Storm Exploration Inc.
TSX : SEO

Storm Exploration Inc.

August 14, 2008 22:35 ET

Storm Exploration Inc. Is Pleased to Announce Its Financial and Operating Results for the Three and Six Months Ended June 30, 2008

CALGARY, ALBERTA--(Marketwire - Aug. 14, 2008) - Storm Exploration Inc. (TSX:SEO)



Highlights -
Thousands of $CDN Three Three Six Six
except volumetric Months to Months to Months to Months to
and per share June 30, June 30, June 30, June 30,
amounts 2008 2007 2008 2007
----------------------------------------------------------------------------

Financial

Gas sales 29,547 (1) 20,381 55,788 (1) 43,821 (1)
NGL sales 3,239 1,236 5,628 2,341
Oil sales 5,906 3,365 11,051 6,592
Royalty Income 196 174 395 411
-------------------------------------------------------
Production Revenue 38,888 25,156 72,862 53,165
-------------------------------------------------------
Funds from
operations 23,250 12,921 42,768 29,338
Per share - basic 0.52 0.30 0.96 0.68
Per share - diluted 0.50 0.29 0.93 0.67

Net income 9,465 2,832 15,889 7,898
Per share - basic 0.21 0.06 0.36 0.18
Per share - diluted 0.20 0.06 0.34 0.18

Capital
expenditures, net of
dispositions 5,780 32,768 32,555 56,843

Debt, including
working capital
deficiency 75,144 (2) 84,806 75,144 (2) 84,806

Weighted average
common shares
outstanding
Basic 44,634 42,915 44,610 42,915
Diluted 46,179 43,708 46,101 43,702

Common shares
outstanding
Basic 44,657 43,047 44,657 43,047
Fully Diluted 47,026 44,998 47,026 44,998

Operations

Oil Equivalent (6:1)
Barrels of oil
equivalent (000s) 558 520 1,149 1,040
Barrels of oil
equivalent per day 6,130 5,713 6,315 5,744

Average selling
price ($CDN per
BOE) $ 69.36 (1) $ 48.05 (1) $ 63.05 (1) $ 50.74 (1)

Gas production
Thousand cubic feet
(000s) 2,893 2,720 5,943 5,424
Thousand cubic feet
per day 31,786 29,891 32,656 29,969
Average selling
price ($CDN per
mcf) $ 10.22 (1) $ 7.49 (1) $ 9.39 (1) $ 8.08 (1)

NGL Production
Barrels (000s) 28 20 59 39
Barrels per day 313 217 323 216

Average selling
price ($CDN per
barrel) $ 113.64 $ 62.66 $ 95.69 $ 59.82

Oil Production
Barrels (000s) 47 47 100 97
Barrels per day 519 514 549 533

Average selling
price ($CDN per
barrel) $ 124.97 $ 71.87 $ 110.56 $ 68.28

Wells drilled
Gross - 1.0 11.0 11.0
Net - 1.0 10.1 8.5

(1) Includes results of hedging activities

(2) Excluding unrealized mark to market hedging provision


Second Quarter 2008 Highlights

- Production in the second quarter increased to 6,130 Boe per day, a 7% increase from production of 5,713 Boe per day in the same period one year ago. This is a per share increase of 3% using basic shares outstanding. Quarterly production was reduced by 1,050 Boe per day as a result of the planned 22 day maintenance shut-down at the McMahon Gas Plant in June. Production in April and May prior to the shut-down averaged 7,200 Boe per day while production in June averaged 4,000 Boe per day.

- Cash flow for the quarter totaled $23.3 million or $0.50 per diluted share, an increase of 72% from cash flow of $0.29 per diluted share in the year earlier period. Growth in production as well as higher commodity prices both contributed to the increase.

- The cash flow netback of $41.69 per Boe is an increase of 68% from the cash flow netback of $24.85 per Boe in the second quarter of 2007. This increase is significantly greater than the increase of 44% in the average AECO natural gas reference price over the same period as a result of production growth from our Montney discovery at Parkland which contains higher heat content, liquids rich natural gas.

- Net income for the quarter was $9.5 million or $0.20 per diluted share, up from net income of $0.06 per diluted share in the prior year period. The increase is the result of both growth in production and the increase in the corporate cash flow netback.

- Capital investment during the quarter totaled $5.8 million which resulted in the bank debt and working capital deficiency declining significantly to end the period at $75.1 million (excluding non-cash mark to market hedging loss of $5.3 million) or 0.8 times annualized quarterly cash flow. This is a $16.8 million decline from the bank debt plus working capital deficiency of $91.9 million at the end of the prior quarter. Capital spending was relatively modest as road use restrictions in the Fort St. John area that are imposed every spring (road bans) prevented mobilization of rigs until late June.

CORE AREA REVIEW

Parkland/Ft 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 3,335 Boe per day in the second quarter, an increase of 64% from production of 2,029 Boe per day in the second quarter of 2007. Production from our Montney discovery at Parkland averaged approximately 2,150 Boe per day during the quarter. Quarterly production from this area was reduced by 1,050 Boe per day as a result of the planned maintenance shut-down of the McMahon gas plant for 22 days in June.

During the second half of 2008, all of our activity in this area will be at our Parkland property and will include:

- Drilling eight vertical Montney step-outs (7.6 net).

- Drilling seven more horizontal Montney development wells (7.0 net). By the end of 2008, Storm expects to have 12 producing horizontal Montney wells at Parkland.

- Drilling two horizontal Montney wells (1.4 net) as part of a farm-in we have entered into on a six section block just south-west of our Parkland discovery. Storm has committed to paying 67% of the cost to drill and complete two horizontal wells and has an option to drill a third with each horizontal well earning a 33% working interest in two sections of land. Facility and pipeline cost will be shared based on the earned working interest (33% Storm). Successful horizontal wells will not be pipelined and producing until late in the first quarter of 2009.

- Constructing a second facility with 12.5 Mmcf per day of initial capacity at an estimated cost of $15 million which will be expanded to 25 Mmcf per day of capacity through the addition of a second compressor early in 2009 at a cost of $2.5 million. This facility is expected to be operational by the end of November, 2008.

This activity represents 90% of Storm's total capital investment planned in the second half of 2008.

Development of our Montney discovery using four horizontal wells per section with six to eight fracs per wellbore continues to progress as expected. We are currently producing 14 Mmcf per day of raw gas from six horizontal Montney gas wells plus 3 Mmcf per day of raw gas from nine Montney vertical wells. The seventh horizontal well has been drilled and is currently being completed. First year rates from each horizontal well are still expected to average 2.3 Mmcf per day of raw gas which is approximately four to six times that of the average vertical well. Cost inflation and increasing the number of fracs (six to eight fracs instead of five) has increased the cost of drilling, completing and pipelining each horizontal to $5.3 million. The presentation on our website (www.stormexploration.com) is periodically updated and shows monthly average production for each of our producing vertical and horizontal wells.

Our most recent internal estimate of potential gas in place for our 100% working interest Montney discovery was 330 BCF which was determined based on an internal evaluation by Storm's technical staff using an areal extent of 5,825 acres (approximately 9 sections) and data from nine successful vertical gas wells which show average net pay of 35 metres (average gross pay of 89 metres) and average porosity of 8%. Net pay has been determined using gas effect on logs which is evidenced by cross-over on limestone scale neutron-density logs; this is approximately equivalent to a 6% sandstone scale cut-off. To date in the third quarter, we have drilled four more vertical step-outs (4.0 net) with three of them being successful while the fourth was abandoned after encountering a thick, gas saturated Montney interval which is not believed to be economic for vertical well development. The 12 successful vertical gas wells we have now drilled provide vertical well control covering approximately 8.5 sections which is equivalent to 94% of our most recent internal estimate of potential gas in place. As a result of our drilling success to date in the third quarter, our internal estimate of potential gas in place now ranges from our most recent estimate of 330 BCF (330 BCF net) to as much as 430 BCF (410 BCF net) which is based on an expanded area of 8,420 acres (approximately 13 sections) with average net pay of 32 metres (average gross pay of 86 metres) and average porosity of 7.9%. Although Storm has a 100% working interest in the original nine sections of land encompassing our discovery, the area of expanded potential gas in place includes two adjacent sections where Storm earned a 60% working interest through a farm-in. Based on production from our vertical wells, reservoir quality may be lower in some areas, which could result in lower recovery factors being realized in these areas, or could result in the cost to develop those areas being higher due to the need for increased horizontal well density.

Peace River Arch, North West Alberta

Production from this area averaged 1,761 Boe per day in the second quarter and is currently 1,750 Boe per day. Production in the second quarter of 2007 was 2,467 Boe per day.

In the first half of 2008, we were not active in this area since Alberta's New Royalty Framework ('NRF') does not provide us with a high enough return at lower natural gas price levels to justify putting capital at risk drilling wells in Alberta. However, as a result of the recent increase in natural gas prices, we have more discretionary cash flow available for reinvestment and will drill four wells (2.2 net) in the second half of 2008, with two wells (0.7 net) planned at Pouce Coupe and two horizontal infills (1.5 net) planned for our Doe Creek light oil pool at Saddle Hills. These drilling locations are all lower risk and are less affected by Alberta's New Royalty Framework ('NRF') given that successful wells are expected to have a longer reserve life, with production stabilizing at lower rates which means that they will be subject to lower royalties.

Cabin-Kotcho-Junior Area, North East British Columbia

Net production from this area averaged 962 Boe per day in the second quarter. This represents a decline of 9% from average production of 1,053 Boe per day in the year earlier period. Current production is approximately 875 Boe per day.

This area is accessible only in the winter and, this past winter, we were not active as most of our available capital was directed at evaluating and bringing on production from our Montney discovery at Parkland. Historically, our drilling activity in this winter access area has mainly targeted the Slave Point formation. In the future, our drilling activity can be expected to include prospects in the Bluesky/Debolt formations and horizontal wells in the Jean Marie formation, all in the Junior area. Our level of activity this coming winter will be contingent on the amount of discretionary, unallocated cash flow that is available which is dependent on natural gas prices.

Storm also has exposure to the emerging Devonian shale gas play in the Horn River Basin which is adjacent to the Cabin area. Most of our existing lands in the Cabin area are on the Slave Point reef edge, where the Devonian shales are much thinner and less likely to be economically exploitable. Although very little of our existing land position is prospective for the Devonian shales, we have been increasing our exposure to more prospective areas as a result of our partnership with and ownership position in Storm Gas Resource Corp. ('SGR'). Storm and SGR have agreed to jointly acquire lands prospective for the Devonian shales in the Horn River Basin with Storm having a 40% working interest and SGR having a 60% working interest. Combined with Storm's 23% ownership position in SGR, our exposure to this unconventional gas project is approximately 54% which enables us to use internally generated cash flow in 2008 and 2009 to fund land capture and the possible drilling of test wells in this area. With this area being accessible mainly in the winter and with our focus on land capture over the next one to two years, we don't expect to have an indication regarding potential upside for at least two to three years.

Surmont Oil Sands Lease, Alberta

As reported in our first quarter update on May 8th, McDaniel &Associates Consultants Ltd updated their evaluation of the bitumen contingent resource contained in the McMurray formation on Storm's 3,840 acres (6 sections) of oil sands leases. Their best case estimate of discovered bitumen resource (defined as bitumen in place exploitable using a Steam-Assisted-Gravity Drainage or SAGD process) is 312 million barrels with the best estimate of contingent bitumen resources recoverable using a SAGD process being 113 million barrels.

Next winter, possibly as early as December 2008, Storm plans to drill and core an additional five test holes to further prove up and expand the estimated bitumen in place. One section remains largely unevaluated and could materially increase our bitumen contingent resources. Storm has no plans at present to initiate development of this resource and no assurance can be provided that this resource will ever be exploited with a conventional SAGD project.

STORM GAS RESOURCE CORP.

Storm Gas Resource Corp ('SGR') was formed more than one year ago to pursue unconventional gas opportunities in the Horn River Basin and elsewhere. Subsequent to the end of the second quarter, SGR completed an equity issue and raised $40 million at a price of $6.50 per share. Storm invested $4.9 million to acquire 0.8 million shares as part of this offering. We have now invested a total of $6.1 million in SGR and own 2.05 million shares representing a 23% ownership position. SGR's primary focus in the next two years will be to expand its land position prospective for the Devonian shales in the Horn River Basin, test the productivity of those acquired lands, and add additional lands in new areas with unconventional gas potential. This is a longer term investment and we don't expect to have an indication regarding the upside potential for at least 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 unconventional and international exploration and exploitation opportunities. This share position has a value of $28 million or $0.60 per fully diluted Storm share using the price of $6.25 per share from a rights offering to existing shareholders, which raised $31 million and closed mid August 2008. Storm invested $1.25 million and acquired an additional 200,000 shares.

SVI is active in the UK sector of the North Sea through its affiliate, Silverstone Energy Limited in which SVI has a 33% ownership position. Silverstone recently completed the Granby Oil and Gas corporate acquisition, which included a 54% working interest in the producing Tristan NW gas field and also added 110,000 net undeveloped acres, with the top five prospects on those lands containing 42 MM Boe of net risked contingent resources focused on oil which significantly diversifies Silverstone's project inventory. In the Viking Fields area, one of three gas discoveries drilled by SVI, the Victoria field, is expected to commence production beginning the last quarter of 2008 at a cost of Pounds Sterling 44 million. Victoria field gas in place is estimated to be 163 BCF with gross proved plus probable recoverable reserves being 106 BCF (net 66 BCF). Silverstone has identified multiple greater than 50 BCF prospects in the Viking Fields area which potentially represent greater than 2 TCF of gas in place, and plans to drill one or two of these each year for the next several years. With current netbacks of Cdn $60 per Boe, significant cash flow will be provided by production from the Tristan NW and Victoria gas fields which will be used to fund the tie-in of the remaining Viking Fields discoveries in 2009 and 2010. Cash flow will also be used to fund additional exploratory drilling which, in 2008, will include one to two more Viking Fields exploratory wells and a well targeting a medium gravity oil prospect in the Quad 9/Gryphon area which has been farmed out (Silverstone pays 10% and is carried for a 30% working interest).

In Tunisia, SVI recently drilled and is currently completing and evaluating an onshore well in the 71% interest Remada Sud permit that is testing one of two large Ordovician structures. The well is believed to be capable of production at 200-250 Bbl of 43 degree API light oil per day. This is a significant early stage encouragement on SVI's huge, 1.2 million acre land block. In the 65% interest Jenein Centre block, a well will be drilled targeting light oil early in 2009. Offshore in the Gulf of Hammamet, ten prospects have been identified offsetting existing discoveries using the 440 km2 of marine 3-D seismic recorded by SVI last year. An exploratory well is planned for mid-2009 to test one of these prospects. This block also holds three existing fallow discoveries with as much as 150 million barrels of oil in place. One of these, the Cosmos Main pool (67% interest) with 25 million barrels of oil in place, will be developed with two production wells, one injection well and with a vessel converted to an FPSO which is purpose-built for smaller field development. First oil is expected in 2010 with initial production possibly as high as 20,000 barrels of light oil per day. Immediately adjacent to this development, the Cosmos Terraces potentially hold another 12 million barrels of oil in place.

2008 OUTLOOK

So far in 2008, natural gas prices have averaged $8.67 per GJ at AECO (January to July average spot price) with current spot prices being approximately $7.25 per GJ. This is higher than our original budget assumption of $6.25 per GJ and will result in cash flow for the year being considerably higher than originally forecasted. As a result, we are increasing our level of capital investment in 2008 to $105 million from our original estimate of $65 million, and we will fund this higher level of investment primarily with cash flow assuming natural gas prices at AECO average $7.75 per GJ in the second half of 2008. This does not include our additional equity investments in SVI or SGR. About $10 million of the increase is required to offset cost inflation resulting from rising steel prices, trucking costs, drilling rig rates and frac costs which have increased the cost of drilling and completing a well by approximately 10% to 15%. An additional $20 million will be invested in expanding our drilling program from 24 wells (23.3 net) to 32 wells (28.3 net) which includes an additional four horizontal Montney development wells (3.4 net). We will also invest $15 million to expand our infrastructure at Parkland by constructing a second facility in the fourth quarter which will further enhance our competitive advantage in the area. Minor dispositions are expected to total $5 million. Although most of the increased drilling will be towards the end of 2008, we expect that production exiting 2008 will now be 8,200 Boe per day which represents an estimate for fourth quarter production assuming that there are no major facility outages.

Production in July averaged approximately 7,100 Boe per day and current production is approximately 7,000 Boe per day. We expect third quarter production to average approximately 7,100 to 7,300 Boe per day.

Second quarter operating costs were higher than guidance at $7.13 per Boe as a result of our Parkland property being shut-in for the 22 day planned maintenance turnaround at the McMahon gas plant in June. Operating costs at Parkland in the first half of 2008 were exceptionally low at $4.33 per Boe so the shut-in of this property for most of June had a significant impact on second quarter operating costs. We expect considerable improvement in operating costs in the second half of 2008 and are still forecasting an average 2008 operating cost of $6.75 per Boe.

Field netbacks in the second quarter increased significantly to average $45.08 per Boe with the improvement resulting from increased volumes at Parkland where the second quarter field netback was $51.00 per Boe. The gas produced from our Montney discovery at Parkland is liquids rich resulting in liquids recoveries of 25 barrels per Mmcf and a higher heat content sales gas stream with a price per Mcf approximately 24% higher than the price in $ per GJ or 23% higher than the price in $ per Mmbtu.

We expect that our Montney discovery at Parkland will be the cornerstone of our growth for several years. Longer term, we have exposure to SVI's growing inventory of large-scale international opportunities, we are working at expanding our exposure to the Horn River Basin Devonian shale gas play and will work to further expand the resource contained in our oil sands lease at Surmont through additional drilling. Although the spot natural gas price has undergone a significant correction in the last month, this is an exciting time be a natural gas focused producer with exposure to several large-scale resource oriented opportunities given that consumption is likely to continue rising since natural gas is relatively inexpensive and has a lower carbon emission profile than alternative fuels. With the cost to find and develop new and existing reserves of natural gas steadily increasing each year, offsetting production declines and increasing production will require natural gas prices to continue trending higher as they have over the past seven years.



Respectfully,

Brian Lavergne,
President and Chief Executive Officer
August 14, 2008


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008

Set out below is management's discussion and analysis of financial and operating results for Storm Exploration Inc ("Storm" or the "Company") for the three and six months ended June 30, 2008. It should be read in conjunction with the consolidated financial statements for the three and six months ended June 30, 2008 and for the year ended December 31, 2007 and other operating and financial information included in this press release. This management's discussion and analysis is dated August 14, 2008.

Introduction and Limitations:

Basis of Presentation - Financial data presented below have largely been derived from the Company's unaudited financial statements for the three and six months ended June 30, 2008, prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). Specific accounting policies adopted by the Company are set out in footnote 1 to the unaudited consolidated financial statements for the three and six months ended June 30, 2008 and in footnote 2 to the Company's audited consolidated financial statements for the year ended December 31, 2007. 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 of dollars.

Effective January 1, 2008 Storm adopted with prospective effect certain new accounting standards introduced as part of GAAP as follows:

- Capital Disclosures:

Section 1535 of the CICA Handbook, Capital Disclosures, requires companies to disclose in their financial statements, objectives, policies and processes for managing capital, including compliance with any externally imposed capital requirements.

- Financial Instrument Disclosure and Presentation:

Section 3862 of the CICA Handbook, "Financial Instruments - Disclosures" and Section 3863, "Financial Instruments - Disclosure and Presentation". The new accounting standards require the Company to provide information about the significance of financial instruments to the Company's financial position and performance. In addition information about the nature and extent of risks associated with financial instruments, and how the Company manages such risks, is to be provided.

Additional details about such accounting changes and their effect on the Company are described in the footnotes to the unaudited consolidated financial statements for the three and six months ended June 30, 2008.

Forward-Looking Statements - Certain information set forth in this document, including management's assessment of Storm's future plans and operations, contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond the Company's control, including the effect of general economic conditions, 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. 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 update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required under securities law.

Boe Presentation - For the purpose of calculating unit 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. Barrels of oil equivalent ("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 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 having widespread use in the oil and gas industry in Canada. 'Funds from operations', 'funds from operations per share', 'cash flow from operations' and 'netbacks' are not defined by GAAP in Canada and are regarded as non-GAAP measures. Measurement of funds from operations is detailed on the Statement of Cash Flows. Funds from operations per share is calculated based on the weighted average number of common shares outstanding consistent with the calculation of net income per share. Netbacks equal total revenue less royalties, transportation and operating costs, calculated on a Boe basis. Total Boe is calculated by multiplying the daily production by the number of days in the year or quarter as the case may be.



PRODUCTION AND REVENUE

Average Daily Production

----------------------------------------------------------------------------
Three Three Six Six
Months to Months to Months to Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Natural gas
(Mcf/d) 31,786 29,891 32,656 29,969
----------------------------------------------------------------------------
Natural gas
liquids
(Bbls/d) 313 217 323 216
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Crude oil
(Bbls/d) 519 514 549 533
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Total (Boe/d) 6,130 5,713 6,315 5,744
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----------------------------------------------------------------------------


Production for the second quarter of 2008 was affected by scheduled maintenance at the McMahon gas plant operated by Spectra Energy in Fort St John, British Columbia, which receives approximately 58% of Storm's gas production, including all of the Company's Parkland production. The plant was closed to gas shipments for 22 days in June which resulted in the loss of approximately 3,190 Boe per day of production during the month. Pro forma average production for the quarter would have approximated 7,200 Boe per day, absent the McMahon plant turnaround, representing growth of 26% over the prior year and 11% over the first quarter of 2008. The Company expects that the McMahon plant will be subject to a similar turnaround in 2010.

Total Boe production in the second quarter of 2008 increased by 7% when compared to the same quarter in 2007. The year-over-year production increase is largely attributable to production growth from the Company's Montney discovery at Parkland. Production approximated 2,150 Boe in the second quarter of 2008 from Storm's Montney gas discovery; the Company had 196 Boe per day of Montney gas production in the same quarter of 2007.

Production per million basic shares outstanding in the second quarter of 2008 averaged 137 Boe per day, compared to 133 Boe per day for the second quarter of 2007, an increase of 3%.

For the six months ended June 30, 2008 production increased by 10% when compared to the same period in 2007, or an increase of 6% per million shares outstanding for each period.



Production Profile and Per Unit Prices

----------------------------------------------------------------------------
Three Months to Three Months to
June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Average Average
Selling Selling
Percentage Price Before Percentage Price Before
of Total Boe Transportation of Total Boe Transportation
Production Costs Production Costs
----------------------------------------------------------------------------
Natural gas
- Mcf 86% $10.49 87% $7.47
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Natural
gas liquids
- Bbl 5% $113.64 4% $62.66
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Crude oil
- Bbl 8% $124.97 9% $71.87
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Per Boe $70.80 $47.91
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----------------------------------------------------------------------------
Six Months to June 30, 2008 Six Months to June 30, 2007
----------------------------------------------------------------------------
Percentage Average Selling Average Selling
of Total Price Before Percentage of Price Before
Boe Transportation Total Boe Transportation
Production Costs Production Costs
----------------------------------------------------------------------------
Natural gas
- Mcf 87% $9.53 87% $7.61
----------------------------------------------------------------------------
Natural gas
liquids -Bbl 5% $95.69 4% $59.82
----------------------------------------------------------------------------
Crude oil
- Bbl 9% $110.56 9% $68.28
----------------------------------------------------------------------------
Per Boe $63.05 $48.29
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Per unit prices in the table above do not include any gains or losses from hedging.

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, it is unlikely in the short and medium term, that crude oil will increase as a percentage of Boe production. Growth in gas production for the balance of 2008 is expected to come largely from Parkland in British Columbia.

The average AECO reference price for the second quarter of 2008 was $9.67 per GJ; for the first quarter of 2008 the AECO price was $7.45 per GJ; and for the six months to June 30, 2008 was $8.50 per GJ.

The corporate average realized price per GJ received by Storm for the second quarter of 2008 was approximately 9% higher than the AECO reference price. This pricing premium is attributable to high heat content natural gas delivered from Storm's Montney discovery at Parkland, which receives a price approximately 25% higher than the AECO reference price. Montney natural gas accounted for approximately 35% of natural gas production in the quarter. Correspondingly, the McMahon gas plant turnaround in June 2008 had the effect of reducing the contribution of premium priced Montney production to the corporate average realized price for the second quarter. For the six months to June 30, 2008, the corporate average price was 11% higher than the AECO reference price. In addition to superior heat content, Montney natural gas also has associated liquids content of approximately 25 barrels per Mmcf, which has resulted in year-over-year growth in liquids production. Increased Montney gas production in future months should result in an increase to Storm's average natural gas price, plus continued growth in natural gas liquids production.



Production by Area - Boe per Day

----------------------------------------------------------------------------
Three Three Six Six
Months to Months to Months to Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Parkland, Fort
St. John - BC 3,335 2,029 3,424 1,893
----------------------------------------------------------------------------
Peace River
Arch - Alberta 1,761 2,467 1,896 2,613
----------------------------------------------------------------------------
Cabin-Kotcho
- Junior - BC 962 1,053 924 1,068
----------------------------------------------------------------------------
Other 72 164 71 170
----------------------------------------------------------------------------
Total 6,130 5,713 6,315 5,744
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The above sets out the average production from each of Storm's core areas. Montney production averaged 2,150 Boe per day for the quarter ended June 30, 2008. There was 196 Boe per day of Montney production in the same quarter of 2007.

The Company's focus on the Parkland area has resulted in quarterly year-over-year production from the area growing by 64%. Correspondingly, reduced investment in Alberta is evidenced by a 29% reduction in year-over-year production in to Peace River Arch.




Production Revenue

----------------------------------------------------------------------------
Three Three Six Six
Months to Months to Months to Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Natural gas $ 30,349 $ 20,310 $ 56,590 $ 41,270
----------------------------------------------------------------------------
Natural gas liquids 3,239 1,236 5,628 2,341
----------------------------------------------------------------------------
Crude oil 5,906 3,365 11,051 6,592
----------------------------------------------------------------------------
Hedging (losses) gains (802) 71 (802) 2,551
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------------------------------------------------------
Revenue from
product sales 38,692 24,982 72,467 52,754
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Royalty income 196 174 395 411
----------------------------------------------------------------------------
Total Production
Revenue $ 38,888 $ 25,156 $ 72,862 $ 53,165
----------------------------------------------------------------------------
----------------------------------------------------------------------------


A reconciliation of revenue from product sales between the quarters ended June 30, 2008 and 2007 is as follows:



----------------------------------------------------------------------------
Natural
Natural Gas Crude
Gas Liquids Oil Total
----------------------------------------------------------------------------
Revenue from product
sales - second
quarter 2007 $ 20,381 1,236 3,365 $ 24,982
----------------------------------------------------------------------------
Contribution from
increased production
quarter-over-quarter 1,809 997 58 2,864
----------------------------------------------------------------------------
Contribution from
increased product prices
quarter-over-quarter 8,230 1,006 2,483 11,719
----------------------------------------------------------------------------
Loss from hedging activities (873) - - (873)
----------------------------------------------------------------------------
Revenue from product sales
- second quarter 2008 $ 29,547 3,239 5,906 $ 38,692
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Hedging:

Storm realized a hedging loss of $0.8 million, equivalent to $1.44 per Boe or $0.28 per Mcf during the quarter ended June 30, 2008. No hedging gains or losses were realized in the first quarter of 2008; however, averaged over the six month period to June 30, 2008, the hedging loss realized in the second quarter was equivalent to $0.70 per Boe or $0.13 per Mcf.

Although Storm followed hedge accounting rules with respect to prior hedges and hedges in place at June 30, 2008, any future hedges entered into by the Company may not satisfy hedge accounting criteria; correspondingly the Company may be obliged to follow mark-to-market rules.



Hedges in place at June 30, 2008 are as follows:

----------------------------------------------------------------------------
Product Volume Period Contract Price
----------------------------------------------------------------------------
Natural gas 12,000 GJ July 1, 2008 - Fixed price Cdn $8.04 per GJ
per day September 30,
2008
----------------------------------------------------------------------------
Natural gas 11,000 GJ July 1, 2008 - Collar Ceiling $8.70 per GJ
per day September 30, Floor $7.50 per GJ
2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------


ROYALTIES

----------------------------------------------------------------------------
Three Three Six Six
Months to Months to Months to Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Charge for period $ 8,504 $ 5,398 $ 15,406 $ 10,990
----------------------------------------------------------------------------
Royalties as a
percentage of
revenue from
product sales
before hedging
- Crown 20.3% 20.2% 20.1% 20.3%
- Other 1.2% 1.4% 1.1% 1.7%
----------------------------------------------------------------------------
Total 21.5% 21.6% 21.2% 22.0%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per Boe $ 15.24 $ 10.38 $ 13.40 $ 10.57
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The introduction of the New Royalty Framework by the Provincial Government of Alberta in October 2007, to be effective from January 1, 2009, will have the broad result of increasing Alberta provincial royalties, particularly on wells with high initial production rates, which tend to be wells with higher capital at risk. This results in a reduction in returns accruing to oil and gas investment in the province. Approximately 30% of Storm's production came from Alberta in the second quarter of 2008, compared to 45% in the second quarter of 2007. All other production comes from British Columbia. For the balance of 2008, Storm's capital programs will continue to be focused on the exploitation of its natural gas properties in the Peace River Arch area of north eastern British Columbia, which, assuming operational success, will result in revenue from Alberta continuing to fall as a percentage of total revenue. In addition to lower investment, natural declines will further reduce Storm's Alberta based production and revenues. In the final quarter of 2008, immediately prior to implementation of the new royalty framework, successful execution of the Company's business plan could result in production from British Columbia increasing to 80% of total production. Nevertheless, the allocation of capital by the Company to projects outside of Alberta is not exclusively in response to the changed provincial royalty regime in Alberta. The Company's British Columbia projects offer the highest economic returns.



PRODUCTION COSTS

----------------------------------------------------------------------------
Three Three Six Six
Months to Months to Months to Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Charge for period $ 3,978 $ 3,959 $ 8,426 $ 7,619
----------------------------------------------------------------------------
Percentage of revenue
from product sales
before hedging 10.1% 15.9% 11.5% 15.2%
----------------------------------------------------------------------------
Per Boe $ 7.13 $ 7.62 $ 7.33 $ 7.33
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Total production costs for the quarter ended June 30, 2008 were largely unchanged year-over-year but fell as a percentage of revenue largely in response to improved pricing. Per Boe, production costs for the quarter to June 30, 2008 fell by 6% when compared to the same period in 2007, in part due to a more concentrated asset base and higher productivity Montney horizontal natural gas wells. Production costs per Boe for the six month periods to June 30, 2008 and 2007 were unchanged. A return to full production at Parkland in July 2008, and the focus on drilling high productivity horizontal wells in the second half of 2008, should result in future reductions in per unit costs. A focus on cost control in all pricing environments has enabled Storm to maintain a consistent and low cost structure.

Storm's cash costs, which comprise production, general and administrative costs and interest, amounted to $10.53 for the quarter ended June 30, 2008, compared to $10.77 for the quarter ended June 30, 2007. For the six month periods to June 30, cash costs for 2008 amounted to $10.46 and to $10.07 for 2007. Second quarter cash costs tend to be higher than other quarters, as limited field activity results in lower overhead recoveries.



TRANSPORTATION COSTS

----------------------------------------------------------------------------
Three Three Six Six
Months to Months to Months to Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Charge for period $ 1,258 $ 1,238 $ 2,666 $ 2,366
----------------------------------------------------------------------------
Percentage of revenue
from product sales
before hedging 3.2% 5.0% 3.6% 4.7%
----------------------------------------------------------------------------
Per Boe $ 2.25 $ 2.38 $ 2.32 $ 2.28
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The Company's predominately natural gas production base results in reasonable stability of transportation costs. Transportation costs from Storm's Parkland property are lower than the corporate average and increased future production from the area should result in lower transportation costs in future quarters.



Details of field netbacks per commodity unit are as follows:

----------------------------------------------------------------------------
Three Months to June 30, 2008
----------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($ Bbl) ($ Bbl) ($ Mcf) ($ Boe)
----------------------------------------------------------------------------
Product sales $ 124.97 $ 113.64 $ 10.49 $ 70.80
----------------------------------------------------------------------------
Hedging loss - - (0.28) (1.44)
----------------------------------------------------------------------------
Royalty income 0.79 0.43 0.05 0.35
----------------------------------------------------------------------------
Royalties (21.71) (25.42) (2.33) (15.24)
----------------------------------------------------------------------------
Production costs (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
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Three Months to June 30, 2007
----------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($ Bbl) ($ Bbl) ($ Mcf) ($ Boe)
----------------------------------------------------------------------------
Product sales $ 71.87 $ 62.66 $ 7.47 $ 47.92
----------------------------------------------------------------------------
Hedging gain - - 0.03 0.14
----------------------------------------------------------------------------
Royalty income 0.40 0.53 0.05 0.34
----------------------------------------------------------------------------
Royalties (11.35) (15.09) (1.68) (10.38)
----------------------------------------------------------------------------
Production costs (8.46) - (1.31) (7.62)
----------------------------------------------------------------------------
Transportation (2.34) (4.82) (0.38) (2.38)
----------------------------------------------------------------------------
Field netback $ 50.12 $ 43.28 $ 4.18 $ 28.02
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Six months to June 30, 2008
----------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($ Bbl) ($ Bbl) ($ Mcf) ($ Boe)
----------------------------------------------------------------------------
Product sales $ 110.56 $ 95.69 $ 9.52 $ 63.75
----------------------------------------------------------------------------
Hedging loss - (0.13) (0.70)
----------------------------------------------------------------------------
Royalty income 1.25 0.46 0.04 0.34
----------------------------------------------------------------------------
Royalties (18.08) (21.26) (2.06) (13.41)
----------------------------------------------------------------------------
Production costs (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
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Six months to June 30, 2007
----------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($ Bbl) ($ Bbl) ($ Mcf) ($ Boe)
----------------------------------------------------------------------------
Product sales $ 68.28 $ 59.82 $ 7.61 $ 48.29
----------------------------------------------------------------------------
Hedging gain - - 0.47 2.45
----------------------------------------------------------------------------
Royalty income 0.44 0.66 0.06 0.40
----------------------------------------------------------------------------
Royalties (10.98) (16.15) (1.71) (10.57)
----------------------------------------------------------------------------
Production costs (7.64) - (1.27) (7.33)
----------------------------------------------------------------------------
Transportation (2.01) (4.05) (0.37) (2.28)
----------------------------------------------------------------------------
Field netback $ 48.09 $ 40.28 $ 4.79 $ 30.96
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Production costs for natural gas liquids are included with natural gas costs.

Field netbacks per Boe for the quarter ended June 30, 2008 increased by 61% over the same period of 2007. Storm benefited from increased prices for each product category, supported by lower costs, somewhat offset by a hedging loss. For the six months ended June 30, 2008 field netback increased by 30% over the equivalent period in 2007. Excluding the effects of a hedging loss in 2008, and a hedging gain in 2007, the increase in netback per Boe for the first half of 2008 amounted to 44%.



INTEREST

----------------------------------------------------------------------------
Three Months to Three Months to Six Months to Six Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Charge for
period $ 944 $ 868 $ 2,005 $ 1,537
----------------------------------------------------------------------------
Per Boe $ 1.69 $ 1.67 $ 1.74 $ 1.48
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Interest is paid on Storm's revolving bank facility. Increased interest costs for the second quarter of 2008, when compared to the equivalent quarter of 2007, correspond to an increased borrowing level consistent with the growth in the Company's operations, slightly offset by lower debt service costs. Lower debt service costs largely benefited the second quarter of 2008 only.



GENERAL AND ADMINISTRATIVE COSTS

Total costs:

----------------------------------------------------------------------------
Three Months to Three Months to Six Months to Six Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Gross general
and
administrative
costs $ 1,414 $ 1,100 $ 2,777 $ 2,507
----------------------------------------------------------------------------
Capital and
operating
recoveries (460) (328) (1,186) (1,192)
----------------------------------------------------------------------------
Net general and
administrative
costs $ 954 $ 772 $ 1,591 $ 1,315
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Costs per Boe:

----------------------------------------------------------------------------
Three Months to Three Months to Six Months to Six Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Gross general
and
administrative
costs $ 2.53 $ 2.12 $ 2.42 $ 2.41
----------------------------------------------------------------------------
Capital and
operating
recoveries (0.82) (0.63) (1.04) (1.15)
----------------------------------------------------------------------------
Net general
and
administrative
costs $ 1.71 $ 1.49 $ 1.38 $ 1.26
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Increases in gross general and administrative costs for the quarter and six months ended June 30, 2008, when compared to the same periods in 2007, are primarily due to an increased staff count, as well as higher year-over-year compensation and accommodation costs. In addition, seasonally lower field activity in the second quarter of each year, results in lower operating recoveries.

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



STOCK BASED COMPENSATION COSTS

----------------------------------------------------------------------------
Three Three Six Six
Months to Months to Months to Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Charge for
period $ 395 $ 341 $ 731 $ 678
----------------------------------------------------------------------------
Per Boe $ 0.71 $ 0.66 $ 0.64 $ 0.65
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Stock based compensation costs are non cash charges which reflect the value of stock options and performance warrants issued to directors and employees. The value is amortized over the life of the award. Storm's performance warrant plan was terminated mid 2007, upon the exercise of the remaining warrants. The increase in the charge in the second quarter of 2008, when compared to the second quarter of 2007, corresponds to the issue of additional stock options late in 2007.



DEPLETION DEPRECIATION AND ACCRETION

----------------------------------------------------------------------------
Three Three Six Six
Months to Months to Months to Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Depreciation and
depletion charge
for period $ 9,470 $ 8,137 $19,527 $16,497
----------------------------------------------------------------------------
Accretion charge
for period 123 115 244 227
----------------------------------------------------------------------------
Total $ 9,593 $ 8,252 $19,771 $16,724
----------------------------------------------------------------------------
Total per Boe $ 17.20 $ 15.87 $ 17.21 $ 16.08
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The increase in the charge for depreciation, depletion and accretion for the three and six month periods to June 30, 2008, when compared to the same periods in 2007, is a consequence of higher production volumes as the depletion component of the charge is based on a cost per Boe.

The year-over-year increases in the charge for depletion and depreciation per Boe is largely attributable to a mid 2007 property acquisition, as acquired reserves were purchased at a higher cost per Boe than Storm's historical finding costs. 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, 2008, Storm recorded a future income tax provision of $3.8 million compared to $1.5 million for the quarter ended June 30, 2007. For the six month periods ended June 30, 2008 and 2007 the future income tax provision amounted to $6.4 million and $4.0 million. The 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 2008 is 30%, compared to 32% for 2007.

At June 30, 2008, Storm had tax pools carried forward estimated to be $187 million. In September 2007 the Company entered into a flow through share issue, which provided for the renunciation of Canadian Exploration Expense of $15.1 million, and the incurrence of such expenditures by December 31, 2008. At June 30, 2008 the Company considers that $12.0 million of such expenditures have been incurred. In addition, Storm has a capital loss in the amount of $9 million available for application against future capital gains.

NET INCOME AND NET INCOME PER SHARE

Net income for the quarter ended June 30, 2008 increased by 234% when compared to the quarter ended June 30, 2007. Quarter over quarter, net income per diluted share increased by 233%. For the six months ended June 30, 2008 net income increased by 101% when compared to the six months ended June 30, 2007. Per diluted share, net income increased by 89% in the first half of 2008 over the same period in 2007.



----------------------------------------------------------------------------
Three Months to Three Months to
June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Per Per
diluted diluted
$ share-$ $ share-$
----------------------------------------------------------------------------
Net income for
quarter $ 9,465 $ 0.20 $ 2,832 $ 0.06
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Six Months to Six Months to
June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Per Per
diluted diluted
$ share-$ $ share-$
----------------------------------------------------------------------------
Net income for
quarter $ 15,889 $ 0.34 $ 7,898 $ 0.18
----------------------------------------------------------------------------
----------------------------------------------------------------------------


FUNDS FROM OPERATIONS

Funds from operations for the quarter ended June 30, 2008 increased by 80% to $23.3 million, or $0.50 per diluted share, compared to $12.9 million, or $0.29 per diluted share for the equivalent quarter of 2007. For the six month period to June 30, 2008 funds from operations increased by 46% to $42.8 million, or $0.93 per diluted share, compared to $29.3 million, or $0.67 per diluted share for the equivalent period in 2007.



----------------------------------------------------------------------------
Three Months to Three Months to
June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Per Per
diluted diluted
$ share-$ $ share-$
----------------------------------------------------------------------------
Funds from
Operations for
quarter 23,250 0.50 $ 12,921 $ 0.29
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Six Months to Six Months to
June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Per Per
diluted diluted
$ share-$ $ share-$
----------------------------------------------------------------------------
Funds from
Operations for
quarter $ 42,768 $ 0.93 $ 29,338 0.67
----------------------------------------------------------------------------
----------------------------------------------------------------------------


INVESTMENT AND FINANCING

Working Capital

Receivables comprise production revenue receivables and accruals, and receivables in respect of operating and capital costs. Prepaid costs and deposits include unamortized insurance premiums and software licensing fees, deposits and certain inventory items. Included in receivables is an amount of $550,000 in respect of natural gas shipped in June 2008 to SemCAM ULC ("SemCAM"). Subsequent to June 30, 2008, SemCAM, in response to Chapter 11 filings in the United States by its parent company, secured protection under the Company Creditors' Arrangement Act, which inter alia, resulted in the non payment of amounts owing to Storm at June 30, 2008. The amount of any loss relating to the SemCAM receivable is not determinable, and no provision for loss has been made at June 30, 2008.

Accounts payable 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.

Storm had a working capital deficiency of $8.7 million at June 30, 2008 compared to $2.0 million at June 30, 2007 and $10.2 million at December 31, 2007. 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 normally highest at the end of the first quarter of each year and lowest at the end of second quarter. The relatively high working capital deficiency at June 30, 2008, when compared to June 30, 2007, is attributable to receivables at June 30, 2008 being lower than normal, as a consequence of part of Storm's production being shut in due to scheduled maintenance at the McMahon gas plant in British Columbia.



Property and Equipment

Capital costs incurred were as follows:

----------------------------------------------------------------------------
Three Three Six Six
Months to Months to Months to Months to
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------------------------------------------------------------------------
Land and lease,
net $ 998 $ 632 $ 2,267 $ 1,776
----------------------------------------------------------------------------
Seismic 23 2,173 (77) 2,946
----------------------------------------------------------------------------
Drilling and
completions 7,381 1,689 28,934 13,665
----------------------------------------------------------------------------
Facilities and
equipment -
net (1,559) 2,163 3,050 9,895
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Field Expenditures 6,843 6,657 34,174 28,282
----------------------------------------------------------------------------
Property
acquisitions - 26,111 528 28,561
----------------------------------------------------------------------------
Property
dispositions (1,063) - (2,147) -
----------------------------------------------------------------------------
Total $ 5,780 $32,768 $32,555 $56,843
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Bank Debt, Liquidity and Capital Resources

Storm has a revolving borrowing base bank credit facility of $110 million. The amount drawn on this facility at June 30, 2007 amounted to $66.4 million. Debt, including working capital deficiency, amounted to $75.1 million at June 30, 2008, resulting in a ratio of debt to annualized quarterly cash flow of 0.8 times.

Storm funds its field capital programs through cash flow and bank borrowings. 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 capital expenditures in the first and fourth quarters of the year will exceed cash flow, which is 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.

Investments

Storm Ventures International Inc.

At June 30, 2008 the Company's investment in Storm Ventures International Inc. ("SVI") represented a 13% ownership position, comprising 4.3 million common shares. The carrying amount of the investment on the Company's consolidated balance sheet comprises the Company's investment cost, plus a dilution gain recognized during the year ended December 31, 2005. This carrying amount should not be regarded as representative of the value of Storm's investment in SVI. Subsequent to June 30, 2008, SVI entered into a private placement financing, in which Storm participated, purchasing 200,000 common shares at a price of $6.25 per share for a total of $1,250,000. The SVI financing will result in further dilution of Storm's ownership position, to approximately 12%.

Storm Gas Resource Corp.

Storm Gas Resource Corp. ("SGR") was incorporated to identify and participate in unconventional natural gas opportunities; initially shale gas in the Horn River Basin of northeast British Columbia. Storm's ownership position at June 30, 2008 was 1.25 million shares or a 45% ownership position, the remaining shareholders being SVI, also at 45%, and SGR employees at 10%. Storm's initial investment was satisfied by a cash contribution of $833,000 for 833,000 common shares at a price of $1.00 per share, plus the transfer of undeveloped land independently valued at $417,000, with consideration being 417,000 common shares at $1.00 per share, for a total initial investment of $1,250,000. Subsequently, in July 2008, Storm and SVI each purchased an additional 200,000 common shares at a price of $5.20 per share, and Storm purchased a further 600,000 common shares at a price of $6.50. Concurrently, SGR entered into a private placement financing, which resulted in SGR issuing an additional 5,280,000 common shares at a price of $6.50 per share, for total proceeds before commission and expenses of $34,320,000. At the conclusion of the private placement, Storm owned 2,050,000 common shares of SGR, equivalent to an ownership position of 23% at an average price of $3.02. In addition to its investment in SGR, Storm has an agreement to acquire lands jointly with SGR in the Horn River Basin, with SGR and Storm having interests of 60% and 40% respectively. The Company's investment in SGR, combined with its working interest, provides Storm with a 54% exposure to the Horn River Basin Devonian shale gas play.

SGR had no operations at June 30, 2008. Storm's investment in SGR is carried at cost, equivalent to the Company's equity interest in SGR.

Future Income Taxes

Estimated future income tax at June 30, 2008 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, 2008 deduction
----------------------------------------------------------------------------
Canadian oil and gas property expense 92,000 10%
----------------------------------------------------------------------------
Canadian development expense 45,000 30%
----------------------------------------------------------------------------
Canadian exploration expense (1) 7,000 100%
----------------------------------------------------------------------------
Undepreciated capital cost 42,000 20 - 100%
----------------------------------------------------------------------------
Other 1,000 20%
----------------------------------------------------------------------------

Total 187,000
--------------------------------------------------------
--------------------------------------------------------

Capital losses 9,666
--------------------------------------------------------
--------------------------------------------------------
(1) An additional $3 million of Canadian Exploration Expense must be
incurred prior to December 31, 2008 to satisfy the terms of a flow
through share issue dated September 2007.


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 June 30, 2008 and December 31, 2007 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 As at
June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
Common shares outstanding
- end of period 44,657 44,532
----------------------------------------------------------------------------
Stock options 2,369 2,166
----------------------------------------------------------------------------
Fully diluted common shares
- end of period 47,026 46,698
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average common shares
- basic 44,610 43,449
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average common shares
- diluted 46,101 44,132
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Stock options outstanding are exercisable over five years on various dates beginning September 2005 at prices ranging from $2.60 to $11.40.

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.



Obligations with a fixed term are as follows:

----------------------------------------------------------------------------
($000's) 2008 2009 2010 2011 2012
----------------------------------------------------------------------------
Lease of premises $ 759 $ 759 $ 772 $ 785
----------------------------------------------------------------------------
Equipment leases 11 - - -
----------------------------------------------------------------------------
Gas transportation and
processing fee
commitments 885 2,239 1,398 1,120 592
----------------------------------------------------------------------------
Total $ 1,655 $ 2,998 $ 2,170 $ 1,905 $ 592
----------------------------------------------------------------------------
----------------------------------------------------------------------------


QUARTERLY RESULTS

Summarized information by quarter for the two years ended June 30, 2008
appears below:

----------------------------------------------------------------------------
Quarter Ended June March December September June March
30, 31, 31, 30, 30, 30,
2008 2008 2007 2007 2007 2007
----------------------------------------------------------------------------
Production revenue -
($000s) 38,888 33,974 25,553 19,573 25,156 28,009
----------------------------------------------------------------------------
Funds from operations -
($000s)
Per share 23,250 19,520 13,233 9,372 12,921 16,417
- basic $ 0.52 $ 0.44 $ 0.30 $ 0.21 $ 0.30 0.38
- diluted $ 0.50 $ 0.43 $ 0.30 $ 0.20 $ 0.29 0.38
----------------------------------------------------------------------------
Net income - ($000s)
Per share 9,465 6,426 2,852 299 2,832 5,066
- basic $ 0.21 $ 0.14 $ 0.06 $ 0.01 $ 0.06 $ 0.12
- diluted $ 0.20 $ 0.14 $ 0.06 $ 0.01 $ 0.06 $ 0.12
----------------------------------------------------------------------------
Average daily
production - Boe 6,130 6,500 5,992 5,618 5,713 5,776
----------------------------------------------------------------------------
Average field netback
per Boe $ 45.09 $ 35.87 $ 27.44 $ 20.83 $ 28.02 $ 33.91
----------------------------------------------------------------------------
Capital expenditures
- net - ($000s) 5,780 26,775 17,094 19,953 32,768 24,075
----------------------------------------------------------------------------
----------------------------------------------------------------------------


----------------------------------------------------------------------------
Quarter Ended December September
31, 30,
2006 2006
----------------------------------------------------------------------------
Production revenue -
($000s) 23,590 18,973
----------------------------------------------------------------------------
Funds from operations -
($000s)
Per share 12,748 10,053
- basic 0.30 0.23
- diluted 0.29 0.23
----------------------------------------------------------------------------
Net income - ($000s)
Per share 3,049 1,828
- basic $ 0.07 $ 0.04
- diluted $ 0.07 $ 0.04
----------------------------------------------------------------------------
Average daily
production - Boe 5,442 4,933
----------------------------------------------------------------------------
Average field netback
per Boe $ 27.88 $ 24.24
----------------------------------------------------------------------------
Capital expenditures -
net - ($000s) 13,635 7,619
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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 months and six months ended June 30, 2008 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 annual report for the year ended December 31, 2007 and the unaudited consolidated financial statements for the three and six months ended June 30, 2008.

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, 2007.

DISCLOSURE CONTROLS

Storm's disclosure control policy provides for the establishment of a Disclosure Committee, comprised of the Chief Executive Officer and Chief Financial Officer, which reviews policies and procedures applicable to the provision of information to any party, other than industry partners in the ordinary course of business, and reviews any circumstances which may suggest a breach of disclosure controls. Controls and procedures are designed to provide reasonable assurance that relevant information is collected and provided to senior management. Although Storm's Disclosure Committee has concluded that its disclosure policy is effective, it cannot provide more than reasonable assurance that its objectives have been realized. No circumstance suggesting a possible breach of disclosure controls was identified by the Disclosure Committee in the three or six month periods ended June 30, 2008.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

Storm is required to comply with Multilateral Instrument 52-109 "Certification of Disclosure in Issuers' Annual and Interim Filings". The 2008 certificate requires that the Company disclose in the interim MD&A any changes in the Company's internal control over financial reporting that occurred during the period that has materially affected, or is reasonably likely to materially affect Storm's financial reporting. The Company confirms that no such changes were made to the internal controls over financial reporting during the second quarter of 2008.

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, December 31,
2008 2007
----------- -------------

ASSETS

Current
Accounts receivable $ 11,283 $ 11,949
Prepaid and other costs 2,981 1,945
----------- -------------
14,264 13,894

Property and Equipment - Net (Note 2) 250,909 237,738

Investments 10,525 9,275

----------- -------------
$ 275,698 $ 260,907
----------- -------------
----------- -------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current
Accounts payable and accrued liabilities $ 22,994 $ 24,103
Unrealized mark-to-market hedging provision
(Note 9) 5,267 -
----------- -------------
28,261 24,103

Bank Indebtedness (Note 4) 66,414 74,472
Asset Retirement Obligation (Note 5) 7,304 6,918
Future Income Taxes (Note 3) 15,316 10,519
----------- -------------
117,295 116,012
----------- -------------

Shareholders' Equity (Note 6)
Share capital 87,750 86,994
Contributed surplus 2,868 2,318
Retained earnings 71,472 55,583
Accumulated other comprehensive income (deficit) (3,687) -
----------- -------------
158,403 144,895
----------- -------------

$ 275,698 $ 260,907
----------- -------------
----------- -------------
-


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,
2008 2007 2008 2007
---------- ---------- -------------------

Revenue
Production revenue 38,888 25,156 72,862 53,165
Royalties (8,504) (5,398) (15,406) (10,990)
---------- --------- -------------------
30,384 19,758 57,456 42,175
---------- --------- -------------------

Expenses
Production 3,978 3,959 8,426 7,619
Transportation 1,258 1,238 2,666 2,366
Interest 944 868 2,005 1,537
General and administrative 954 772 1,591 1,315
Stock based compensation 395 341 731 678
Depletion, depreciation and
accretion 9,593 8,252 19,771 16,724
---------- --------- -------------------
17,122 15,430 35,190 30,239
---------- --------- -------------------
Income before taxes: 13,262 4,328 22,266 11,936

Future income taxes (Note 3) (3,797) (1,496) (6,377) (4,038)
---------- --------- -------------------

Net income for the period 9,465 2,832 15,889 7,898

Retained earnings, beginning
of period 62,007 49,600 55,583 44,534
---------- --------- -------------------
Retained earnings, end of period 71,472 52,432 71,472 52,432
---------- --------- -------------------
---------- --------- -------------------
Net Income per share (Note 7)
- basic 0.21 0.06 0.36 0.18
- diluted 0.20 0.06 0.34 0.18


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

Three Three Six Six
Months to Months to Months to Months to
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
---------- --------- -------------------

Net Income for the period 9,465 2,832 15,889 7,898
Unrealized Hedging loss (2,489) 155 (5,267) -
Related income tax benefit 802 (50) 1,580 -
---------- --------- -------------------
Other Comprehensive income (loss)
(Note 9) (1,687) 105 (3,687) -
----------------------------------------
Comprehensive income for the period 7,778 2,937 12,202 7,898
----------------------------------------
----------------------------------------


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,
2008 2007 2008 2007
---------- --------- -------------------
Operating activities

Net income for the period 9,465 2,832 15,889 7,898
Add non-cash items:
Depletion, depreciation
and accretion 9,593 8,252 19,771 16,724

Future income tax 3,797 1,496 6,377 4,038

Stock based compensation 395 341 731 678
---------- -----------------------------
Funds from operations 23,250 12,921 42,768 29,338
Net change in non-cash
working capital items (Note 8) 1,640 (299) (998) 2,067
---------- -----------------------------
24,890 12,622 41,770 31,405
---------- -----------------------------

Financing activities
Issue of common shares - net
of expenses 172 13 575 13
Increase (Decrease) in bank
indebtedness (13,636) 28,992 (8,058) 32,365
---------- -----------------------------
(13,464) 29,005 (7,483) 32,378
---------- -----------------------------

Investing activities

Increase in investments (833) - (1,250) -
Additions to property and
equipment (6,841) (32,768) (35,208) (56,843)
Disposals of property and
equipment 1,061 0 2,653 -
Net change in non-cash
working capital items (Note 8) (4,813) (8,859) (482) (6,940)
---------- -----------------------------
(11,426) (41,627) (34,287) (63,783)
---------- -----------------------------
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, 2008
(UNAUDITED)


1. SIGNIFICANT ACCOUNTING POLICIES

These interim unaudited consolidated financial statements of the Storm Exploration Inc. ("Storm" or "the Company") have been prepared by management in accordance with accounting principles generally accepted in Canada, following, except as described below, the same accounting policies and methods of computation as used in the audited consolidated financial statements for the year ended December 31, 2007. 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, 2007.

CHANGES IN ACCOUNTING POLICIES

On January 1, 2008, the Company adopted additional accounting pronouncements promulgated by the Canadian Institute of Chartered Accountants ("CICA"). The new accounting policies are set out in CICA Handbook Section 1535 "Capital Disclosures"; Section 3862 "Financial Instruments - Disclosures"; and Section 3863 "Financial Instruments - Presentation". As required by the new standards, prior periods have not been restated.

Section 1535 - "Capital Disclosures" This new accounting pronouncement requires companies to describe their objectives, policies and processes regarding management of capital. Information about what constitutes capital is also required; further, the existence of any obligations relating to capital maintenance must be disclosed, along with the consequences of non-compliance. Note 10 to these unaudited consolidated interim financial statements provides the required disclosures.

Section 3862- "Financial Instruments - Disclosures" This pronouncement is an expansion of existing standards relating to financial instruments and requires the disclosure of information about financial instruments to which the Company is a party. Information is provided about financial instruments and their actual or potential effect on the financial position and results of the Company. Further, information is provided about risks to which the Company is exposed through recognized and unrecognized financial instruments and how these risks are managed. See Note 9.

Section 3863 - "Financial Instruments - Presentation". This pronouncement also enhances existing disclosure requirements and establishes presentation standards for financial instruments and non-financial derivatives. See Note 9.

The adoption of these pronouncements has had no effect on the Company's net income or funds from operations for the period.



2. PROPERTY AND EQUIPMENT

June 30, December 31,
2008 2007
-----------------------------

Property and equipment 348,284 315,587
Accumulated depletion and depreciation (97,375) (77,849)
-----------------------------
$ 250,909 $ 237,738
-----------------------------
-----------------------------


At June 30, 2008, the depletion calculation excluded unproved properties of $20.0 million (December 31, 2007 - $21.0 million) and included future development costs of $15.5 million (December 31, 2007 - $23.1 million).

3. FUTURE INCOME TAXES

The future income tax liability is made up of the excess of the accounting amounts over the related tax bases of the Company's property and equipment, share capital and other comprehensive income.

The Company has tax pools associated with property and equipment, for accounting purposes, of approximately $184 million as well as capital losses of approximately $10 million, all of which are not subject to expiry.

Under the terms of a flow-through share issue in September, 2007, the Company is obligated to incur Canadian Exploration Expenditures in the amount of $15.1 million prior to December 31, 2008. As at June 30, 2008 the Company had incurred an estimated $12 million of qualifying expenditures. The full amount of $15.1 million has been renounced to the subscribers at December 31, 2007 and this amount has been deducted from the Company's tax pool balance.

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,
2008 2007 2008 2007
----------------------------------------------------------------------------
Statutory combined
federal and provincial
income tax rate 30% 32% 30% 32%

Expected income
taxes $ 3,992 $ 1,399 $ 6,704 $ 3,858
Add (deduct) the
income tax effect of:
Stock-based
compensation 119 110 220 219
Rate adjustments (316) (550)
Other 2 (13) 3 (39)
----------------------------------------------------------------------------
Future Income Tax $ 3,797 $ 1,496 $ 6,377 $ 4,038
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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

June 30, December 31,
2008 2007
-----------------------------

Property and equipment $ 19,463 $ 13,073
Asset retirement obligation (2,082) (2,006)
Share issue costs (485) (548)
Recovery on unrealized hedging loss (1,580) -
-----------------------------
Future income tax liability $ 15,316 $ 10,519
-----------------------------
-----------------------------


4. BANK INDEBTEDNESS

The Company has an extendible revolving bank facility in the amount of $110 million (December 31, 2007 - $94 million), based on the Company's producing reserves. The revolving facility is available to the Company until May 31, 2009, but may be extended at the Company's request until May 30, 2010, 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 payable on the revolving facility at bank prime rate or banker's acceptance rates plus a stamping fee. Security comprises a floating charge demand debenture on the assets of the Company.

5. 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 $13.4 million (December 31, 2007 - $13.1 million), which will be paid over the next 20 years, with the majority of costs incurred between 2018 and 2028. A credit adjusted risk-free rate of eight percent was used to calculate the present value of the asset retirement obligations, amounting to $7.3 million (December 31, 2007 - $6.9 million).


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



----------------------------------------------------------------------------
June 30, December 31,
2008 2007
----------------------------------------------------------------------------
Asset retirement obligation, beginning of
period $ 6,918 $ 5,925
----------------------------------------------------------------------------
Liabilities incurred, net of liabilities
disposed 142 531
----------------------------------------------------------------------------
Accretion expense 244 462
----------------------------------------------------------------------------
Asset retirement obligation, end of period $ 7,304 $ 6,918
----------------------------------------------------------------------------
----------------------------------------------------------------------------


6. 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, 2007 44,532 $ 86,994
Stock options exercised 125 756
-----------------------------
Balance as at June 30, 2008 44,657 $ 87,750
-----------------------------
-----------------------------


Stock Based Compensation Plans

(i) 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 has been reserved for issuance. Details of the options outstanding at June 30, 2008 are as follows:



Outstanding Options Exercisable Options
-------------------------------- ------------------------

Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Range of Options Life Exercise Options Exercise
Exercise Price Outstanding (years) Price Outstanding Price
----------------------------------------------------------------------------

$ 2.60 to $3.61 290 1.6 $ 3.27 218 $ 3.27

$ 3.91 to $5.71 1,313 2.8 $ 5.46 367 $ 5.29

$ 6.03 to $8.57 758 4.4 $ 7.98 60 $ 6.66
$ 9.00 to $11.40 8 4.7 $ 11.40 - -
-------------------------------- ------------------------

2,369 3.1 $ 6.02 645 $ 4.74
-------------------------------- ------------------------
-------------------------------- ------------------------


7. PER SHARE AMOUNTS

Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Basic

Net income per share $ 0.21 $ 0.06 $ 0.36 $ 0.18
Weighted average
number of shares
outstanding ('000) 44,634 42,915 44,610 42,915

Diluted

Net income per share $ 0.20 $ 0.06 $ 0.34 $ 0.18
Weighted average
number of shares
outstanding ('000) 46,179 43,708 46,101 43,702


The reconciling items between basic and diluted weighted average common
shares are stock options described in Note 6.


8. SUPPLEMENTAL CASH FLOW INFORMATION

Changes in non-cash working capital

----------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
to to to to
June 30, June 30, June 30, June 30,
2008 2007 2008 2006
----------------------------------------------------------------------------

Accounts
receivable $ 3,086 $ 1,247 $ 665 $ 1,881
Prepaid costs and
deposits (384) (403) (1,036) 516
Accounts payable
and accrued
liabilities $ (5,875) (10,002) (1,109) (7,270)
----------------------------------------------------------------------------

Change in non-cash
working capital $ (3,173) $ (9,158) $ (1,480) $ (4,873)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Relating to:

Financing
activities $ - $ - $ - $ -
Investing
activities (4,813) (8,859) (482) (6,940)
Operating
activities 1,640 (299) (998) 2,067
----------------------------------------------------------------------------

$ (3,173) $ (9,158) $ (1,480) $ (4,873)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Interest paid during
the period $ 944 $ 868 $ 2,005 $ 1,537
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Income taxes paid
during the period $ - $ - $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------


9. 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 the establishing Company's risk management framework. In certain circumstances, for example, hedging of future production revenue, the Board has established policies and has established 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 unaudited consolidated balance sheet consist of accounts receivable, bank indebtedness and accounts payable and accrued liabilities. The fair value of these financial instruments approximates their carrying amounts based on the short term to maturity.

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.

Market risk:

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

- Commodity prices

- Interest rates

- Foreign exchange

The Company faces certain other financial risks as follows:

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 unexpected 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 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.

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 to future cash flow. These contracts reduce the fluctuation in production revenue by fixing prices of future deliveries of oil and natural gas.

For the three and six month period ending June 30, 2008 the Company realized a hedging loss of $802,000. (2007 - Nil) This amount has been offset against production revenues.



Volume Term

Fixed price financial sale

12,000 GJ/d $8.04 / GJ - AECO July 1, 2008 - Sept. 30, 2008

Physical Collar

11,000 GJ/d $7.50 - 8.70 / GJ - AECO July 1, 2008 - Sept. 30, 2008


These financial instruments have been designated as meeting the criteria for hedge accounting. Correspondingly, at June 30, 2008, the market value, being the cost to exit the contracts, of $3.7 million (net of related income tax of $1.6 million) has been charged to Other Comprehensive Income and not included in the determination of net income for the year to date.

Interest rates -

Interest on the Company's revolving bank facility varies, 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. The Company had no interest rate swaps or similar contracts in place at June 30, 2008 to reduce interest rate risk.

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, 2008 the Company had no contracts in place to reduce foreign exchange risk.

10. 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. Management of capital 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 during the fiscal year uses a non-GAAP measurement of net debt to cash flow to measure and control debt levels. This measurement is established as follows:



----------------------------------------------------------------------------
June 30, December 31,
2008 2007
----------------------------------------------------------------------------
Current assets $ 14,264 $ 13,894
----------------------------------------------------------------------------
Accounts payable and accrued liabilities 22,994 24,103
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Working capital deficiency 8,730 10,209
----------------------------------------------------------------------------
Bank indebtedness 66,414 74,472
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net debt $ 75,144 $ 84,681
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Annualized cash flow for the period $ 93,000 $ 51,943
----------------------------------------------------------------------------
Net debt to cash flow ratio 0.8 : 1 1.6 : 1
----------------------------------------------------------------------------


The ratio of net debt to cash flow 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 Company's bank indebtedness is based on the Company's producing reserves and generally is not subject to restrictions which would potentially affect the Company's operations. However, the ratio 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.

From time to time the Company may enter into hedging arrangements if capital programs or acquisitions 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.

The Company may issue share capital when debt levels are high and potentially constrain operations, usually in circumstances when the Company has completed a large acquisition.

Contact Information

  • Storm Exploration Inc.
    Brian Lavergne
    President & CEO
    (403) 264-3520
    or
    Storm Exploration Inc.
    Donald McLean
    Chief Financial Officer
    (403) 264-3520
    (403) 264-3552 (FAX)