plus a dilution gain recognized during a prior year. This carrying amount should not be regarded as representative of the value of Storm's investment. During 2008, Storm invested $1.25 million to acquire an additional 200,000 common shares, resulting in total cash invested in SVI since inception of Storm being $4.25 million.

Future Income Taxes

Estimated future income taxes at June 30, 2009 represents the excess of the accounting amounts over the related tax bases of property and equipment and share capital.



Details of the Company's tax pools are as follows:

----------------------------------------------------------------------------
As at Maximum Annual
June 30, 2009 deduction
----------------------------------------------------------------------------
Canadian oil and gas property expense $90,343 10%
----------------------------------------------------------------------------
Canadian development expense 77,970 30%
----------------------------------------------------------------------------
Canadian exploration expense 4,073 100%
----------------------------------------------------------------------------
Undepreciated capital cost 41,511 20 - 100%
----------------------------------------------------------------------------
Other 2,389 7-20%
----------------------------------------------------------------------------

Total $216,286

----------------------------------------------------------------------------
----------------------------------------------------------------------------

Capital losses $9,666

------------------------------------------------------------
------------------------------------------------------------



Asset Retirement Obligation

Storm's asset retirement obligation represents the present value of estimated future costs to be incurred to abandon and reclaim the Company's wells and facilities. Changes in amount of the obligation between December 31, 2008 and June 30, 2009 comprise the present value of additional obligations accruing to the Company as a result of field activity and acquisitions during the quarter, less costs paid in settlement of abandonment obligations, plus the quarterly increase in the present value of the obligation. The discount rate used to establish the present value is 8%. Future costs to abandon and reclaim Storm's properties are based on an internal evaluation of each of the Company's properties, supported by external data from industry sources.



Share Capital

Details of outstanding share capital and dilutive elements:

----------------------------------------------------------------------------
As at and As at and
for the three for the six As at and for
months ended months ended the year ended
June 30, 2009 June 30, 2009 December 31, 2008
----------------------------------------------------------------------------
Common shares outstanding
- end of period 46,554 46,554 44,703
----------------------------------------------------------------------------
Stock options 2,458 2,458 2,267
----------------------------------------------------------------------------
Fully diluted common shares
- end of period 49,012 49,012 46,970
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average common
shares - basic 46,553 45,888 44,654
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average common
shares - diluted 47,637 46,959 45,877
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Stock options outstanding are exercisable over five years on various dates beginning September 2005 at prices ranging from $2.60 to $12.06.

CONTRACTUAL OBLIGATIONS

In the course of its business Storm enters into various contractual obligations, including the following:

- purchase of services

- royalty agreements

- operating agreements

- processing agreements

- right of way agreements

- lease obligations for accommodation, office equipment and automotive equipment.

All such contractual obligations reflect market conditions at the time of contract and do not involve related parties except that SGR subleases office space from the Company at the same rate as the Company's head lease.



Obligations with a fixed term are as follows:

----------------------------------------------------------------------------
($000's) 2009 2010 2011 2012 2013
----------------------------------------------------------------------------
Lease of premises $ 406 $ 825 $ 838 $ 838 $ 419
----------------------------------------------------------------------------
Equipment leases 113 163 109 15 -
----------------------------------------------------------------------------
Gas transportation and
processing commitments 1,118 1,437 1,146 599 198
----------------------------------------------------------------------------
Total $ 1,636 $ 2,424 $ 2,092 $ 1,452 $ 617
----------------------------------------------------------------------------
----------------------------------------------------------------------------

QUARTERLY RESULTS

Summarized information by quarter for the two years ended June 30, 2009
appears below:

----------------------------------------------------------------------------
June March December September June March December September
Quarter 30, 31, 31, 30, 30, 31, 31, 30,
Ended 2009 2009 2008 2008 2008 2008 2007 2007
----------------------------------------------------------------------------
Production
revenue -
($000s) 19,198 26,425 35,447 40,215 38,888 33,974 25,553 19,573
----------------------------------------------------------------------------
Funds from
operations -
($000s)
Per share
($) 8,460 13,720 20,432 24,290 23,250 19,518 13,233 9,372
- basic 0.18 0.30 0.46 0.54 0.52 0.44 0.30 0.21
- diluted 0.18 0.30 0.45 0.53 0.50 0.43 0.30 0.20
----------------------------------------------------------------------------
Net income
(loss)-
($000s)
Per share
($) (2,192) 1.250 5,968 12,829 9,465 6,426 2,852 299
- basic (0.05) 0.03 0.13 0.28 0.21 0.14 0.06 0.01
- diluted (0.05) 0.03 0.13 0.28 0.20 0.14 0.06 0.01
----------------------------------------------------------------------------
Average daily
production -
Boe 8,153 8,441 8,161 7,107 6,130 6,500 5,992 5,618
----------------------------------------------------------------------------
Average field
netback -
($/Boe) 14.22 20.15 30.35 39.77 45.09 35.87 27.44 20.83
----------------------------------------------------------------------------
Capital
expenditures
net -
($000s) 3,843 31,491 35,342 27,057 5,780 26,775 17,094 19,953
----------------------------------------------------------------------------
----------------------------------------------------------------------------


CRITICAL ACCOUNTING ESTIMATES

Financial amounts included in the Company's management's discussion and analysis and in the unaudited consolidated financial statements for the three and six months ended June 30, 2009 are based on accounting policies, estimates and judgment which reflect information available to management at the time of preparation. Information with respect to the accounting policies selected by the Company and the use of estimates is set out in the Company's audited consolidated financial statements for the year ended December 31, 2008 and the unaudited consolidated financial statements for the three months and six months ended June 30, 2009.

RISK ASSESSMENT

There are a number of risks facing participants in the Canadian oil and gas industry. Some of the risks are common to all businesses while others are specific to the sector and others are specific to Storm. Information with respect to such risks is set out in the Company's annual report for the year ended December 31, 2008

REPORTING CONTROLS

The Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") are responsible for establishing and maintaining disclosure controls and procedures ("DC&P") and internal controls over financial reporting ("ICFR"). Storm has codified and distributed to staff its policies, controls and procedures with respect to disclosure to third parties of information concerning the Company's operations and results. In addition, DC&P are designed to provide reasonable assurance that material information is made known to the CEO and CFO on a timely basis and that information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation. The CEO and CFO have concluded such controls are effective.

ICFR have been designed by the CEO and CFO, either directly or under their supervision, to provide reasonable assurance regarding the reliability of financial reporting, including financial reporting for external purposes under GAAP.

As at December 31, 2008, the CEO and CFO evaluated the design and operating effectiveness of the Company's ICFR. In part, this evaluation was based on the work of third party specialists who were engaged by the Company to update documentation and test the operating effectiveness of such controls. Based on this evaluation and enquiries made since that date, the CEO and CFO conclude that the design of ICFR is sufficiently effective as at June 30, 2009 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP.

No changes to internal controls were made and no circumstances suggesting a possible breach of disclosure controls were identified in the quarter ended June 30, 2009.

Because of inherent limitations, disclosure controls and procedures and internal controls over financial reporting cannot prevent or identify all mismeasurements, errors and fraud.

INTERNATIONAL FINANCIAL REPORTING STANDARDS

The Canadian Institute of Chartered Accountants, the primary source for accounting standards in Canada, proposes to implement International Financial Reporting Standards ("IFRS") as part of Canadian GAAP. Such standards have been established cooperatively by many countries and have widespread application to financial reporting by businesses throughout the world. The adoption of IFRS in Canada will result in major changes to GAAP in Canada and to financial reporting practices followed by Storm. The effective date of introduction for IFRS is proposed for company year ends beginning after December 31, 2010; thus, in the case of Storm, the year ended December 31, 2011. However, the need to have comparative information presented in accordance with IFRS for the year ended December 31, 2010, requires that the Company's consolidated balance sheet at January 1, 2010 be IFRS compliant, meaning that the Company must plan its conversion considerably in advance of the proposed implementation date. Currently, the application of IFRS to the oil and gas industry in Canada requires considerable clarification: correspondingly, the effect of IFRS on the Company's accounting policies and reporting standards and practices is not presently determinable.

With respect to organizing for the changeover, the Company has recruited appropriately qualified staff and has identified external resources to assist in the process. Key elements of the changeover plan include: staff education; choosing among policies permitted under IFRS; deciding whether certain changes will be applied on a retroactive or prospective basis; evaluating the effect of adoption on Storm's information technology and data systems and internal control over financial reporting and disclosure controls and procedures; alignment of internal and outsourced processes, applications and internal controls; external and internal communications; and liason with peers, industry groups and professional advisors.

ADDITIONAL INFORMATION

Additional information relating to the Company, including the Company's Annual Information Form, can be viewed at www.sedar.com or on the Company's website at www.stormexploration.com. Information can also be obtained by contacting the Company at Storm Exploration Inc., 800, 205 - 5th Avenue, SW, Calgary, Alberta, T2P 2V7.



Storm Exploration Inc.
Consolidated Balance Sheets
($000s)
(UNAUDITED)

June 30, 2009 December 31, 2008
-----------------------------------

ASSETS
Current

Accounts receivable 7,142 14,274
Prepaid and other costs 4,744 2,916
-----------------------------------
11,886 17,190

Property and Equipment - Net (Note 3) 304,712 290,944

Investments (Note 4) 20,242 20,242

-----------------------------------
336,840 328,376
-----------------------------------
-----------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current
Accounts payable and accrued liabilities 13,418 34,076
Unrealized financial instrument provision
(Note 11) 1,092 -
-----------------------------------
4,510 34,076

Bank Indebtedness (Note 5) 91,941 81,904
Asset Retirement Obligation (Note 6) 7,688 7,259
Future Income Taxes (Note 7) 21,799 22,875
-----------------------------------
135,938 146,114
-----------------------------------

Shareholders' Equity (Note 8)
Share capital 106,793 88,013
Contributed surplus 4,782 3,980
Retained earnings 89,327 90,269
Accumulated other comprehensive income
(deficit) - -
-----------------------------------
200,902 182,262
-----------------------------------

Commitments (note 13)

-----------------------------------
336,840 328,376
-----------------------------------
-----------------------------------


Storm Exploration Inc.
Consolidated Statements of Income and Retained Earnings
($000s)
(UNAUDITED)

Three Three Six Six
Months to Months to Months to Months to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
-----------------------------------------
Revenue
Production revenue 19,198 38,888 45,623 72,862
Unrealized loss on financial
instruments (note 11) (486) - (1,092) -
Royalties (3,360) (8,504) (8,613) (15,406)
-----------------------------------------
15,352 30,384 35,918 57,456
-----------------------------------------

Expenses
Production 4,160 3,978 8,621 8,426
Transportation 1,125 1,258 2,527 2,666
Interest 824 944 1,402 2,005
General and administrative 1,269 954 2,280 1,591
Stock based compensation 405 395 801 731
Depletion, depreciation and
accretion 10,709 9,593 21,995 19,771
-----------------------------------------
18,492 17,122 37,626 35,190
-----------------------------------------

Income (loss) before taxes: (3,140) 13,262 (1,708) 22,266

Future income taxes (Note 7) 948 (3,797) 766 (6,377)
-----------------------------------------

Net income (loss) for the period (2,192) 9,465 (942) 15,889

Retained earnings, beginning of
period 91,519 62,007 90,269 55,583

-----------------------------------------
Retained earnings, end of period 89,327 71,472 89,327 71,472
-----------------------------------------
-----------------------------------------

Net Income (loss) per share (Note 9)
- basic (0.05) 0.21 (0.02) 0.36
- diluted (0.05) 0.20 (0.02) 0.34


Storm Exploration Inc.
Consolidated Statements of Comprehensive Income (Loss)
($000s)
(UNAUDITED)

Three Three Six Six
Months to Months to Months to Months to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
----------------------------------------
Net Income (loss) for the period (2,192) 9,465 (942) 15,889
Reversal of unrealized hedging loss - (2,489) - (5,267)
Related income tax benefit - 802 - 1,580
----------------------------------------
Other comprehensive income (Note 11) - (1,687) - (3,687)
----------------------------------------

----------------------------------------
Comprehensive income (loss) for the
period (2,192) 7,778 (942) 12,202
----------------------------------------
----------------------------------------


Storm Exploration Inc.
Consolidated Statements of Cash Flows
($000s)
(UNAUDITED)

Three Three Six Six
Months to Months to Months to Months to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
-----------------------------------------

Operating activities
Net income (loss) for the period (2,192) 9,465 (942) 15,889
Add non-cash items:
Depletion, depreciation and
accretion 10,709 9,593 21,995 19,771
Unrealized loss on financial
instruments (Note 11) 486 - 1,092 -
Future income tax (948) 3,797 (766) 6,377
Stock based compensation 405 395 801 731
-----------------------------------------
Funds from operations 8,460 23,250 22,180 42,768
Net change in non-cash working
capital items
(Note 10) 632 1,640 1,545 (998)
-----------------------------------------
9,092 24,890 23,725 41,770
-----------------------------------------
Financing activities
Issue of common shares - net of
expenses (204) 172 18,471 575
Increase (decrease) in bank
indebtedness 7,047 (13,636) 10,037 (8,058)
-----------------------------------------
6,843 (13,464) 28,508 (7,483)
-----------------------------------------

Investing activities
Increase in investments - (833) - (1,250)
Additions to property and equipment (3,843) (6,841) (36,896) (35,208)
Disposals of property and equipment - 1,061 1,562 2,653
Net change in non-cash working
capital items
(Note 10) (12,092) (4,813) (16,899) (482)
-----------------------------------------
(15,935) (11,426) (52,233) (34,287)
-----------------------------------------

Change in cash during the period - - - -

Cash, beginning of period - - - -
-----------------------------------------

Cash, end of period - - - -
-----------------------------------------
-----------------------------------------


STORM EXPLORATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)


Tabular amounts in '000s, except per share amounts

1. NATURE OF OPERATIONS

Storm Exploration Inc. (the "Company" or "Storm"), is an oil and gas exploration and development company listed on the Toronto Stock Exchange under the symbol SEO. The Company operates in the provinces of Alberta and British Columbia. The Company's production base is largely natural gas and natural gas liquids. These consolidated financial statements include the accounts of Storm and its wholly owned subsidiary and partnership.

2. SIGNIFICANT ACCOUNTING POLICIES

These interim unaudited consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in Canada ("GAAP"), following the same accounting policies and methods of computation as used in the audited consolidated financial statements for the year ended December 31, 2008. The interim unaudited consolidated financial statement note disclosures do not include all disclosures applicable for annual audited financial statements. Accordingly, the interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto contained in the Company's annual report for the year ended December 31, 2008.

FUTURE ACCOUNTING CHANGES

Convergence with International Financial Reporting Standards

Canada's Accounting Standards Board has confirmed January 1, 2011 as the effective date for the convergence of Canadian GAAP to International Financial Reporting Standards ("IFRS"). The Company will be required to begin reporting under IFRS in the first quarter of 2011 with comparative data for the prior year. IFRS uses a conceptual framework similar to Canadian GAAP; however, there will be significant differences in recognition, measurement and disclosures that will be addressed.

The Company has established a project group to review the adoption of IFRS and its effect on financial reporting software, bank covenants, business contracts and internal controls over financial reporting and to provide regular updates to the Audit Committee.

3. PROPERTY AND EQUIPMENT



June 30, 2009 December 31, 2008
-----------------------------------

Property and equipment $ 445,916 $ 410,394
Accumulated depletion and depreciation (141,204) (119,450)
-----------------------------------
$ 304,712 $ 290,944
-----------------------------------
-----------------------------------


At June 30, 2009, the depletion calculation excluded unproved properties of $24.9 million (December 31, 2008 - $23.3 million) and included future development costs of $120.6 million (December 31, 2008 - $140.3 million).



4. INVESTMENTS

June 30, 2009 December 31, 2008
-----------------------------------

Investment in Storm Gas Resource Corp. $ 9,717 $ 9,717
Investment in Storm Ventures
International Inc. 10,525 10,525
-----------------------------------
$ 20,242 $ 20,242
-----------------------------------
-----------------------------------


The Company holds a 22% interest in a private company, Storm Gas Resource Corp. and accounts for its holding using the equity method. Changes to the equity of Storm Gas Resource Corp. for any of the reporting periods are not material to the Company.

The Company also has a 6% interest in another private company, Storm Ventures International Inc., which is accounted for using the cost method as the ownership position does not meet the requirements for equity accounting.

5. BANK INDEBTEDNESS

The Company has an extendible revolving bank facility in the amount of $120 million (December 31, 2008 - $110 million), based on the Company's producing reserves. The revolving facility is available to the Company until April 30, 2010, but may be extended at the Company's request until April 29, 2011, subject to the bank's review of the Company's reserve lending base. If the revolving facility is not renewed at the end of the current revolving phase, the facility moves into a term phase whereby the loan is to be retired with one payment on the 366th day following the last day of the revolving phase, in an amount equal to the outstanding principal. Interest is paid on the revolving facility at banker's acceptance rates plus a stamping fee. Security comprises a floating charge demand debenture on the assets of the Company.

6. ASSET RETIREMENT OBLIGATION

The estimated future asset retirement obligation is based on the Company's net ownership interest in wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The total estimated undiscounted amount required to settle the Company's asset retirement obligations is approximately $13.6 million (December 31, 2008 - $13.0 million), which will be paid over the next 20-25 years, with the majority of costs paid between 2015 and 2031. A credit adjusted risk-free rate of eight percent was used to calculate the present value of the asset retirement obligations, amounting to $7.7 million (December 31, 2008 - $7.3 million).

The following table provides a reconciliation of the carrying amount of the obligation associated with the retirement of oil and gas properties:



----------------------------------------------------------------------------
Six months ended Year ended
June 30, 2009 December 31, 2008
----------------------------------------------------------------------------
Asset retirement obligation, beginning
of period $ 7,259 $ 6,918
----------------------------------------------------------------------------
Liabilities incurred 254 108
----------------------------------------------------------------------------
Liabilities disposed (66) (255)
----------------------------------------------------------------------------
Accretion expense 241 488
----------------------------------------------------------------------------
Asset retirement obligation, end of
period $ 7,688 $ 7,259
----------------------------------------------------------------------------
----------------------------------------------------------------------------


7. FUTURE INCOME TAXES

The future income tax liability is based on the excess of the accounting amounts over the related tax bases of the Company's property and equipment, asset retirement obligation and share capital.

The Company has tax pools associated with property and equipment of approximately $216 million as well as capital losses of approximately $10 million, all of which are not subject to expiry.

The provision for future income taxes is different from the amount computed by applying the combined statutory Canadian federal and provincial tax rates to pre-tax income for the period.



The differences are as follows:

Three Three Six Six
months to months to months to months to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
------------------------------------------
Statutory combined federal and
provincial income tax rate 29% 30% 29% 30%

Expected income taxes $ (927) $ 3,992 $ (504) $ 6,704

Add (deduct) the income tax effect of:
Stock-based compensation 119 119 236 220
Rate adjustments (39) (316) (491) (550)
Other (101) 2 (7) 3
------------------------------------------

Future Income Tax $ (948) $ 3,797 $ (766) $ 6,377
------------------------------------------
------------------------------------------

The components of the future income tax liability are as follows:

June 30, 2009 December 31, 2008
-----------------------------------

Property and equipment $ 24,493 $ 25,331
Asset retirement obligation (2,076) (2,033)
Share issue costs (618) (423)
-----------------------------------
Future income tax liability $ 21,799 $ 22,875
-----------------------------------
-----------------------------------


8. SHARE CAPITAL

Authorized

An unlimited number of non-voting common shares
An unlimited number of voting common shares
An unlimited number of preferred shares

Included in the following common share balances are 1,275,000 non-voting
common shares.
Except for voting rights, non-voting and voting common shares are identical.

Issued
Number of
Shares Consideration
-------------------------------
Balance as at December 31, 2008 44,703 $ 88,013
Issuance of common shares (i) 1,850 19,610
Stock options exercised 1 8
Share issue costs (net of income tax benefit) (838)
-------------------------------
Balance as at June 30, 2009 46,554 $ 106,793
-------------------------------
-------------------------------

(1) On March 6, 2009, 1,850,000 common shares were issued at a price of
$10.60 per share for total proceeds of $19,610,000, before commission
and expenses.


Stock Based Compensation Plans

The Company has a stock option plan under which it may grant, at the Company's discretion, options to purchase common shares to directors, officers and employees. Under the stock option plan a total of 3,700,000 common shares have been reserved for issuance. Details of the options outstanding at June 30, 2009 are as follows:



----------------------------------------------------------------------------
Number of options Weighted Average
Exercise Price
Outstanding at December 31, 2008 2,267 $ 6.03
Issued during period 193 $ 11.85
Exercised during period (1) (8.27)
----------------------------------------------------------------------------

Outstanding at June 30, 2009 2,459 $ 6.48
----------------------------------------------------------------------------


Outstanding Options Exercisable Options
------------------------------------------------------------
Weighted Weighted Weighted
Number of Average Average Number of Average
Range of Options Remaining Exercise Options Exercise
Exercise Price Outstanding Life (years) Price Outstanding Price
----------------------------------------------------------------------------
$ 2.60 to $3.61 266 0.7 $ 3.33 266 $ 3.33
$ 3.91 to $5.71 1,299 1.8 $ 5.46 725 $ 5.35
$ 6.03 to $8.57 693 3.2 $ 8.06 197 $ 7.79
$ 9.62 to $12.06 201 4.6 $ 11.83 2 11.40
-----------------------------------------------------------
2,459 2.3 $ 6.48 1,190 $ 5.31
-----------------------------------------------------------
-----------------------------------------------------------


Using the Black-Scholes pricing model, the weighted average fair value of the options granted to date in 2009 was estimated to be $3.70 (2008 - $8.68), using risk-free interest rates of 2.5 %, volatility of 40% and an expected average life of 30 months. The amortized cost of the options is charged as stock based compensation in the consolidated statement of income (loss) with an equivalent offset to contributed surplus.



9. PER SHARE AMOUNTS

Three Three Six Six
Months to Months to Months to Months to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
------------------------------------------
Basic

Net income per share $ (0.05) $ 0.21 $ (0.02) $ 0.36
Weighted average number of
shares outstanding ('000) 46,553 44,634 45,888 44,610

Diluted

Net income per share $ (0.05) $ 0.20 $ (0.02) $ 0.34
Weighted average number of
shares outstanding ('000) 47,637 46,179 46,959 46,101

The reconciling items between basic and diluted weighted average common
shares are stock options described in Note 8.

10. SUPPLEMENTAL CASH FLOW INFORMATION

Changes in non-cash working capital

Three Three Six Six
months to months to months to months to
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
------------------------------------------
Accounts receivable $ 3,013 $ 3,086 $ 7,132 $ 665
Prepaid costs and deposits (1,556) (384) (1,827) (1,036)

Accounts payable and accrued
liabilities $ (12,917) $ (5,875) $(20,659) $ (1,109)
------------------------------------------
Change in non-cash working capital $ (11,460) $ (3,173) $(15,354) $ (1,480)
------------------------------------------
------------------------------------------

Relating to:
Financing activities $ - $ - $ - $ -

Investing activities (12,092) (4,813) (16,899) (482)
Operating activities 632 1,640 1,545 (998)
------------------------------------------
$ (11,460) $ (3,173) $(15,354) $ (1,480)
------------------------------------------
------------------------------------------
Interest paid during the period $ 824 $ 944 $ 1,402 $ 2,005
------------------------------------------
------------------------------------------
Income taxes paid during the period $ - $ - $ - $ -
------------------------------------------
------------------------------------------


11. FINANCIAL INSTRUMENTS

The Company holds various financial instruments. These financial instruments expose the Company to the following risks:

- credit risk

- market risk

- liquidity risk

Management has primary responsibility for monitoring and managing financial instrument risks under direction from the Board of Directors, which has overall responsibility for establishing the Company's risk management framework. In certain circumstances, for example, hedging of future production revenue, the Board has established policies and risk limits and controls, and monitors these risks in relation to market conditions. In other circumstances, for example, extending credit to purchasers of the Company's products, the Board has delegated responsibility for credit assessment to management, but receives frequent financial and operating reports.

The Company's financial instruments recognized on the consolidated balance sheet consist of accounts receivable, bank indebtedness, accounts payable and accrued liabilities and unrealized financial instrument provision. The fair value of these financial instruments approximates their carrying amounts.

Credit risk

A substantial portion of the Company's accounts receivable are concentrated with a limited number of purchasers of commodities and joint venture partners in the oil and gas industry and are subject to normal industry credit risk. Management considers this concentration of credit risk to be limited, as commodity purchasers are major industry participants, and receivables from partners are protected by effective industry standard legal remedies. In addition, the Company's high working interest in its major operating properties mitigates the risk of partner default. The Company requires cash calls from its partners on major field projects in advance of commencement. Receivables related to the sale of the Company's production are normally collected on the 25th day of the month following delivery. Nevertheless, the recent widespread disruption of credit markets, together with falling commodity prices, exposes the Company to greater credit risks, necessitating greater vigilance regarding provision of credit to customers and to joint venture partners.

Market risk

Market risks are as follows and are largely outside of the control of the Company:

- Commodity prices

- Interest rates

- Foreign exchange

Commodity prices

The Company is constantly exposed to the risk of declining prices for its products with a corresponding reduction in cash flow. Reduced cash flow may result in lower levels of capital being available for field activity, thus compromising the Company's capacity to grow production while at the same time replacing continuous declines from existing properties. In certain circumstances, usually when debt levels are forecast to increase due to capital expenditures exceeding cash flow, or where the Company has financed, in whole or in part, an acquisition using bank debt, the Company may enter into oil and natural gas hedging contracts in order to provide stability of future cash flow. These contracts reduce the fluctuation in production revenue by fixing prices of future deliveries of oil and natural gas. Such arrangements are made in accordance with the Company's risk management policy and the Company does not use these instruments for trading or speculative purposes. The Company formally documents all relationships between derivative instruments and hedged items, as well as the risk management objectives and strategy for undertaking hedge transactions. Certain derivative instruments used by the Company have in the past qualified for hedge accounting treatment. Realized gains and losses on these contracts are recognized as revenue in the same period in which the revenues associated with the hedged transactions are recognized. The Company also assesses, both at the contract's inception and on an ongoing basis, whether the instruments that are used are highly effective in offsetting the changes in fair values or cash flows of hedged items. However, derivative instruments in place during the first six months of 2009 did not satisfy hedge accounting criteria. As a result, these financial instruments have been valued on a mark-to-market basis and the resulting gain or loss recognized in income.

For the three and six months ended June 30, 2009, the Company realized losses on financial instruments of $52,000 and 367,000, respectively (2008 - $nil) which are offset against production revenues.

As at June 30, 2009, Storm has the following derivative contracts in place, which do not meet the hedge accounting criteria. The unrealized mark-to-market loss on these contracts of $1.1 million for the six months ended June 30, 2009 is recognized in the financial statements as a current liability and a reduction of revenue:



Volume Price Term
Costless Collars

350 Bbls/d $60.00 - $65.00 / Bbl July 1, 2009 - Sept 30, 2009
350 Bbls/d $60.00 - $70.00 / Bbl Oct 1, 2009 - Dec 31, 2009


Interest rates

Interest on the Company's revolving bank facility varies with changes in interest rates, and is most commonly based on bankers' acceptance rates plus a stamping fee. The Company is thus exposed to increased borrowing costs during periods of increasing interest rates, with a corresponding reduction in both cash flows and project economics. As at June 30, 2009, Storm has fixed the interest rate on $60 million of bankers acceptances at a rate of 0.695%, plus stamping fees, for the period May 8, 2009 to May 10, 2010. Mark-to-market measurement of this derivative instrument does not have a material effect on the value of the Company's debt at June 30, 2009.

Foreign exchange

Although the Company's product revenues are denominated in Canadian dollars, the underlying market prices are affected by the exchange rate between the Canadian and the United States dollar. As at June 30, 2009, the Company had no contracts in place to reduce foreign exchange risk.

Sensivities

Using the Company's actual production volumes, royalty rates, income tax rates and debt levels for the first half of 2009 and 2008, the estimated after-tax effects that changes in certain factors would have on net income and net income per share is as follows:



----------------------------------------------------------------------------
2009 2008
Change Change
in net in net
Change in income per Change in income per
Factor net income share net income share
----------------------------------------------------------------------------
$US 1.00/bbl change in the
price of WTI $146,000 $0.00 $ 93,000 $0.00
$0.10/mcf change in the price
of natural gas $460,000 $0.01 $329,000 $0.01
1% change in the interest rate $628,000 $0.01 $536,000 $0.01
----------------------------------------------------------------------------


Liquidity risk

Liquidity difficulties would emerge if the Company was unable to meet its financial obligations as they fell due within normal credit terms. This may be the consequence of diminished cash flows resulting from lower product prices, production interruptions, or operating or capital cost increases. Liquidity difficulties could also occur if the Company's bankers were unable to continue to provide credit at a level, cost and on terms compatible with the Company's capital requirements. Generally the Company will, over a reasonable period of time, limit its capital programs to cash flow from operations. In addition, the Company endeavours to maintain its debt at a level somewhat less than the maximum amount of its total bank facility to ensure financial flexibility to deal with unforeseen or rapidly changing circumstances.

12. CAPITAL MANAGEMENT

Capital management is fundamental to the Company's objective of cost-effective production growth, while simultaneously replacing continuous production declines. The Company's capital comprises shareholders' equity, bank indebtedness and working capital. Capital management involves the preparation of an annual budget, which may only be implemented after approval by the Company's Board of Directors. As the Company's business evolves during the fiscal year, the budget may be amended; however, any changes are again subject to approval by the Board of Directors. As part of the budget process, and as part of capital management control procedures, the Company continuously uses a non-GAAP measurement of net debt to cash flow to measure and control debt levels during the fiscal year. Debt to cash flow is also used by the Company's bankers to set the stamping fee applicable to the Company's bank indebtedness.



The measurement is established as follows:

----------------------------------------------------------------------------
As at and for the As at and for the
six months twelve months
ended ended
June 30, 2009 December 31, 2008
----------------------------------------------------------------------------
Current assets $ 11,886 $ 17,190
----------------------------------------------------------------------------
Accounts payable and accrued
liabilities 13,418 34,076
----------------------------------------------------------------------------
Working capital deficiency 1,532 16,886
----------------------------------------------------------------------------
Bank indebtedness 91,941 81,904
----------------------------------------------------------------------------
Net debt 93,473 98,790
----------------------------------------------------------------------------
Annualized funds from operations
for the period $ 44,360 $ 87,490
----------------------------------------------------------------------------
Net debt to non-GAAP funds from
operations 2.1 : 1 1.1 : 1
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The above measurement is subject to quarterly variations and is usually highest in the first and fourth quarter of each year, when capital expenditures normally exceed cash flow, with a resulting increase in net debt. The increase in this ratio at June 30, 2009 is a result of decreased cash flow in 2009 due to lower commodity prices.

The Company's credit availability is based on the Company's producing reserves. The non-GAAP measurement of net debt to cash flow is used to determine the interest rate applied to the Company's bank indebtedness, with interest rates changing at certain threshold levels of net debt to cash flow. The Company's bankers are entitled to complete a year-end and a mid-year evaluation of the Company's borrowing base, which, in circumstances of falling commodity prices, negative changes to the Company's operating activities, or credit limitations affecting the Company's banking syndicate, may result in a decrease in the line of credit available to the Company.

From time to time, the Company may enter into hedging arrangements if capital programs or acquisition costs result in a high net debt to cash flow ratio. Such arrangements provide for stability of cash flow during periods when the Company applies cash flow to reduce its net debt.

Increased debt levels arising from acquisitions, or capital programs exceeding cash flow, may be addressed by reduced capital expenditures, disposal of non-core assets or the issue of common shares.

13. COMMITMENTS

The Company has the following fixed term commitments relating to its on-going business:



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2009 2010 2011 2012 2013
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Lease of premises $ 406 $ 825 $ 838 $ 838 $ 419
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Equipment leases 113 163 109 15 -
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Gas transportation and
processing commitments 1,118 1,437 1,146 599 198
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Total $ 1,636 $ 2,425 $ 2,093 $ 1,452 $ 617
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Contact Information

  • Storm Exploration Inc.
    Brian Lavergne
    President
    (403) 264-3520
    or
    Storm Exploration Inc.
    Donald McLean
    Chief Financial Officer
    (403) 264-3520
    Website: www.stormexploration.com