Storm Exploration Inc.
TSX : SEO

Storm Exploration Inc.

February 26, 2008 03:00 ET

Storm Exploration Inc. Is Pleased to Announce Its Financial and Operating Results for the Year and Three Months Ended December 31, 2007

CALGARY, ALBERTA--(Marketwire - Feb. 26, 2007) - Storm Exploration Inc. (TSX:SEO) -



Three Three Twelve Twelve
Highlights - Thousands of Months to Months to Months to Months to
$CDN except volumetric December December December December
and per share amounts 31, 2007 31, 2006 31, 2007 31, 2006

Financial
Gas sales 19,366 19,339 78,327 (1) 59,841 (1)
NGL sales 1,937 1,168 5,566 5,595
Oil sales 4,127 2,841 13,726 13,690
Royalty Income 123 242 672 1,039
------------------------------------------------
Production Revenue 25,553 23,590 98,291 80,165
------------------------------------------------

Funds from operations (2) 13,233 12,748 51,943 43,297
Per share - basic 0.30 0.30 1.20 1.04
Per share - diluted 0.28 0.29 1.18 1.03

Net income 2,852 3,049 11,049 11,505
Per share - basic 0.06 0.07 0.25 0.28
Per share - diluted 0.06 0.07 0.25 0.27

Capital expenditures, net
of dispositions 17,094 13,635 93,890 84,505

Debt, including working
capital deficiency 84,681 57,314 84,681 57,314

Weighted average common
shares outstanding
Basic 44,518 42,914 43,449 41,434
Diluted 45,223 43,564 44,132 41,935

Common shares outstanding
Basic 44,532 42,914 44,532 42,914
Fully Diluted 46,698 44,970 46,698 44,970

Operations

Oil Equivalent (6:1) (2)
Barrels of oil equivalent
(000s) 551 501 2,108 1,723
Barrels of oil equivalent
per day 5,992 5,442 5,775 4,720
Average selling price ($CDN
per BOE) $ 46.13 $ 46.63 $ 46.31 (1) $ 45.93 (1)
Royalties
21.0% 22.0% 20.8% 21.3%
Gas production
Thousand cubic feet (000s) 2,864 2,601 11,058 8,669
Thousand cubic feet per day 31,133 28,271 30,296 23,752
Average selling price ($CDN
per mcf) $ 6.76 $ 7.44 $ 7.08 (1) $ 6.91 (1)

NGL Production
Barrels (000s) 27 20 84 86
Barrels per day 289 217 230 234
Average selling price ($CDN
per barrel) $ 72.94 $ 58.47 $ 66.44 $ 65.42

Oil Production
Barrels (000s) 47 47 181 192
Barrels per day 514 513 496 527
Average selling price ($CDN
per barrel) $ 87.29 $ 60.19 $ 75.82 $ 71.17

Wells drilled
Gross 6.0 9.0 25.0 41.0
Net 5.1 5.7 20.6 25.0

(1) Includes proceeds from hedging activities
(2) The terms Funds from Operations per share and BOE are non-GAAP
measurements. See Management's Discussion and Analysis.


HIGHLIGHTS

- Average 2007 production increased to 5,775 Boe per day, representing growth of 22% from average production of 4,720 Boe per day in 2006. This is a per share increase of 17% using basic shares outstanding.

- Production in the fourth quarter grew 7% to 5,992 Boe per day from 5,618 Boe per day in the immediately preceding quarter and is currently approximately 6,600 Boe per day.

- Production exiting 2007 met guidance with production in December averaging 6,842 Boe per day, an increase of 15% from the 2006 exit rate of 5,940 Boe per day.

- All six wells drilled in the fourth quarter were successful resulting in six (5.1 net) gas wells including two horizontal Montney gas wells. For the year, Storm drilled 25 wells (20.6 net) which resulted in 19 gas wells (16.4 net) including three horizontal Montney gas wells for a 76% success rate.

- Cash flow for the year totaled $51.9 million or $1.18 per diluted share, an increase of 15% from cash flow of $1.03 per diluted share in the year earlier period. The increase is notable given that it was generated entirely through production growth, as the 2007 price per Boe of $46.31 represented an increase of only 1% from the prior year.

- Cash flow netback for 2007 was $24.65 per Boe, a decrease of 2% from the prior year cash flow netback of $25.13 per Boe. Interest expense was $1.81 per Boe, an increase of $0.67 per Boe from the prior year, while operating costs of $7.07 per Boe were unchanged from the prior year.

- Net income for the year was $11.0 million or $0.25 per diluted share, down from net income of $0.27 per diluted share in 2006. Increased charges for depletion, depreciation and amortization contributed to lower year-over-year earnings.

- Invested $93.9 million during the year which included $24.5 million for acquisitions net of disposition. This level of investment resulted in bank debt and working capital deficiency ending the year at $84.7 million or 1.6 times annualized fourth quarter cash flow.

- The all-in cost to add reserves was $21.40 per Boe for proved reserves and $13.64 per Boe for proved plus probable reserves (includes change in future development costs, acquisitions, dispositions and revisions). Using the cash flow netback of $24.65 per Boe, this results in the recycle ratio being 1.2 for total proved reserve additions and 1.8 for total proved plus probable reserve additions.

- Total proved plus probable reserves grew by 53% to 20.48 Mmboe at December 31, 2007, an increase of 45% on a per share basis from the year earlier period (using basic shares outstanding during the year).

- Increased net asset value by 60% over the last year to $8.56 per fully diluted share at December 31.

CORE AREA REVIEW

Parkland Area, North East British Columbia

The Parkland area in north-eastern British Columbia includes our recent Montney discovery and is the largest of Storm's core areas, with net production averaging 2,770 Boe per day in the fourth quarter and 2,080 Boe per day for the year. Production during the final quarter of 2007 was reduced by 200 Boe per day due to an unexpected cutback at a 3rd party processing plant which reduced throughput from 14 mmcf per day to 4 mmcf per day for 11 days in October and November.

During the fourth quarter we were very active and:

- Drilled five wells (5.0 net) with 100% success resulting in two horizontal Montney gas wells, two vertical Montney gas wells and one Halfway gas well.

- Commenced production from the first two horizontal Montney gas wells. The first horizontal well averaged 2.5 mmcf per day in the first month (November) and is currently producing 1.5 mmcf per day while the second horizontal well averaged 5.0 mmcf per day in its first month (December) and is currently producing 3.5 mmcf per day.

- Recompleted 1 well (1.0 net) uphole in the Halfway formation which has added current net production of 195 Boe per day.

- Completed construction of the pipeline crossing the Peace River and connecting Parkland to the McMahon gas plant on November 3rd at a net cost to Storm of $2.75 million (as budgeted). The lower gas processing fees at the McMahon gas plant will reduce operating costs by approximately $1.5 million per year.

The success of our fourth quarter program has resulted in current production from this area increasing to approximately 3,600 Boe per day, which equates to raw gas throughput of 21 to 22 mmcf per day. This has filled our facility to capacity and, as a result, we will be adding a third compressor and twinning part of the gathering system in the first quarter in order to allow for further volume growth from the area. About 55% of our production is being sourced from the seven vertical and three horizontal wells producing from our Montney discovery.

Our activity in 2008 will include:

- Drilling 18 wells (17.5 net) with eight horizontal Montney development wells (8.0 net) and ten vertical wells (9.5 net) targeting the Montney, Halfway and Doig formations. The first of the Montney horizontal wells was tied in at the end of January and in its first month of production is expected to average four to five mmcf per day. The second horizontal has been drilled and the completion with seven fracs is underway.

- Installing the third compressor at our central facility in March to increase raw gas throughput from 22 mmcf per day to 34 mmcf per day.

We will also begin work to identify what is required to further expand or twin our existing facility in early 2009 in order to ensure that production growth from our horizontal development program can continue uninterrupted.
In total, $58 million will be invested in this area during 2008 (90% of Storm's total 2008 capital investment budget).

We have a 100% working interest in our recent Montney discovery which has potential gas in place of 330 BCF (internal Storm evaluation) assuming an areal extent of 5,825 acres (approximately 9 sections), average net pay of 35 metres, and average porosity of 8%. This is lowered from our previous estimate of 350 BCF, primarily due to a reduction in average porosity from 10% to 8%, incorporating data from the additional vertical wells that have been drilled. To date, approximately 60% of the potential gas in place has been delineated with the eight vertical wells we have drilled, and the remaining six vertical wells required to finish delineating the potential gas in place will be drilled in the second half of this year. In addition, one step-out will also be drilled in the first quarter of 2008 to try and expand the potential gas in place, with additional step-out drilling to follow later in the year if this well is successful. We will also drill three vertical wells in 2008 that will test three separate Montney features in the area which have been identified using 3-D seismic. First year average rates are still expected to be 0.4 to 0.5 mmcf per day for vertical wells and 2.5 mmcf per day for horizontal wells. The cost of our first three horizontal wells averaged $4.8 million per well to drill, complete and tie-in, with five fracs having been conducted on each of the first two horizontals and seven fracs on the third horizontal. The completion has been the largest component of the total cost, at $2.5 to $3.0 million per well. On the next several wells, we plan to modify the fluid system in an attempt to reduce the completion cost. Some of these savings will be re-invested in conducting more fracs in each horizontal wellbore, which is expected to improve productivity and reserve recovery.

The upside potential in the Parkland area is significant, with our inventory of opportunities now totaling 38 drilling locations which includes:

- six vertical wells to complete delineation of our Montney discovery and two vertical step-outs which would expand the areal extent if successful.

- three exploratory vertical wells targeting three new Montney features identified with 3-D seismic which will all be drilled in 2008.

- 12 horizontal development wells in our Montney discovery.

- 11 vertical wells targeting extensions to existing Halfway and Doig pools.

- Four vertical infills to improve the recovery factor from the Halfway and Doig formations.

- 11 recompletions on existing producing wells targeting the uphole Halfway, Doig and North Pine formations with most of these contingent on getting approval to commingle production with the current producing formation. The first of these will be done in the first quarter of 2008.

Many of the vertical Montney tests that we drill will also have potential in the uphole Halfway and Doig formations.

In recent months, there has been considerable interest in the development potential of the Montney formation, particularly using multi-frac horizontal wells. This has been evidenced by land sale prices in the final months of 2007 which have been as high as $15,000 per hectare or $6,000 per acre in the area. Our recent development activities and reserve recognition have been focused on our 2007 discovery, which, based on drilling to date, comprises an approximate nine section area. Storm's total land position on the Montney fairway is larger than this and totals approximately 90 sections with 15 sections added during 2007 through swaps, farm-ins and Crown land sales. The three exploratory vertical wells to be drilled in 2008 will help us further evaluate our undeveloped Montney acreage; however, we recognize Montney prospectivity to be uneven and that our favourable results thus far will not be repeatable over our entire land position.

Peace River Arch Area, North East British Columbia and North West Alberta

Production from this core area averaged 2,320 Boe per day in the fourth quarter and 2,565 Boe per day for the year. Current production is approximately 2,100 Boe per day.

During the fourth quarter, we recompleted one standing well (0.4 net) resulting in net incremental production of 30 Boe per day.

In 2008, we plan to drill two wells (1.8 net) at Clairmont to evaluate separate Montney leads which have been identified using 3-D seismic. If successful, the Montney formation would be developed with horizontal wells in 2009 at the earliest.

Our activity levels in this area have fallen off over the past six months and will continue to do so in 2008 as a result of Alberta's proposed New Royalty Framework ('NRF') and because we are directing as much of our available capital into the lower risk and higher return Montney development at Parkland.

Cabin-Kotcho-Junior, North East British Columbia

Net production from this area averaged 830 Boe per day in the fourth quarter and 1,010 Boe per day for the year. Production in the quarter was reduced by 200 Boe per day due to pipeline failures at two wells. Both pipelines have now been repaired and current production is approximately 950 Boe per day.

We will not be active here this winter as we are directing our capital into the lower risk and higher return Montney development at Parkland.

Surmont Oil Sands Leases, Alberta

McDaniel & Associates Consultants Ltd. prepared an estimate of the bitumen contingent resources as of July 1, 2007 associated with Storm's 3,840 acres (6 sections) of oil sands leases in the Surmont area. The result of this evaluation was a best case estimate of discovered bitumen in place, exploitable using a Steam-Assisted-Gravity Drainage (SAGD) process , of 165 million barrels with the contingent bitumen resources recoverable using SAGD process estimated to be 56 million barrels. Approximately 4.5 sections of Storm land were included in the evaluation for SAGD potential while an additional 1.5 sections remain prospective (undiscovered) due to a lack of well control.

This winter, we will drill four test holes in an attempt to further evaluate and expand the discovered bitumen in place on to those lands which were considered prospective (undiscovered). 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 using a conventional SAGD project. The first two wells have been drilled and have estimated net pays of 25 to 30 metres, considerably thicker than the 15.3 metres of average net pay recognized as a best estimate by McDaniel & Associates Ltd.

STORM VENTURES INTERNATIONAL INC.

Storm owns 4.3 million shares or 13% of the common shares of Storm Ventures International ("SVI"), a Calgary based, private energy company focused on unconventional and international exploration and exploitation opportunities. This share position has a value of $21.5 million or $0.46 per fully diluted Storm share using the price of $5 per share from SVI's last equity issue in December, 2006.

SVI is active in the UK sector of the North Sea through its affiliate, Silverstone Energy Limited. During the second quarter of 2007, Silverstone raised £46 million (GBP) or Cdn $97 million to fund ongoing activities which reduced SVI's ownership position from 50% to 37%. Silverstone has three new pool gas discoveries in the large, 200,000 acre V Fields area which have total potential gas in place of 315 BCF (100% working interest) with the completion and tie-in of one of these, the Viking Lx gas discovery, expected in the last quarter of 2008. The cash flow provided by this discovery will be used to fund the tie-in of the remaining two discoveries in 2009 and 2010 and to drill additional wells to continue evaluating the 14 exploration prospects identified to date. The next well will be drilled in mid-2008 which will target a prospect with potentially 100 BCF of gas in place. In the Central North Sea Quad 9/Gryphon area, Silverstone participated on a farm-in basis in drilling the Mermaid oil prospect in December 2007, however, this well was unsuccessful. Silverstone will also participate in drilling a well in mid-2008 targeting a heavy oil prospect, which has been farmed out (Silverstone paying 10% of the cost for a 30% working interest). Silverstone expects to fund the 2008 program using its year end cash position of £40 million plus term debt of £30 million which will be provided upon successful completion of the Viking Lx discovery.

In Tunisia, SVI operates 2.5 million acres on five blocks of onshore and offshore lands. An onshore well (71% interest) will be drilled in the first half of 2008 that will test a large Ordovician structure in the Remada Sud permit. This is a tight reservoir that is likely to require fracture stimulation to prove commerciality however, the upside potential is greater than 0.5 TCF of gas in place if successful. In the 100% interest Jenein block, subject to securing equipment, a well will be drilled targeting light oil from the Silurian Acacus formation later in 2008 which will test one of three leads identified from a 400 square kilometer 3-D survey recorded in 2007. Significant discoveries have recently been announced in offsetting blocks. Offshore in the Gulf of Hammamet, 415 km2 of marine 3-D seismic has been recorded and is being interpreted with a view to drilling in 2009 (50% interest). The Hammamet block offsets eight existing pools containing 25 to 300 million barrels of oil in place. Also offshore, SVI recently acquired a 66% working interest in the Cosmos Sud permit and a 100% working interest in the Yasmin permit. Cosmos Sud has an estimated 20 million barrels of light oil in place which tested over 5,000 barrels per day and is being evaluated for development in 2009 using a purpose built vessel converted to an FPSO (floating production, storage and offloading) that is intended to be used to exploit small offshore discoveries.

RESERVES AT DECEMBER 31, 2007

Storm's year-end reserve evaluation effective December 31, 2007 was prepared by Paddock Lindstrom & Associates Limited ('Paddock'). Paddock has evaluated all of Storm's crude oil, NGL and natural gas reserves. The Paddock price forecast at December 31, 2007 was used to determine all estimates of future net revenue (also referred to as net present value or NPV). Storm's Reserves Committee, comprised of independent and appropriately qualified directors, has reviewed and approved the evaluation prepared by Paddock.

Highlights

- Total proved reserves grew by 32% to 12.60 million Boe (Mmboe) at December 31, 2007, an increase of 27% on a per share basis from the year earlier period (using basic shares outstanding during each year).

- Total proved plus probable reserves grew by 53% to 20.48 Mmboe at December 31, 2007, an increase of 46% on a per share outstanding basis from the year earlier period (using basic shares outstanding during each year).

- Total proved plus probable reserves were increased by 4.4 Boe for each Boe that was produced during 2007 (335% reserve replacement on a total proved plus probable basis).

- The total proved finding and development cost as per NI 51-101 requirements was $17.41 per Boe and the total proved plus probable finding and development cost as per NI 51-101 requirements was $10.77 per Boe. Changes to future development costs (FDC) of properties were included in the calculation and the effect of acquisitions, divestitures, and revisions have been excluded. The comparable amounts for the prior year period were $15.04 and $12.34 per Boe.

- The all-in cost for adding reserves was $21.40 per Boe on a total proved basis and $13.64 per Boe on a total proved plus probable basis. The all-in calculation reflects the result achieved by Storm's entire capital investment program since it takes into account the effect of acquisitions, dispositions, revisions, and the change in future development costs. The comparable amounts for the prior year period were $20.65 and $15.78 per Boe.

- Total proved plus probable net present value discounted at 10% before tax amounted to $369 million, an increase of 53% year over year which was accomplished despite an 8% decrease in the forecast AECO natural gas price used for the first two years of the evaluation.

- Acquisitions net of dispositions added 525 Mboe of proved reserves and 326 Mboe of proved plus probable reserves at a cost of $24.5 million. On a per Boe basis, acquisitions net of dispositions added reserves at a cost of $46.57 for proved reserves and $63.36 for proved plus probable reserves after including the effect of changes to FDC in the calculation. This increased the all-in cost of adding reserves by 15% on both a total proved and total proved plus probable basis. All of the 2007 acquisitions were at our core Parkland property and were done to increase our exposure to the growing upside potential of the area.

- The Montney discovery at Parkland was assigned 4.42 Mmboe of proven reserves and 8.95 Mmboe of proven plus probable reserves which is based on recognized gas in place being 100.6 BCF and a 50% recovery factor. This is less than one-third of the potential gas in place determined by Storm using existing well control, geological mapping, and 3-D seismic. This included four proven undeveloped and four probable additional Montney horizontal gas wells which were assigned reserves totaling 2.14 Mmboe on a proven basis and 6.02 Mmboe on a proved plus probable basis along with FDC of $34.1 million. Storm plans to drill all eight of these proven undeveloped and probable additional Montney horizontal gas wells in 2008. Three of these horizontal wells will be drilled, completed and tied in by the end of the first quarter with two of them already having already been drilled.

- Proved producing reserves represent 73% of total proved reserves (84% last year) and 45% of total proved plus probable reserves (60% last year). The proportion of proved producing reserves declined from last year as a result of the reserves assigned to the four proved undeveloped and four probable additional horizontal gas wells in our Montney discovery at Parkland.

The recycle or reinvestment ratio was 1.8 times in 2007 using a cash flow netback of $24.65 per Boe and the all-in total proved plus probable finding, development, and acquisition cost of $13.64 per Boe (includes the effect of future development capital, acquisitions, dispositions and revisions).



Gross Company Interest Reserves as at December 31, 2007
(Before deduction of royalties payable, not including royalties receivable)

--------------------------------------------------
Light Crude Sales NGLs 6:1 Oil
Oil Gas Equivalent
(Mbbls) (mmcf) (Mbbls) (Mboe)
--------------------------------------------------
Proved Producing 551 46,899 773 9,141
Proved Non-Producing 0 2,601 31 465
--------------------------------------------------
Total Proved Developed 551 49,500 804 9,605

Proved Undeveloped 355 13,605 368 2,991
--------------------------------------------------
Total Proved 906 63,105 1,172 12,596

Probable Additional 427 102,624 867 7,881
--------------------------------------------------
Total Proved plus Probable 1,333 67,663 2,039 20,476
--------------------------------------------------
--------------------------------------------------



Gross Company Reserve Reconciliation for 2007
(Gross company interest reserves before deduction of royalties payable)

----------------------------
6:1 Oil Equivalent (Mboe)
Proved
Total Probable plus
Proved Probable
----------------------------
December 31, 2006 -- Opening Balance 9,545 3,835 13,380
Acquisitions 830 221 1,051
Revisions - existing properties (301) (569) (870)
Discoveries 5,062 4,855 9,917
Extensions 0 0 0
Dispositions (305) (420) (725)
Economic factors -- increased natural gas
shrinkage (1) (127) (42) (169)
----------------------------
Production (2,108) 0 (2,108)
----------------------------
December 31, 2007 -- Closing Balance 12,596 7,880 20,476
----------------------------
----------------------------

(1) Redirecting Parkland area gas volumes to the McMahon gas plant resulted
in increased shrinkage being applied to raw gas volumes, however, this was
offset by an increase in heat content (resulting in a higher gas price) and
no change to the economic value of the reserves.



Total Proved Finding & Development Cost - per NI 51-101

3 YEAR
2007 2006 TOTAL
----------------------------------------------------------------------------
Capital expenditures excluding acquisitions
and dispositions-$'000 $ 69,287 $ 56,272 $ 167,011

Net change from previously allocated future
development capital - $'000 16,641 2,057 (13,654)
--------- -------- ----------
Total capital including the net change in
future capital - $'000 $ 85,928 $ 58,329 $ 153,357

Reserve additions excluding acquisitions,
dispositions and revisions - MBoe 4,935 3,879 11,404

Total Proved Finding and Development Costs -
per Boe $ 17.41 $ 15.04 $ 13.45
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Total Proved Plus Probable Finding & Development Cost -- per NI 51-101

3 YEAR
2007 2006 TOTAL
----------------------------------------------------------------------------
Capital expenditures excluding acquisitions &
dispositions-$'000 $ 69,287 $ 56,272 $ 167,011

Net change from previously allocated future
development capital - $'000 35,685 6,976 38,660
--------- -------- ---------

Total capital including the net change in
future capital - $'000 $ 104,972 $ 63,248 $ 205,671

Reserve additions excluding acquisitions,
dispositions & revisions - MBoe 9,748 5,127 18,145

Total Proved plus Probable Finding and
Development Costs - per Boe $ 10.77 $ 12.34 $ 11.33
----------------------------------------------------------------------------
----------------------------------------------------------------------------



All In Total Proved Finding, Development & Acquisition Cost
- including FDC, Acquisitions, Dispositions, Revisions

3 YEAR
2007 2006 TOTAL
----------------------------------------------------------------------------
Capital expenditures including acquisitions &
dispositions -$'000 $ 93,772 $ 84,505 $ 220,854

Net change from previously allocated future
development capital - $'000 16,606 2,607 14,169
--------- -------- ---------
Total capital including the net change in
future capital - $'000 $ 110,378 $ 87,112 $ 235,023

Reserve additions including acquisitions,
dispositions & revisions - MBoe 5,159 4,218 11,896

All In Total Proved Finding and Development
Costs - $/Boe $ 21.40 $ 20.65 $ 17.37
----------------------------------------------------------------------------
----------------------------------------------------------------------------

All In Total Proved Plus Probable Finding, Development & Acquisition Cost
- including FDC, Acquisitions, Dispositions, Revisions

3 YEAR
2007 2006 TOTAL
----------------------------------------------------------------------------
Capital expenditures including acquisitions and
dispositions -$'000 $ 93,772 $ 84,505 $ 220,854

Net change from previously allocated future
development capital - $'000 31,794 10,176 37,969
--------- -------- ---------
Total capital including the net change in
future capital - $'000 $ 125,566 $ 94,681 $ 258,823

Reserve additions including acquisitions,
dispositions and revisions - MBoe 9,204 5,999 18,308

All In Total Proved plus Probable Finding and
Development Costs - $/Boe $ 13.64 $ 15.78 $ 14.14
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Reserve revisions can mainly be attributed to newer wells that underperformed with respect to the initial reserve estimate which was based on volumetrics and offset well performance.

Total exploration and development costs incurred in the most recent financial year and the change during that year in estimated future development costs, generally will not reflect the total cost of reserve additions in that year.

Net Present Value Summary (before tax) as at December 31, 2007

Benchmark oil and NGL prices used are adjusted for quality of oil or NGL produced and for transportation costs.

The calculated NPVs include a deduction for estimated future well abandonment costs.



DIS- DIS- DIS- DIS-
UN- COUNTED COUNTED COUNTED COUNTED
DISCOUNTED AT 5% AT 10% AT 15% AT 20%
$ '000 $ '000 $ '000 $ '000 $ '000
------------------------------------------------------------
Proved
Producing $ 289,534 $ 225,821 $ 189,780 $ 165,984 $ 148,793
Proved Non-
Producing 12,335 10,113 8,616 7,534 6,709
------------------------------------------------------------
Total Proved
Developed 301,869 235,934 198,396 173,518 155,502
Proved
Undeveloped 102,172 67,395 50,206 39,691 32,462
------------------------------------------------------------
Total Proved 404,041 303,329 248,602 213,209 187,964
Probable
Additional 294,402 169,923 120,401 93,436 76,022
------------------------------------------------------------
Total Proved
plus
Probable $ 698,443 $ 473,252 $ 369,003 $ 306,645 $ 263,986
----------------------------------------------------------------------------
----------------------------------------------------------------------------



Paddock Lindstrom & Associates Ltd. Escalating Price Forecast as at
December 31, 2007

---------------------------------------------------------------------------
WTI Edmonton Henry Hub AECO
Crude Oil Light Crude Oil Natural Gas Natural Gas Propane Butane
$US/bbl $CDN/bbl $US/mmbtu $CDN/mmbtu $CDN/bbl $CDN/bbl
---------------------------------------------------------------------------
2008 90.00 88.75 7.75 6.80 53.25 71.00
2009 88.00 86.73 8.25 7.28 52.04 69.38
2010 84.00 82.70 8.42 7.43 49.62 66.16
2011 82.00 80.67 8.58 7.58 48.40 64.54
2012 80.00 78.65 8.75 7.73 47.19 62.92
---------------------------------------------------------------------------
---------------------------------------------------------------------------





Storm Wellhead Oil Storm Wellhead Gas Storm Wellhead
Price Price and PLA NGL Price
PLA Forecast Price Forecast Price PLA Forecast Price
$CDN/bbl $CDN/mcf $CDN/bbl
----------------------------------------------------------------------------
2007 Actual 75.82 6.85 66.44
2008 PLA Forecast 82.64 7.16 76.11
2009 PLA Forecast 80.42 7.72 74.80
2010 PLA Forecast 76.27 7.86 71.15
2011 PLA Forecast 74.16 8.02 69.30
2012 PLA Forecast 72.07 8.18 67.49
----------------------------------------------------------------------------
----------------------------------------------------------------------------


2008 OUTLOOK

Investment on exploration and development activities in 2008 is expected to total $65 million with over 90% of this invested in the Parkland area of north-eastern British Columbia. We plan to use our cash flow to fund the majority of this investment assuming a gas price of CDN $6.25/GJ at AECO, an oil price of CDN $78.00/bbl, operating costs of $6.50 per Boe, a royalty rate of 22%, and cash general and administrative costs of $1.00 per Boe. The 2008 capital investment plan includes a drilling program totaling 24 wells (23.3 net) with 18 (17.5 net) at Parkland including eight horizontal wells, four (4.0 net) test holes at Surmont and two (1.8 net) at Clairmont in the Grande Prairie area. In the first quarter, we expect to invest $26 MM in drilling 11 wells (10.5 net) and installing the third compressor at Parkland.

This activity is forecast to result in production growing from approximately 6,500 to 7,000 Boe per day in the first quarter and to 8,000 Boe per day by the end of 2008. Guidance on average annual production is not being provided due to the uncertainty associated with predicting the timing of drilling, completion and tie-in activities, all of which can be affected by weather related delays, availability of equipment and facility maintenance

As production from the Parkland area increases from 35% of total corporate production in 2007 to an estimated 70% by the end of 2008, we expect an improvement in our corporate netback given that:

- Operating costs will decline by $1.5 million per year as a result of the tie-in of Parkland to the McMahon gas plant.

- NGL production should increase with NGL/condensate recovery from Montney wells being 30 barrels per mmcf and with production from the Montney formation forecast to be 50% of our corporate production by the end of 2008 versus 5% in 2007.

- The heat content of the Parkland sales gas stream has improved by approximately 5% from the 2007 average.

Excluding the impact of commodity prices, the improvements detailed above have the potential to increase our corporate netback by approximately 10% to 15% by the end of 2008.

With respect to Alberta's proposed New Royalty Framework ('NRF'), we provided a summary of the impact on Storm in our November 13, 2007 press release reviewing our third quarter results. Unfortunately, nothing appears to have changed with respect to the proposed NRF, except that it is more and more evident that the changes to the royalty structure are politically motivated and are not based on any kind of realistic economic analysis. Although the resource is owned by Albertans, it has no value unless it can be produced and sold and this requires that oil and gas producers get a fair return on the billions of dollars of capital that they have to invest in creating the intellectual knowledge, in drilling the wells and in constructing the infrastructure needed to extract and sell the resource. As shown below, with our current cost structure, the 20% increase in royalties from the proposed NRF excessively penalizes new wells and virtually eliminates our profit at current commodity prices:



Current Alberta
Royalty Proposed Alberta
Structure NRF
2007 selling price, per Boe $ 45.10 $ 45.10
2007 royalties, per Boe $ 9.65 $ 17.14
Royalty Rate (21%) (38%)(1) (2)
2007 operating costs, per Boe $ 7.07 $ 7.07
2007 transportation cost, per Boe $ 2.35 $ 2.35
2007 cash G&A, per Boe $ 1.10 $ 1.10
2007 interest expense, per Boe $ 1.81 $ 1.81
3 year average all-in cost to add proved
plus probable reserves, per Boe $ 14.14 $ 14.14
----- -----
2007 profit margin, per Boe $ 8.98 $ 1.49
(20% of selling (3% of selling
price) price)


1) Storm is primarily a natural gas producer so, Storm's actual 1st year average gas well rate was used for the quantity component which is 600 mcf per day using the 18 gas wells we have drilled and brought on production in Alberta since 2004.


2) Storm is primarily a natural gas producer so, the average 2007 AECO gas price of $6.22 per GJ was used for the price component.

The above information has not been 'massaged' or distorted in any way and can quickly and easily be extracted from our 2007 year end audited financial statements and management's discussion and analysis. With very little profit to show for investing and putting our capital at risk in Alberta, we have had no choice but to significantly reduce our planned level of capital investment in the province.

We are fortunate in having been able to build an inventory of opportunities which exceeds what we are able to fund with our cash flow in any given year. In 2007 and 2008, we have directed most of our capital investment into drilling the higher return and lower risk vertical delineation and horizontal development wells in our Montney discovery at Parkland, British Columbia. As we have drilled more wells, our confidence level in the ultimate potential of this area has continued to increase. On the 90 sections of land we own within the Montney fairway, there is now an inventory of two and possibly three years of horizontal drilling activity ahead of us in our new pool discovery, which we expect will continue to grow as we drill step-out wells around our discovery and as we test several other separate Montney leads in the area with vertical wells in 2008.

In closing, I would like to thank our employees and directors for their efforts in making 2007 another successful year and our shareholders for their continued support. 2008 is shaping up to be as exciting as 2007 for Storm and we look forward to updating our shareholders on our progress throughout the year.

Respectfully,



Brian Lavergne,
President and Chief Executive Officer
February 25, 2008


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND OPERATING RESULTS FOR THE YEAR AND THREE MONTHS ENDED DECEMBER 31, 2007

Set out below is management's discussion and analysis of financial and operating results for Storm Exploration Inc. ("Storm" or the "Company") for the year and three months ended December 31, 2007. It should be read in conjunction with the audited consolidated financial statements 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 February 25, 2008.

Introduction and Limitations:

Basis of Presentation -- Financial data presented below have largely been derived from the Company's consolidated financial statements for the year and three months ended December 31, 2007, prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). Specific accounting policies adopted by the Company as applicable to its business are set out in footnote 1 to the 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, 2007, Storm adopted with prospective effect certain new accounting standards introduced as part of GAAP as follows:

- Comprehensive Income:

Comprehensive income is the sum of net income for the reporting period plus certain other measurements of value that cannot be recognized currently in the unaudited statement of income and retained earnings. Such other measurements may include items such as an unrealized holding gain or loss from securities held for sale, unrealized gains or losses from hedging and foreign currency translation gains or losses. Although such items do not satisfy criteria necessary for inclusion in the Company's statement of income and retained earnings, largely because they have not been realized, their identification and measurement provide relevant additional information about the financial condition of the Company. At December 31, 2007, there were no items eligible for inclusion in the Company's consolidated statement of comprehensive income.

- Financial Instruments:

The new disclosure standard establishes criteria for identifying and measuring the carrying amount of financial assets and liabilities and derivative instruments. Financial assets and liabilities include accounts receivable and payable, bank loans, and securities held for sale. The intent of the disclosure is to establish a carrying amount for such assets and liabilities equal to their fair value, which is established by reference to current market values or appropriate discounting.

Additional details about such accounting changes and their effect on the Company are described in the footnotes to the consolidated financial statements for the year ended December 31, 2007.

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, most of which are beyond the Company's control, including but not limited to the effect of general economic conditions, industry conditions, volatility of commodity prices, changes in taxation and royalty regimes, currency fluctuations, imprecision of reserve estimates, relationships with parties involved with or affected by the Company's activities, environmental risks, competition from other industry participants, 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.

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', and 'netbacks' and 'netbacks per Boe' are not defined by GAAP in Canada and are regarded as non-GAAP measures. Measurement of funds from operations is detailed on the Consolidated Statements 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 commodity and 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

--------------------------------------------------------------------------
Year ended December Year Ended December 31,
31, 2007 2006
--------------------------------------------------------------------------
Natural gas (Mcf/d) 30,296 23,752
--------------------------------------------------------------------------
Natural gas liquids (Bbls/d) 230 234
--------------------------------------------------------------------------
Crude oil (Bbls/d) 496 527
--------------------------------------------------------------------------
Total (Boe/d) 5,775 4,720
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Total Boe production in 2007 increased by 22% when compared to 2006. The year-over-year increase in production came from Storm's successful drilling and exploitation programs in the Peace River Arch area of British Columbia, coupled with an acquisition completed in June 2007. Production per million shares outstanding for 2007 averaged 133 Boe per day, compared to 114 Boe per day for 2006, an increase of 17 %.

Production at the date of this report approximated 6,600 Boe per day. Average annual production has grown 660% since inception of oil and gas operations in mid 2004.



Production Profile and Per Unit Prices

----------------------------------------------------------------------------
Year ended December 31, 2007 Year Ended December 31, 2006
----------------------------------------------------------------------------
Average Average
Selling Price Percentage Selling Price
Percentage of Before of Total Before
Total Boe Transportation Boe Transportation
Production Costs Production Costs
----------------------------------------------------------------------------
Natural gas -
Mcf 87% $ 6.85 84% $ 6.57
----------------------------------------------------------------------------
Natural gas 4% $ 66.44 $ 65.42
liquids - Bbl 5%
----------------------------------------------------------------------------
Crude oil -
Bbl 9% $ 75.82 11% $ 71.17
----------------------------------------------------------------------------
Per Boe $ 45.10 $ 44.24
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Per unit prices in the table above do not include any gains from hedging of natural gas prices.

Storm's production base is largely natural gas and associated liquids. In addition, Storm's prospect inventory is largely focused on natural gas, and it is unlikely that in the short and medium term that crude oil will grow as a percentage of Boe production. The increase in natural gas as a percentage of total Boe production in 2007 is a result of a 28% increase in Storm's average natural gas production in 2007 and the mid year disposition of certain oil properties.

The Company's realized gas price, before hedging gains, increased 4 % in 2007 to $6.85 per Mcf from $6.57 per Mcf in 2006. The Company sells natural gas in both British Columbia and Alberta, with pricing being based on Station #2 in British Columbia and AECO in Alberta. In late 2007, as a result of the commissioning of the Company's Peace River pipeline, natural gas from the Parkland area was sold with reference to Station #2 instead of AECO pricing. In 2008, growth in gas production is expected to come largely from British Columbia and is likely to be priced according to the Station #2 index. The 2007 daily index price at AECO averaged $6.27 per GJ and at Station #2 averaged $6.06 per GJ.



Pricing volatility for natural gas prevailed throughout 2007. Realized
prices per Mcf, before hedging gains, for each quarter are as follows:

----------------------------------------------------------------------------
Quarter Ended 2007 2006
----------------------------------------------------------------------------
March 31 $ 7.75 $ 7.62
----------------------------------------------------------------------------
June 30 $ 7.46 $ 6.03
----------------------------------------------------------------------------
September 30 $ 5.47 $ 5.57
----------------------------------------------------------------------------
December 21 $ 6.76 $ 7.11
----------------------------------------------------------------------------
Average for Year $ 6.85 $ 6.57
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Natural gas prices have been influenced by a number of factors outside of the Company's and industry control. Gas storage was at a historically high level throughout 2007; imports of liquefied natural gas have supplemented and competed for markets with Canadian and United States production; and the unprecedented and rapid increase in the value of the Canadian dollar, when compared to its United States counterpart, has further depressed Canadian dollar denominated prices. Although prices have improved recently in response to seasonal demand, no other market conditions have emerged that would suggest that pricing for natural gas will show permanent improvement or become more stable in 2008.



Production by Area - Boe per Day
-------------------------------------------------------------
2007 2006
-------------------------------------------------------------
Peace River Arch - Alberta 2,052 1,899
-------------------------------------------------------------
Peace River Arch - British Columbia 2,592 1,278
-------------------------------------------------------------
Cabin-Kotcho-Junior - British Columbia 1,010 1,076
-------------------------------------------------------------
Red Earth - Alberta 62 250
-------------------------------------------------------------
Other - Alberta 59 217
-------------------------------------------------------------
Total 5,775 4,720
-------------------------------------------------------------
-------------------------------------------------------------

The above sets out the average production from each of Storm's core areas.
Production for British Columbia made up approximately 62% of the total.



Production Revenue
------------------------------------------------------
2007 2006
------------------------------------------------------
Natural gas $ 75,776 $ 56,936
------------------------------------------------------
Natural gas liquids 5,566 5,595
------------------------------------------------------
Crude oil 13,726 13,690
------------------------------------------------------
Hedging gains 2,551 2,905
------------------------------------------------------
Revenue from product sales 97,619 79,126
------------------------------------------------------
Royalty income 672 1,039
------------------------------------------------------
Total Production Revenue $ 98,291 $ 80,165
------------------------------------------------------
------------------------------------------------------

Royalty income for each quarter is derived from ownership of overriding
royalties, largely in the Peace River Arch.

A reconciliation of revenue from product sales between 2007 and 2006 is as
follows:



----------------------------------------------------------------------------
Natural
Natural Gas Crude Hedging
Gas Liquids Oil Gains Total
----------------------------------------------------------------------------
Revenue from product
sales 2006 $ 56,936 $ 5,595 $ 13,690 $ 2,905 $ 79,126
----------------------------------------------------------------------------
Effect of increased
(decreased) production
year-over-year 16,843 (123) (794) - 15,926
----------------------------------------------------------------------------
Effect of increased
product prices
year-over-year 1,997 94 830 - 2,921
----------------------------------------------------------------------------
Decrease in natural gas
hedging gains - - - (354) (354)
----------------------------------------------------------------------------
Revenue from product
sales 2007 $ 75,776 $ 5,566 $ 13,726 $ 2,551 $ 97,619
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Hedging:

Storm had no hedges in place at December 31, 2007. However, in the first quarter of 2007, the Company realized hedging gains on natural gas contracts of $2.6 million, or $1.21 per Boe, or $0.23 per Mcf. During 2006, Storm realized a hedging gain of $2.9 million, or $1.69 per Boe, or $0.34 per Mcf. Storm followed hedge accounting rules with respect to hedges in place in both 2007 and 2006. However, any future hedges entered into by Storm may not satisfy hedge accounting criteria; correspondingly, the Company may be obliged to follow mark-to-market rules.



ROYALTIES
-----------------------------------------------------
2007 2006
-----------------------------------------------------
Charge for period $ 20,341 $ 16,876
-----------------------------------------------------
Royalties as a percentage of
revenue from product sales before
hedging gains 20.2% 19.9%
- Crown
- Other 1.2% 2.2%
-----------------------------------------------------
Total 21.4% 22.1%
-----------------------------------------------------
-----------------------------------------------------
Per Boe $ 9.65 $ 9.80
-----------------------------------------------------
-----------------------------------------------------


In late 2007, the provincial government of Alberta announced broadly based changes to the provincial Crown royalty structure. The changes are complex and final details are not yet available; nevertheless, the expected result will be that, effective January 1, 2009, total royalties paid by producers to the Alberta provincial government will increase considerably. The new royalty structure reflects both well productivity and product pricing. Higher productivity wells, primarily new wells, face the greatest increases; however, lower productivity wells, including some of Storm's production, may benefit from lower royalty rates. Storm has endeavoured to measure the effect of the proposed changes to the provincial royalty regime in Alberta. Observations are as follows:

- in 2007, approximately 38% of Storm's production came from Alberta, with the remaining 62% from British Columbia

- looking into 2008 and beyond, Storm's capital programs will be focused on the exploitation of its largely natural gas properties in the Peace River Arch area of north eastern British Columbia, which, assuming operational success, will result in Alberta revenues falling as a percentage of total revenue. In addition, natural declines will further reduce Storm's Alberta based production. 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 Boe production.

- the allocation of capital by the Company to projects outside of Alberta is not exclusively in response to the changed Crown royalty regime. The Company's British Columbia projects offer the highest return of any from Storm's project inventory.

- for illustration purposes, the Company has calculated the effect of increased Crown royalties using certain representative Alberta properties as follows:



----------------------------------------------------------------------------
Royalty Rate as a Percentage
Percentage of Decrease in
Production Per Boe
Revenue Netback
----------------------------------------------------------------------------
Current royalty rate 22.6% -
----------------------------------------------------------------------------
New royalty rates applied to
existing wells 30.1% (17.0%)
----------------------------------------------------------------------------
New royalty rates on newly drilled wells
using product prices realized in 2007 37.6% (27.0%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The hypothetical nature of these calculations should be recognized. For example, the use of current pricing is unlikely to match future prices actually realized. In addition, by January 1, 2009, production declines may result in lower royalty rates being applied to Storm's existing wells. Also, only a limited number of wells will be drilled in Alberta by Storm in the short and medium term; correspondingly, the rates applicable to newly drilled wells in Alberta, will, quite simply, not be realized.



PRODUCTION COSTS

------------------------------------------------------------
2007 2006
------------------------------------------------------------
Charge for period $ 14,908 $ 12,188
------------------------------------------------------------
Percentage of revenue from product sales
before hedging gains 15.7% 16.0%
------------------------------------------------------------
Per Boe $ 7.07 $ 7.07
------------------------------------------------------------


Total production costs for 2007 increased over production costs for 2006 in response to growing product sales. The completion of the Peace River pipeline in early November 2007 allows the Company to deliver natural gas to the McMahon plant near Fort St John, British Columbia, which has resulted in a reduction in gas processing costs, the full benefit of which will be realized throughout 2008.

Storm's cash costs per Boe, which comprise production, cash general and administrative costs and interest, amounted to $9.98 for 2007, compared to $9.40 for 2006. Higher interest costs in 2007 resulted in higher cash costs per Boe.



TRANSPORTATION COSTS

----------------------------------------------------------
2007 2006
----------------------------------------------------------
Charge for period $ 4,959 $ 3,795
----------------------------------------------------------
Percentage of revenue from product
sales before hedging gains 5.2% 4.8%
----------------------------------------------------------
Per Boe $ 2.35 $ 2.20
----------------------------------------------------------
----------------------------------------------------------


Increased charges for transportation reflect increasing production levels. Minor increases in costs per Boe in 2007 when compared to the prior year, are in part due to increases in transportation costs for crude oil and natural gas liquids resulting from cost reallocations at Storm's new Saddle Hills oil battery, and increased production at Parkland.



FIELD NETBACKS

Details of netbacks per commodity unit are as follows:
----------------------------------------------------------------------------
2007
----------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($/Bbl) ($/Bbl) ($/Mcf) ($/Boe)
----------------------------------------------------------------------------
Product sales $ 75.82 $ 66.44 $ 6.85 $ 45.10
----------------------------------------------------------------------------
Hedging gains - - 0.23 1.21
----------------------------------------------------------------------------
Royalty income 0.54 0.60 0.05 0.32
----------------------------------------------------------------------------
Royalties (12.09) (17.67) (1.51) (9.65)
----------------------------------------------------------------------------
Production costs (8.10) - (1.22) (7.07)
----------------------------------------------------------------------------
Transportation (3.03) (3.97) (0.37) (2.35)
----------------------------------------------------------------------------
Field netback $ 53.14 $ 45.40 $ 4.03 $ 27.56
----------------------------------------------------------------------------
----------------------------------------------------------------------------



2006
----------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($/Bbl) ($/Bbl) ($/Mcf) ($/Boe)
----------------------------------------------------------------------------
Product sales $ 71.17 $ 65.42 $ 6.57 $ 44.24
----------------------------------------------------------------------------
Hedging gains - - 0.34 1.69
----------------------------------------------------------------------------
Royalty income 0.81 0.74 0.09 0.60
----------------------------------------------------------------------------
Royalties (11.40) (17.74) (1.52) (9.80)
----------------------------------------------------------------------------
Production costs (6.24) - (1.27) (7.07)
----------------------------------------------------------------------------
Transportation (1.40) (1.93) (0.39) (2.20)
----------------------------------------------------------------------------
Field netback $ 52.94 $ 46.49 $ 3.82 $ 27.46
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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

Storm's netback in 2007 increased marginally when compared to 2006. A higher price per Boe in 2007 was largely offset by lower hedging gains.



INTEREST
----------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------
Total Charge $ 3,811 $ 1,966
----------------------------------------------------------------------------
Per Boe $ 1.81 $ 1.14
----------------------------------------------------------------------------


Interest is paid on Storm's revolving bank facility. Increased interest costs in 2007 correspond to increased borrowings required to fund a property acquisition effective June 2007. In addition, in 2007, the Company experienced year-over-year increases in debt service costs. However, in December 2007 interest rates began to fall and the Company has benefited from lower rates in the first part of 2008.



GENERAL AND ADMINISTRATIVE COSTS

Total costs:

---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------
Gross general and administrative costs $ 5,735 $ 4,589
---------------------------------------------------------------------------
Capital and operating recoveries (3,406) (2,546)
---------------------------------------------------------------------------
Net general and administrative costs $ 2,329 $ 2,043
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Costs per Boe:

---------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------
Gross general and administrative costs $ 2.72 $ 2.66
---------------------------------------------------------------------------
Capital and operating recoveries (1.62) (1.47)
---------------------------------------------------------------------------
Net general and administrative costs $ 1.10 $ 1.19
---------------------------------------------------------------------------


Increased gross general and administrative costs for 2007, when compared to 2006, are primarily due to increases in personnel and accommodation costs. Increased costs were offset by increased capital and operating recoveries. In particular, the construction of the Peace River pipeline, in the second half of 2007, resulted in significant capital recoveries. Major infrastructure projects are not characteristic of Storm's day-to-day operations; correspondingly, capital and operating recoveries in 2007 are high relative to the company's operations, and are unlikely to be sustained in future years. Nevertheless, a growing production base should result in lower net general and administrative costs per Boe in the future.



Storm does not capitalize general and administrative costs.

STOCK BASED COMPENSATION COSTS

----------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------
Total Charge $ 1,232 $ 956
----------------------------------------------------------------------------
Per Boe $ 0.58 $ 0.56
----------------------------------------------------------------------------


Stock based compensation costs are non cash charges which reflect an estimate of 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 charge for future periods will relate to the issue of stock options only.



DEPLETION, DEPRECIATION AND ACCRETION

-------------------------------------------------------
2007 2006
-------------------------------------------------------
Depreciation and depletion $ 34,390 $ 24,593
-------------------------------------------------------
Accretion 462 379
-------------------------------------------------------
Total $ 34,852 $ 24,972
-------------------------------------------------------
Total per Boe $ 16.53 $ 14.49
-------------------------------------------------------
-------------------------------------------------------


The increase in the charge for depletion, depreciation and accretion for 2007 is a consequence of higher production volumes, as the depletion component of the charge is based on a cost per Boe sold in the year.

The year-over-year increase in the charge for depletion and depreciation per Boe is largely attributable to property acquisitions in both 2007 and 2006, when reserves were purchased at a higher cost per Boe than Storm's historical finding costs. Accretion is the increase for the year 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 year ended December 31, 2007, Storm recorded a future income tax charge of $4.8 million compared to $5.9 million for the prior year. 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 used to measured the future income tax obligation for 2007 is 32%, compared to 35% for 2006.

At December 31, 2007, Storm had tax pools carried forward estimated to be $208 million. In June 2006, the Company entered into a flow through share issue, which provided for the renunciation of Canadian Exploration Expense of $15.6 million, and the incurrence of such expenditures by December 31, 2007. The Company considers that the necessary expenditures have been made. In September 2007, the Company issued additional flow through shares for gross proceeds of $15.1 million. The Company is obligated to incur a like amount of Canadian Exploration Expense by December 31, 2008. At December 31, 2007, the Company considers that qualifying expenditures totaling $1.9 million have been incurred.

In addition, Storm has a capital loss in the amount of $10 million available for application against future taxable capital gains.

NET INCOME AND NET INCOME PER SHARE

Net income for 2007 fell to $11.0 million, compared to $11.5 million in 2006. Net income per diluted share fell by $0.02 in 2007, a contributing factor being the issue of additional shares in September 2007.



2007 2006
--------------------------------------------------------
Per diluted Per diluted
share share
--------------------------------------------------------
Net income $ 11,049 $ 0.25 $ 11,505 $ 0.27
--------------------------------------------------------
--------------------------------------------------------


FUNDS FROM OPERATIONS

Funds from operations for 2007 increased by 20% to $51.9 million, or $1.18 per diluted share, compared to $43.3 million, or $1.03 per diluted share for 2006.



2007 2006
---------------------------------------------
Per diluted Per diluted
share share
--------------------------------------------------------
Funds from
operations $ 51,943 $ 1.18 $ 43,297 $ 1.03
--------------------------------------------------------
--------------------------------------------------------


INVESTMENT AND FINANCING

Working Capital

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

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 $10.2 million at December 31, 2007 compared to $6.9 million at December 31, 2006. The working capital deficiency at each year end reflects the Company's preference to act as operator and the seasonality of its field operations. The Company's working capital deficiency is cyclical and is highest at the end of the first quarter of each year and lowest at the end of second quarter. The high working capital deficiency at December 31, 2007 corresponds to the seasonal increase in the Company's field activity in the fourth quarter of each year.



Property and Equipment

Capital costs incurred were as follows:

------------------------------------------------------------
2007 2006
------------------------------------------------------------
Land and lease, net $ 3,860 $ 1,786
------------------------------------------------------------
Seismic 2,997 4,145
------------------------------------------------------------
Drilling and completions 41,102 33,805
------------------------------------------------------------
Facilities and equipment 21,278 16,420
------------------------------------------------------------
Other 168 116
------------------------------------------------------------
Field expenditures 69,405 56,272
------------------------------------------------------------
Property acquisitions 27,578 41,243
------------------------------------------------------------
Property dispositions (3,093) (13,010)
------------------------------------------------------------
Total $ 93,890 $ 84,505
------------------------------------------------------------
------------------------------------------------------------


Bank Debt, Liquidity and Capital Resources

Storm has a revolving borrowing base bank credit facility of $94 million, increased from $66 million at December 31, 2006. The amount drawn on this facility at December 31, 2007 amounted to $74.5 million. Debt, including working capital deficiency, amounted to $84.7 million at December 31, 2007, resulting in a ratio of year end debt to funds from operations for 2007 of 1.6 times compared to 1.3 times in 2006.

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, 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.



Capital programs were funded as follows:

----------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------
Funds from operations $ 51,943 $ 43,297
----------------------------------------------------------------------------
Non cash working capital 3,305 (822)
----------------------------------------------------------------------------
Issue of flow through shares - net of expenses 14,580 18,143
----------------------------------------------------------------------------
Increase in bank indebtedness 24,062 24,887
----------------------------------------------------------------------------
Proceeds on property sales 3,093 11,307
----------------------------------------------------------------------------
---------------------
Funds available for investment $ 96,983 $ 96,812
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Field expenditures $ 69,405 $ 56,272
----------------------------------------------------------------------------
Property acquisitions 27,578 39,540
----------------------------------------------------------------------------
Investment in Storm Ventures International Inc. - 1,000
----------------------------------------------------------------------------
---------------------
Total expenditures $ 96,983 $ 96,812
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Investment

At December 31, 2007, 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. Storm's cash investment in SVI since commencement of oil and gas operations in 2004 totals $3,000,000. Storm has no financial or management commitments to SVI: however, Storm does provide accommodation and administrative services to SVI. Costs incurred by Storm and billed to SVI amounted to $135,000 in 2007 and $169,000 in 2006.

Future Income Taxes

Estimated future income taxes at December 31, 2007 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 assets are as follows:



----------------------------------------------------------------------------
As at Maximum
December 31, Annual
2007 deduction
----------------------------------------------------------------------------
Canadian oil and gas property expense $ 100,861 10%
----------------------------------------------------------------------------
Canadian development expense 44,136 30%
----------------------------------------------------------------------------
Canadian exploration expense (1) 10,971 100%
----------------------------------------------------------------------------
Undepreciated capital cost 51,637 20 - 100%
----------------------------------------------------------------------------
Other 1,989 20%
----------------------------------------------------------------------------
Less: CEE incurred to December 31, 2007 and
renounced to subscribers (1,933)
-----------------------------------------------------------------
---------------
Total $ 207,661
-----------------------------------------------------------------
-----------------------------------------------------------------
Capital losses $ 9,666
-----------------------------------------------------------------
-----------------------------------------------------------------


(1) At December 31, 2007 Storm has renounced an additional $13.1 MM to flow-through share subscribers and is obligated to incur Canadian Exploration Expenses in this amount before December 31, 2008.

Asset Retirement Obligation

Storm's asset retirement obligation increased to $6.9 million at December 31, 2007 from $5.9 million at the end of 2006 and represents the present value of estimated future costs to be incurred to abandon and reclaim the Company's wells and facilities. Changes in amount of the obligation between December 31, 2007 and December 31, 2006 comprise the present value of additional obligations accruing to the Company as a result of field activity and acquisitions during the year, less costs paid in settlement of abandonment obligations, plus the 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
December 31, 2007 December 31, 2006
----------------------------------------------------------------------------
Common shares outstanding - end of year 44,532 42,914
----------------------------------------------------------------------------
Performance warrants - 122
----------------------------------------------------------------------------
Stock options 2,166 1,934
----------------------------------------------------------------------------
-------------------------

Fully diluted common shares - end of year 46,698 44,970
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average common shares - basic 43,449 41,434
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average common shares - diluted 44,132 41,935
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Stock options outstanding are exercisable over five years on various dates beginning September 2005 at prices ranging from $2.60 to $8.57. In December 2007, Storm's Board approved the issue of an additional 230,000 options at a price of $8.27 to directors and certain officers. This issue is subject to future shareholder approval, and has not been included in the table above.



NET ASSET VALUE

An estimate of Storm's net asset value at December 31, 2007 is as follows:

--------------------------------------------------------------------------
December December Percentage
31, 2007 31, 2006 Change
--------------------------------------------------------------------------
Reserves discounted at 10% before tax $369,000 $241,800 53%
--------------------------------------------------------------------------
Undeveloped land, excluding Parkland
area in NE British Columbia (1) 15,800 21,000 (6) -
--------------------------------------------------------------------------
Undeveloped land, Parkland area in NE
British Columbia (2) 34,000 - -
--------------------------------------------------------------------------
Surmont oil sands leases (3) 19,000 - -
--------------------------------------------------------------------------
Seismic (4) 9,600 4,000 140%
--------------------------------------------------------------------------
Investment (5) 21,500 21,500 -
--------------------------------------------------------------------------
Cash proceeds on exercise of stock
options 15,400 9,900 56%
--------------------------------------------------------------------------
Net debt (84,700) (57,300) 48%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net Asset Value $399,600 $240,900 66%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Fully diluted common shares outstanding
(000s) 46,698 44,970 4%
--------------------------------------------------------------------------
Net Asset Value per Common Share $8.56 $5.36 60%
--------------------------------------------------------------------------
--------------------------------------------------------------------------

1. As evaluated by Seaton Jordan & Associates Ltd. as at December 31, 2007.
Undeveloped land position evaluated totaled 178,000 net acres at an average
valuation of $89 per acre.
2. As evaluated internally based on 2007 Crown land sale prices in the
immediate Parkland area. Land position evaluated totaled 51,960 net acres,
at an average valuation of $654 per acre.
3. Based on July 31, 2007 evaluation by McDaniel & Associates Consultants
Ltd. using 8% before tax present value of the best estimate of contingent
resources recoverable using SAGD process.
4. Based on estimated seismic expenditures since July 2004.
5. Based on a private placement completed in December 2006 at $5.00
per share.
6. Total land value at December 31, 2006.


FOURTH QUARTER RESULTS

Storm's summarized financial and operating results for the fourth quarter of
2007, compared to the fourth quarter of 2006, are as follows:



---------------------------------------------------------------------------
Three Months Three Months
Ended Ended
December 31, December 31, Percentage
2007 2006 Change
---------------------------------------------------------------------------
Financial - $
---------------------------------------------------------------------------
Production revenue 25,553 23,590 8%
---------------------------------------------------------------------------
Funds from operations 13,233 12,748 4%
---------------------------------------------------------------------------
Per share - basic 0.30 0.30 -
---------------------------------------------------------------------------
Per share - diluted 0.28 0.29 (3%)
---------------------------------------------------------------------------
Net income 2,852 3,049 (6%)
---------------------------------------------------------------------------
Per share - basic 0.06 0.07 (14%)
---------------------------------------------------------------------------
Per share - diluted 0.06 0.07 (14%)
---------------------------------------------------------------------------
Capital expenditures - net 17,094 13,635 25%
---------------------------------------------------------------------------
Debt, including working capital
deficiency 84,681 57,314 48%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Operations
---------------------------------------------------------------------------
Boe production per day 5,992 5,442 10%
---------------------------------------------------------------------------
Gas production per day - mcf 31,133 28,271 10%
---------------------------------------------------------------------------
NGL production per day - bbls 289 217 33%
---------------------------------------------------------------------------
Oil production per day- bbls 514 513 -
---------------------------------------------------------------------------
Gross wells drilled 6.0 9.0 (33%)
---------------------------------------------------------------------------
Net wells drilled 5.1 5.7 (11%)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Production:

In the fourth quarter of 2007 average Boe per day volumes increased by 10% when compared to the fourth quarter of 2006, and also by 7% when compared to the third quarter of 2007. Production of natural gas amounted to 87% of total Boe production in the fourth quarter of 2007, identical to the fourth quarter of 2006 and compared to 89% in the third quarter of 2007. Production increases in the final quarter of 2007 largely came from additional vertical wells at Parkland and the Company's first two Montney horizontal wells.

Production Revenue:

Production revenue for the fourth quarter of 2007 increased by 8%, when compared to the fourth quarter of 2006, and by 31% when compared to the immediately preceding quarter. Year-over-year, volume increases resulted in production revenue increasing by 10%; offset by hedging gains in 2006 of 2%. Volume growth provided 7% of the 31% increase in production revenue between the fourth and third quarters of 2007 and improved prices the remaining 24%. Hedging gains realized in the final quarter of 2006 totaled $0.8 million, equivalent to $0.32 per Mcf or $1.68 per Boe. There were no hedging transactions in the final quarter of 2007.

Royalties:

Royalties for the fourth quarter of 2007 amounted to $5.3 million, an increase of 4% when compared to the same quarter of 2006 and an increase of 33% compared to the third quarter of 2007. Volume increases largely account for the changes. The royalty rate in the fourth quarter of 2007 was 21%; for the fourth quarter of 2006, 22%; and for the third quarter of 2007, 21%.

Production Costs:

Production costs for the quarter increased by 11% to $3.8 million or $6.86 per Boe when compared to the final quarter of 2006 and by 8% when compared to the third quarter of 2007. Production costs have grown in response to increasing production volumes. Per Boe, production costs were largely the same in the final quarters of both 2007 and 2006, and also in the third quarter of 2007.

Cash costs per Boe, comprising production costs, interest and cash general and administrative costs amounted to $10.30 for the final quarter of 2007, $9.22 for the equivalent quarter of 2006 and $9.48 for the third quarter of 2007. Higher interest costs and seasonally higher general and administrative costs resulted in the quarterly differences.

Transportation Costs:

Transportation costs for the final quarter of 2007 amounted to $1.3 million, an increase of 20% over 2006 and were largely the same in the immediately preceding quarter. Costs per Boe amounted to $2.37 in the fourth quarter of 2007, compared to $2.18 in the same quarter of 2006 and to $2.49 in the third quarter of 2007.



Field Netbacks:

Details of field netbacks per commodity unit are as follows:

--------------------------------------------------------------
Three Months to December 31, 2007
--------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($/Bbl) ($/Bbl) ($/Mcf) ($/Boe)
--------------------------------------------------------------
Product sales $87.29 $72.94 $6.76 $46.12
--------------------------------------------------------------
Royalty income 0.59 0.42 0.03 0.22
--------------------------------------------------------------
Royalties (13.92) (17.96) (1.47) (9.68)
--------------------------------------------------------------
Production costs (7.99) - (1.19) (6.85)
--------------------------------------------------------------
Transportation (4.71) (3.63) (0.34) (2.37)
--------------------------------------------------------------
Field netback $61.26 $51.77 $3.79 $27.44
--------------------------------------------------------------
--------------------------------------------------------------



--------------------------------------------------------------
Three Months to December 31, 2006
--------------------------------------------------------------

Natural
Crude Gas Natural
Oil Liquids Gas Total
($ Bbl) ($ Bbl) ($ Mcf) ($ Boe)
--------------------------------------------------------------
Product sales $60.19 $58.47 $7.11 $44.95
--------------------------------------------------------------
Hedging gains - - 0.32 1.68
--------------------------------------------------------------
Royalty income 0.64 0.68 0.08 0.48
--------------------------------------------------------------
Royalties (11.49) (16.24) (1.64) (10.25)
--------------------------------------------------------------
Production costs (5.62) - (1.21) (6.80)
--------------------------------------------------------------
Transportation (1.43) (2.56) (0.37) (2.18)
--------------------------------------------------------------
Field netback $42.29 $40.35 $4.29 $27.88
--------------------------------------------------------------
--------------------------------------------------------------


Interest:

Interest costs for the final quarter of 2007 increased by 74% to $1.1 million compared to the same quarter in 2006 and fell marginally compared to the third quarter of 2007. The year-over-year increase is attributable to increased bank borrowings to fund a mid 2007 acquisition. Interest costs per Boe amounted to $2.04 in the fourth quarter of 2007, compared to $1.29 in the same quarter of 2006 and $2.23 in the third quarter of 2007. Growing production, falling interest rates and largely constant bank borrowings in the second half of 2007, account for the per Boe reduction in the final quarter of 2007.



General and Administrative:

Total costs:

---------------------------------------------------------------
Three Months Ended December 31 2007 2006
---------------------------------------------------------------
Gross general and administrative costs $1,944 $1,490
---------------------------------------------------------------
Capital and operating recoveries (1,170) (922)
---------------------------------------------------------------
Net general and administrative costs $774 $568
---------------------------------------------------------------



Costs per Boe:

---------------------------------------------------------------
Three Months Ended December 31 2007 2006
---------------------------------------------------------------
Gross general and administrative costs $3.51 $2.98
---------------------------------------------------------------
Capital and operating recoveries (2.11) (1.85)
---------------------------------------------------------------
Net general and administrative costs $1.40 $1.13
---------------------------------------------------------------


Gross general and administrative costs for the final quarter of 2007 increased by 30% when compared to the final quarter of 2006 and by 50% compared to the third quarter of 2007. The year-on-year increase in general and administrative costs is largely attributable to an increased staff complement and to increased accommodation costs. The increase in the final quarter of 2007 compared to the third quarter is due to the inclusion in the final quarter of certain costs related to the Company's year end, including accrued performance incentives for staff. Increased recoveries in the final quarter of 2007 when compared to the equivalent quarter in 2006 and to the third quarter of 2007 reflect increased field activity as the Company begins its winter drilling program. In addition, the final quarter of 2007 included recoveries associated with the Peace River pipeline project.

Stock Based Compensation:

Stock based compensation fell by 31% in the final quarter of 2007 compared to the same quarter of 2006 and by 24% when compared to the third quarter of 2007. The reduction in stock based compensation in the final quarter of 2007 is attributable to the exercise and cancellation of stock options, as well as the conclusion of the performance warrants program in mid 2007.

Depletion, Depreciation and Accretion:

Increased production and a higher cost asset base resulted in the charge for depletion, depreciation and accretion increasing by 23% in the final quarter of 2007, compared to the same quarter in 2006 and by 8% compared to the third quarter of 2007. Per Boe, depletion, depreciation and accretion amounted to $17.04 in the final quarter of 2007; the charge for the final quarter of 2006 amounted to $15.29 and for the third quarter of 2007, $16.90.

Net Income:

Net income for the fourth quarter of 2007 fell by 6% compared to the same quarter of 2006 and increased by 850% over net income for the third quarter of 2007. Per diluted share amounts were $0.06 for the final quarter of 2007; $0.06 for the final quarter of 2006; and $0.01 for the third quarter of 2007.

Cash Flow:

Cash flow for the fourth quarter of 2007 increased by 4% to $13.2 million from $12.7 million in the fourth quarter of 2006, and increased by 41% compared to the third quarter of 2007. Per diluted share amounts were $0.28 for the final quarter of 2007; $0.29 for the final quarter of 2006; and $0.20 for the third quarter of 2007.

Capital expenditures:

Capital expenditures for the final quarter of 2007 amounted to $17.1 million compared to $13.6 million in 2006 and to $19.9 million in the third quarter of 2007.

QUARTERLY RESULTS

Summarized information by quarter for the last two years appears below:



Quarter December September June March
Ended 31, 2007 30, 2007 30, 2007 31, 2007
-----------------------------------------------------------
Production
revenue -
($000s) 25,553 19,573 25,156 28,009
-----------------------------------------------------------
Funds from 13,233 9,372 12,921 16,417
operations -
($000s)
Per share
- basic $ 0.30 $ 0.21 $ 0.30 $ 0.38
- diluted $ 0.28 $ 0.20 $ 0.29 $ 0.38
-----------------------------------------------------------
Net income 2,852 299 2,832 5,066
- ($000s)
Per share
- basic $ 0.06 $ 0.01 $ 0.06 $ 0.12
- diluted $ 0.06 $ 0.01 $ 0.06 $ 0.12
-----------------------------------------------------------
Average
daily
production -
Boe 5,992 5,618 5,713 5,776
-----------------------------------------------------------
Average
field
netback per
Boe $ 27.44 $ 20.83 $ 28.02 $ 33.91
-----------------------------------------------------------
Capital
expenditures
- net -
($000s) 17,094 19,953 32,768 24,075
-----------------------------------------------------------
-----------------------------------------------------------

Quarter December September June March
Ended 31, 2006 30, 2006 30, 2006 31, 2006
---------------------------------------------------------
Production
revenue -
($000s) 23,590 18,973 17,598 20,004
---------------------------------------------------------
Funds from 12,748 10,053 9,186 11,310
operations -
($000s)
Per share
- basic $ 0.30 $ 0.23 $ 0.23 $ 0.29
- diluted $ 0.29 $ 0.23 $ 0.23 $ 0.28
---------------------------------------------------------
Net income 3,049 1,828 1,767 4,861
- ($000s)
Per share
- basic $ 0.07 $ 0.04 $ 0.05 $ 0.12
- diluted $ 0.07 $ 0.04 $ 0.04 $ 0.12
---------------------------------------------------------
Average
daily
production -
Boe 5,442 4,933 4,478 4,009
---------------------------------------------------------
Average
field
netback per
Boe $ 27.88 $ 24.24 $ 24.86 $ 33.85
---------------------------------------------------------
Capital
expenditures
- net -
($000s) 13,635 7,619 47,570 15,681
---------------------------------------------------------
---------------------------------------------------------



SELECTED ANNUAL FINANCIAL INFORMATION

Financial Results:

----------------------------------------------------------------------------
Six Months
Year Ended Year Ended Year Ended Ended
December December December December
31, 2007 31, 2006 31, 2005 31, 2004
----------------------------------------------------------------------------
Production revenue -
$000 98,291 80,165 70,345 11,414
----------------------------------------------------------------------------
Funds from operations
- $ 000 51,943 43,297 37,992 5,114
----------------------------------------------------------------------------
Per share basic 1.20 $ 1.04 $ 0.98 $ 0.15
----------------------------------------------------------------------------
Per share diluted 1.18 $ 1.03 $ 0.93 $ 0.14
----------------------------------------------------------------------------
Net Income - $000 11,049 11,505 26,533 6,496
----------------------------------------------------------------------------
Per share basic 0.25 $ 0.28 $ 0.68 $ 0.19
----------------------------------------------------------------------------
Per share diluted 0.25 $ 0.27 $ 0.65 $ 0.18
----------------------------------------------------------------------------
Total assets - $000 260,907 202,652 146,989 107,948
----------------------------------------------------------------------------
Debt, including
working
capital deficiency-
$000 84,681 57,314 33,248 29,225
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Comparability of production revenue between the periods is affected as follows:

- information for 2004 is for 6 months only

- although average daily production has grown steadily each period; from 1,366 Boe per day in 2004; 3,324 Boe per day in 2005; 4,720 Boe per day in 2006; and 5,775 Boe per day in 2007, volatility of commodity prices has affected production revenue. In 2004 Storm's average selling price was $43.47 per Boe; for 2005 the average selling price was $57.29 Boe; in 2006 the average selling price was $45.93 per Boe and in 2007 the average selling price was $46.31 per Boe.

Comparability of net income between the periods is affected by variations in production revenue and increased costs relating to an increased production base. In addition, in 2004 and 2005, provisions for future income taxes were largely eliminated through use of prior years' losses. Also, in 2005, the company realized non-cash investment gains for which there was no equivalent in any other year.

Earnings per share, and per diluted share are affected by variations in net income and the issue of common shares in both 2006 and 2007, and the periodic issue of stock options. Increases in total assets for each period reflect the Company's need to continually invest in capital assets to maintain and grow production.

Bank indebtedness has grown each period as bank debt is used, in part, to fund capital investment, particularly acquisitions.

Share Trading:

Set out below is share trading activity for Storm for 2007 and 2006:



----------------------------------------------------------------------------
2007 Q1 Q2 Q3 Q4 Year -
2007
----------------------------------------------------------------------------
High $ 7.80 $ 9.43 $ 9.10 $ 9.10 $ 9.43
----------------------------------------------------------------------------
Low $ 6.30 $ 7.41 $ 7.27 $ 7.90 $ 6.30
----------------------------------------------------------------------------
Close $ 7.46 $ 8.61 $ 8.25 $ 8.90 $ 8.90
----------------------------------------------------------------------------
Volume traded ('000) 2,676 2,525 2,431 4,107 11,738
----------------------------------------------------------------------------
Value traded ('000) $ 18,820 $ 21,638 $ 20,022 $ 35,741 $ 96,222
----------------------------------------------------------------------------
Weighted average trading price $ 7.03 $ 8.57 $ 8.24 $ 8.70 $ 8.20
----------------------------------------------------------------------------



----------------------------------------------------------------------------
2006 Q1 Q2 Q3 Q4 Year -
2006
----------------------------------------------------------------------------
High $ 7.56 $ 6.70 $ 6.97 $ 7.40 $ 7.56
----------------------------------------------------------------------------
Low $ 5.82 $ 5.10 $ 5.45 $ 6.00 $ 5.10
----------------------------------------------------------------------------
Close $ 6.15 $ 5.51 $ 6.20 $ 7.01 $ 7.01
----------------------------------------------------------------------------
Volume traded ('000) 3,440 2,820 3,350 2,280 11,890
----------------------------------------------------------------------------
Value traded ('000) $ 22,886 $ 17,128 $ 20,542 $ 15,483 $ 76,039
----------------------------------------------------------------------------
Weighted average trading price $ 6.65 $ 6.07 $ 6.13 $ 6.79 $ 6.40
----------------------------------------------------------------------------


OUTLOOK FOR 2008

Storm's Board of Directors has approved a capital budget of $65 million for 2008 which is expected to generate production volumes of 8,000 Boe per day by year end. The capital budget should be funded largely from Storm's anticipated cash flow which is based on a natural gas price of $6.25 per GJ. The Company's cash costs for 2008 are estimated to be $9.24, compared to $9.98 in 2007. The Company's planned program involves the drilling of 24 gross (23 net) wells including eight Montney horizontal wells. Substantially all of the Company's drilling is expected to be in the Peace River Arch region of British Columbia.

CONTRACTUAL OBLIGATIONS

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

- purchase of services

- royalty agreements

- operating agreements

- processing agreements

- right of way agreements

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


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

Obligations with a fixed term are as follows:



----------------------------------------------------------------------------
($000's) 2008 2009 2010 2011 2012
----------------------------------------------------------------------------
Lease of premises $ 759 $ 759 $ 772 $ 785 $ 785
----------------------------------------------------------------------------
Equipment leases 11 - - - -
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Total $ 770 $ 759 $ 772 $ 785 $ 785
----------------------------------------------------------------------------


CRITICAL ACCOUNTING ESTIMATES

Financial amounts included in the Company's Management's Discussion and Analysis and in the consolidated audited financial statements for the year ended December 31, 2007 are based on accounting policies, estimates and judgment which reflect information available to management at the time of preparation. Certain financial amounts are derived from a fully completed transaction cycle, or are validated by events subsequent to the end of the reporting year, or are based on established and effective measurement and control systems. However, other amounts, as described below, are based on estimations using information that involves a high degree of measurement uncertainty which could have a material effect on Storm's operating results and financial position.

Oil and Gas Properties

Storm uses the full cost method of accounting for exploration and development activities whereby all costs associated with these activities are capitalized. The aggregate of capitalized costs, less unproved property costs, but including estimated future development costs, is amortized using the unit-of-production method based on estimated proved reserves estimated by external reservoir engineers reporting to the Reserves Committee of the Board of Directors.

Storm's investment in oil and gas assets is evaluated at least annually (the "ceiling test") to consider whether the investment is recoverable and the carrying amount does not exceed the value of the properties, as determined by formula. If the carrying amount of the oil and gas assets is not determined to be recoverable, a loss is recognized to the extent that the carrying amount exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves plus the lower of cost and market value of unproved properties. Cash flows are estimated using future product prices and costs and are discounted using a risk-free rate appropriate to the Company.

Correspondingly, the amount of the charge for depletion and the periodic application of the ceiling test are based on the independent reserves report, which reflects future events which are subject to a high degree of estimation. No write downs of the carrying amount of Storm's oil and gas assets have been required upon the annual application of the ceiling test.

Asset Retirement Obligation

Storm records as a liability the estimated fair value of obligations associated with the retirement of field assets, such as producing well sites and processing facilities. The carrying amount of property and equipment is increased by an amount equivalent to the liability. The future asset retirement obligation is based on the Company's ownership interest in wells and facilities, and reflects estimated costs to complete the abandonment and reclamation as well as the estimated timing of the costs to be incurred in future periods. The liability is increased each reporting period to reflect the passage of time, with the accretion charged to earnings. The liability is also adjusted to reflect changes in the amount and timing of the future retirement obligation and is reduced by the amount of any costs incurred in the period. The amount of the abandonment obligation, the charge for accretion and the charge for depletion of the amount added to property and equipment are subject to uncertainty of estimation.

Income Taxes

The measurement of Storm's future income and other tax liabilities and assets, including losses carried forward and asset pools, requires interpretation of complex laws and regulations. All tax filings and compliance with tax regulations are subject to audit and reassessment, potentially several years after the initial filing. Accordingly, actual income tax assets or liabilities may differ significantly from the amounts initially estimated.

Stock Based Compensation

To determine the charge for stock based compensation, the Company estimates the fair value of stock options at time of issue using assumptions regarding the life of the option, dividend yields, interest rates and the volatility of the security under option. Although the assumptions used to value a specific option remain unchanged throughout the life of the option, assumptions may change with respect to subsequent option grants. In addition, the assumptions used may not properly represent the fair value of stock options at any time; as no alternative valuation model is applied, the difference between the Company's estimation of fair value and the actual value of the option is not measurable.

RISK ASSESSMENT

There are a number of risks facing participants in the Canadian oil and gas industry. Some risks are common to all businesses while others are specific to the industry. The following reviews a number of the identifiable business risks faced by Storm. Business risks evolve constantly and additional risks emerge periodically. The risks below are those identifiable by management at the date of completion of this report, and may not describe all of the business risks faced by the Company.

Exploration

Storm's exploration program requires sophisticated and scarce technical skills as well as capital and access to land and equipment to generate and test exploration ideas. Further, the drilling of an exploratory prospect frequently does not result in the discovery of economical reserves. Storm endeavours to minimize finding risk by ensuring that:

- Where possible prospects have multi-zone potential.

- Activity is focused in core regions where expertise and experience can be levered.

- Prospects are internally generated.

- Storm serves as operator where possible to maintain operational quality, timing and control.

- Geophysical techniques such as seismic are utilized where appropriate and available.

Commodity Price Fluctuations

Pricing for the Company's products is volatile and subject to a myriad of factors, largely out of the Company's control. Low prices, particularly for the Company's primary product, natural gas, have a material effect on the Company's reinvestment capacity, and hence ultimate growth potential and profitability. Low prices also limit access to capital, both equity and debt. High netback production, a low cost structure, along with a stable balance sheet, helps to mitigate commodity price exposure. Periodically, Storm will secure price protection through hedging.

Adverse Well or Reservoir Performance

Changes in well performance in any one or a number of producing pools could result in termination or limitation of production, or acceleration of decline rates, resulting in reduced overall corporate volumes and revenues. In addition, newer wells tend to produce at high rates initially followed by rapid declines until a flattening decline profile emerges. Correspondingly, the timing of tie in of new wells may affect comparability of intra year production. Long life gas reserves, operated under prudent production practices, and a range of producing horizons mitigates exposure to high decline wells or pools

Field Operations

Storm's exploration, development and production activities involve the use of heavy equipment and the handling of potentially volatile liquids and gases. Catastrophic events such as well blowouts, explosions and fires within pipeline, gathering, or facility infrastructure, as well as failure of mechanical equipment, could lead to sour gas releases, spills, personal injuries and damage to the environment, as well as uncontrolled cost escalation. With support from suitably qualified external parties the Company has developed and implemented policies and procedures to mitigate environmental, health and safety risks. These policies and procedures include the use of formal corporate policies, emergency response plans, and other policies and procedures reflecting best oil field practices. These policies and procedures are subject to periodic review. Storm also manages environmental and safety risks by maintaining its facilities to a high standard and complying with all provincial and federal environmental and safety regulations.

Storm maintains industry-specific insurance policies, including business interruption on certain facilities. Although the Company believes its current insurance coverage corresponds to industry standards, there is no guarantee that such coverage will be available in the future, and if it is, at a cost acceptable to the Company, or that existing coverage will necessarily extend to all circumstances or incidents resulting in loss.

Industry Capacity Constraints

High levels of field activity can result in shortages of services, products, equipment, or manpower in many or all necessary components of the exploration and development cycle. Increased demand leads to higher land and service costs during peak activity periods. Competition in the Canadian oil and gas industry, particularly in recent years, has been considerable. Although there was a general easing of competitive pressures in the latter half of the 2007, competition in the Company's most prospective areas continued to be intense. Storm's competitors include companies with far greater resources, including access to capital. Storm competes by maintaining a large inventory of self-generated exploration and development locations, by acting as operator where possible, and through facility access and ownership. Storm also seeks to mitigate such risks through careful management of key supplier relationships and by maintaining a balance of field activity throughout the year.

Capital Programs

Capital expenditures are designed to accomplish two main objectives, being immediate cash flow from development activities, and future cash flow from the discovery of reserves through exploration. Storm faces constant production declines from existing wells which have to be replaced by new production. Storm focuses its activity in core areas, which allows it to leverage its experience and knowledge, and acts as operator wherever possible. The Company uses farmouts to minimize risk on plays it considers higher risk or where total capital invested exceeds an acceptable level. In addition, Storm may enter into hedging agreements in support of capital programs, particularly when cash flow for any period is anticipated to be lower than capital expenditures.

Acquisitions

Storm's objective of rapid and controlled growth is in part supported through carefully selected and managed acquisitions. Acquisitions have to be acceptably priced and production should provide netbacks at least equivalent to the Company's existing production. An acquisition should provide near and medium term development opportunities and be in areas where Storm can readily add to the acquired land position. Processing and transportation infrastructure must also be in place, or within the Company's financial capacity to construct.

Reserve Estimates

Estimates of economically recoverable oil and natural gas reserves and natural gas liquids, and related future net cash flows, are based upon a number of variable factors and assumptions. These include commodity prices, production, future operating costs and potential changes to the Company's operations arising from regulatory or fiscal changes. All of these estimates may vary from actual results, with the result that estimates of recoverable oil and natural gas reserves attributable to any property are subject to revision. Storm's actual production, revenues, taxes, development and operating expenditures associated with its reserves may vary from such estimates, and such variances may be material.

The Company's independent engineering firm, Paddock Lindstrom & Associates Ltd. completes an evaluation of the Storm's reserves each year and reports to the Company's Reserves Committee.

Production

Production of oil and natural gas reserves at an acceptable level of profitability may not be possible during periods of low commodity prices. Storm attempts to mitigate this risk by focusing on high net back commodities and acts as operator where possible, thus allowing the Company to manage costs, timing, method and marketing of production. Production risk is also addressed by concentrating exploration efforts in regions where infrastructure is Storm owned or readily accessible.

Financial and Liquidity Risks

Storm faces a number of financial risks over which it has no control, such as commodity prices, exchange rates, interest rates, access to credit and capital markets, as well as changes to government regulations and tax and royalty policies. The Company uses the following guidelines to address financial exposure:

- Internally generated cash flow provides the initial source of funding on which the Company's annual capital expenditure program is based.

- Debt may be utilized to expand capital programs, including acquisitions, when it is deemed appropriate and where debt retirement can be controlled.

- Equity, including flow-through shares, if available on acceptable terms, may be utilized to fund acquisitions.

- Farmouts of projects may be arranged if management considers that a project requires too much capital or where the project affects the Company's risk profile.

Marketing Risks

Markets for Storm's products are outside its capacity to control or influence, such as weather, regional, national and international supply and demand imbalances, geopolitical events, currency fluctuation, introduction of new, or termination of existing supply arrangements, as well as downtime due to facility maintenance or damage. Storm attempts to mitigate these risks as follows:

- Natural gas properties are developed in areas where there is suitable pipeline infrastructure.

- Exploration efforts focus on light oil and liquids rich natural gas reserves.

- Financial instruments are used where appropriate to manage commodity price volatility where Storm has capital programs, including acquisitions, whose cost exceeds near term projected cash flows.

Climate Change

Increasing public and political focus on climate change and its possible amelioration may cause changes in demand for Storm's products and the introduction of regulations which may result in changes to the Company's operating practices as well as additional and unforeseeable costs. Throughout 2007 there was considerable public discussion of Canada's participation in the United Nations Framework Convention on Climate Change and the country's obligations under the Kyoto Protocol and its possible successors. In addition, provincial legislation is also likely to result in changes to emissions standards. The evolution of public policy over the next several years, and its effect on Storm, cannot be determined at this stage, but given that the Company is a producer of primary hydrocarbons it is likely that its business will be subject to increased regulation and potentially subject to additional taxes and costs.

Access to Capital

Storm's capital structure involves the use of bank debt and from time-to-time access to equity markets. Recent events have seen disruptions of worldwide banking arrangements and the recording of losses by major banking institutions, along with a concurrent reduction in liquidity. It is possible that these conditions may prevail for some time and may have a permanent effect on the way lending institutions view and price risk. It also may result in the reduction of capital available for lending. These circumstances may affect Storm's ability to obtain bank debt at a level or at a cost required for the efficient execution of its capital programs. Access to equity markets may be similarly constrained.

Extraordinary Circumstances

Storm's operations and its financial condition may be affected by uncontrollable and unpredictable circumstances such as weather patterns, changes in contractual, regulatory or fiscal terms, exclusion from third party pipelines or facilities, or actions by certain groups such as industry organizations, local communities, or militant groups.

DISCLOSURE CONTROLS

Storm has codified and distributed to staff its controls, policies and procedures with respect to disclosure to third parties of information concerning the Company's operations and results. Controls and procedures are designed to provide reasonable assurance that relevant information is collected and provided to senior management. 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. Although Storm's disclosure control policy is believed to be effective, it cannot provide more than reasonable assurance that its objectives have been realized.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

As at December 31, 2007, the Chief Executive Officer and Chief Financial Officer evaluated the design and implementation of the Company's internal control over financial reporting. In part this evaluation was based on the work of third party specialists who were engaged by the Company to formally document Storm's internal controls over financial reporting. The initial documentation of internal controls over financial reporting was completed effective December 31, 2006 and has been reviewed and updated by third party specialists, effective December 31, 2007. Based on their evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the design of internal control over financial reporting was sufficiently effective as at December 31, 2007 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. Nevertheless, internal control systems, particularly for a company the size of Storm, have limitations, and however well designed and implemented, may not prevent or detect misstatements, errors or fraud.

INTERNATIONAL FINANCIAL REPORTING STANDARDS

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

The introduction of IFRS will require the application by Storm of resources which may not be available to the Company internally. Management, the Board of Directors and its Audit Committee, will need to develop familiarity with the new standards. Further, management must ensure that internal and outsourced accounting applications and processes produce information that can be readily integrated with IFRS.

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 - 5(th) Avenue, SW, Calgary, Alberta, T2P 2V7.



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

December 31, 2007 December 31, 2006
-----------------------------------

ASSETS

Current
Accounts receivable $ 11,949 $ 13,161
Prepaid and other costs 1,945 2,508
----------------------------------
13,894 15,669

Property and Equipment - Net (Note 2) 237,738 177,708

Investment 9,275 9,275

----------------------------------
$ 260,907 $ 202,652
----------------------------------
----------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current
Accounts payable and accrued liabilities $ 24,103 $ 22,573
----------------------------------
24,103 22,573

Bank Indebtedness (Note 4) 74,472 50,410
Asset Retirement Obligation (Note 5) 6,918 5,925
Future Income Taxes (Note 3) 10,519 1,600
----------------------------------
116,012 80,508
----------------------------------

Shareholders' Equity (Note 6)
Share capital 86,994 76,285
Contributed surplus 2,318 1,325
Retained earnings 55,583 44,534
Accumulated other comprehensive Income - -
----------------------------------
144,895 122,144
----------------------------------

$ 260,907 $ 202,652
----------------------------------
----------------------------------



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

Three Three Nine Year Year
Months to Months to Months to Ended Ended
December December September December December
31, 2007 31, 2006 30, 2007 31, 2007 31, 2006
------------------------------------------------

Revenue

Production revenue 25,553 23,590 72,738 98,291 80,165

Royalties (5,338) (5,132) (15,003) (20,341) (16,876)
------------------------------------------------

20,215 18,458 57,735 77,950 63,289
------------------------------------------------

Expenses

Production 3,779 3,404 11,129 14,908 12,188

Transportation 1,306 1,091 3,653 4,959 3,795

Interest 1,123 647 2,688 3,811 1,966

General and administrative 774 568 1,555 2,329 2,043

Stock based compensation 240 348 992 1,232 956

Depletion, depreciation
and accretion 9,392 7,657 25,460 34,852 24,972
------------------------------------------------

16,614 13,715 45,477 62,091 45,920
------------------------------------------------

Income before taxes: 3,601 4,743 12,258 15,859 17,369

Future income taxes (Note 3) (749) (1,694) (4,061) (4,810) (5,864)
------------------------------------------------

Net income for the period 2,852 3,049 8,197 11,049 11,505

Retained earnings, beginning
of period 52,731 41,485 44,534 44,534 33,029
------------------------------------------------

Retained earnings, end
of period 55,583 44,534 52,731 55,583 44,534
------------------------------------------------
------------------------------------------------

Net Income per share
(Note 7) - basic 0.06 0.07 0.19 0.25 0.28
- diluted 0.06 0.07 0.19 0.25 0.27



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

Three Months Three Months Year Ended Year Ended
to December to December December December
31, 2007 31, 2006 31, 2007 31, 2006
------------ -------------------------------------

Net Income for
the period 2,852 3,049 11,049 11,505

Other Comprehensive income - - - -

Comprehensive income for
the period 2,852 3,049 11,049 11,505
--------------------------------------------------
--------------------------------------------------



Storm Exploration Inc.
Consolidated Statements of Cash Flows
($000s)
Unaudited
Nine
Three Three Months Year Year
Months to Months to Ended Ended Ended
December December September December December
31, 2007 31, 2006 30, 2007 31, 2007 31, 2006
--------------------------------------------------

Operating activities
Net income for the period 2,852 3,049 8,197 11,049 11,505
Add non-cash items:
Depletion, depreciation
and accretion 9,392 7,657 25,460 34,852 24,972
Future income tax 749 1,694 4,061 4,810 5,864
Stock based compensation 240 348 992 1,232 956
--------------------------------------------------
Funds from operations 13,233 12,748 38,710 51,943 43,297
Net change in non-cash
working
capital items (Note 8) 5,937 (1,452) (1,727) 4,210 (2,944)
--------------------------------------------------
19,170 11,296 36,983 56,153 40,353
--------------------------------------------------

Financing activities
Issue of common shares
- net of expenses 125 (49) 14,455 14,580 18,143
Increase (Decrease) in bank
indebtedness 3,705 3,029 20,357 24,062 24,887
--------------------------------------------------
3,830 2,980 34,812 38,642 43,030
--------------------------------------------------

Investing activities
Investment in Storm Ventures
International Inc. - (1,000) - - (1,000)
Additions to property and
equipment (20,187) (13,544) (76,796) (96,983) (97,515)
Disposals of property and
equipment 3,093 (91) - 3,093 13,010
Net change in non-cash
working capital
items (Note 8) (5,906) 359 5,001 (905) 2,122
--------------------------------------------------
(23,000) (14,276) (71,795) (94,795) (83,383)
--------------------------------------------------

Change in cash during the
period - - - - -

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

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



STORM EXPLORATION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2007

Tabular amounts in thousands, except per share amounts

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

1. SIGNIFICANT ACCOUNTING POLICIES

CHANGES IN ACCOUNTING POLICIES

On January 1, 2007, the Company adopted additional accounting pronouncements promulgated by the Canadian Institute of Chartered Accountants ("CICA"). The new accounting standards are set out in CICA Handbook Section 1530 "Comprehensive Income"; Section 3251 "Equity"; Section 3855 "Financial Instruments - Recognition and Measurement"; and Section 3865 "Hedges". As required by the new standards, prior periods have not been restated.

The adoption of these standards has had no effect on the Company's net income or cash flows. The other effects of the implementation of the new standards are discussed below.

Comprehensive Income

The new standards introduce comprehensive income, which consists of net income and other comprehensive income ("OCI"). The Company's consolidated financial statements now include a consolidated statement of comprehensive Income, which measures comprehensive income.

The cumulative changes in OCI are included in accumulated other comprehensive income ("AOCI"), which is presented as a category within shareholders' equity on the consolidated balance sheet. During the year ended December 31, 2007, the Company participated in certain hedging transactions which resulted in the recognition of other comprehensive income. However, as all hedging positions have been closed out by December 31, 2007 and associated gains recognized on the consolidated statement of income and retained earnings, there is no AOCI at that date.

Financial Instruments

The financial instruments standard establishes the recognition and measurement criteria for financial assets, financial liabilities and derivatives. All financial instruments are required to be measured at fair value on initial recognition of the instrument. Measurement in subsequent periods depends on the classification of the financial instrument.

Financial assets and financial liabilities "held-for-trading" are measured at fair value with changes in those fair values recognized in net income. Financial assets "available-for-sale" are measured at fair value, with changes in those fair values recognized in OCI. The methods used by the Company in determining fair value of financial instruments are unchanged as a result of implementing the new standard.

Cash and cash equivalents are designated as "held-for-trading" and are measured at carrying value, which approximates fair value due to the short-term nature of these instruments. Accounts receivable and accrued revenues are designated as "loans and receivables". Accounts payable and long-term debt are designated as "other liabilities". Investments that do not have a quoted market price in an active market are measured at cost. Accordingly, the Company's investment in Storm Ventures International Inc, ("SVI") is carried at cost, adjusted for a non-cash dilution gain recognized in the year ended December 31, 2005.

The Company uses derivative financial instruments from time to time to hedge its exposure to commodity price fluctuations. Such arrangements are made in accordance with the Company's risk management policy and the Company does not use these instruments for trading or speculative purposes. The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk management objectives and strategy for undertaking hedge transactions. Realized gains and losses on these contracts are recognized as revenue in the same period in which the revenues associated with the hedged transactions are recognized. The Company also assesses, both at the hedge's inception and on a ongoing basis, whether the instruments that are used are highly effective in offsetting the changes in fair values or cash flows of hedged items. In the event that a derivative does not meet the designation or effectiveness criterion, the financial instrument is valued on a mark-to-market basis and the resulting gain or loss is recognized in income.

The Company has adopted the accounting policies set out below:

Property and Equipment

a. Petroleum and Natural Gas Properties and Equipment

The Company follows the full-cost method of accounting for petroleum and natural gas properties, whereby all costs associated with the exploration for and development of petroleum and natural gas reserves, whether productive or unproductive, are capitalized in a Canadian cost centre. Such costs include land acquisition, drilling of both productive and unproductive wells, geological and geophysical costs, the cost of production equipment and the present value of the future asset retirement obligation. General and administrative costs are not capitalized. Costs of acquiring and evaluating unproved properties are excluded from depletion calculations until it is determined whether or not proved reserves are attributable to the properties.

Gains or losses are not recognized upon disposition of petroleum and natural gas properties unless crediting the proceeds to accumulated costs would result in a change in the rate of depletion of 20% or more.

Depletion of petroleum and natural gas properties is provided using the unit-of-production method based on estimated proved petroleum and natural gas reserves, before royalties, as determined by independent engineers. Production and reserves of natural gas are converted to equivalent barrels of crude oil on the basis of six thousand cubic feet of gas to one barrel of oil. Processing facilities and well equipment are depreciated on a straight-line basis over the estimated useful life of the facilities and equipment.

The depletion cost base includes total capitalized costs, less prior depletion charges, less costs of unproved properties, plus provision for estimated future development costs of proved undeveloped reserves.

Net capitalized costs of the Company's petroleum and natural gas properties are subject, at least annually, to a ceiling test to ensure that capitalized costs do not exceed an estimate of future net revenues. This latter amount is the aggregate of expected undiscounted future net cash flows from proved reserves and the lower of cost or market value of unproved properties. Future cash flows are estimated using expected future prices and costs. If the carrying amount is not fully recoverable, the amount of impairment is measured by comparing the carrying amounts of the capital assets to an amount equal to the estimated net present value of future cash flows from proved plus probable reserves. This impairment in the carrying amount would be recognized and charged to current operations as additional depletion. No such charges have been incurred by the Company.

b. Office Furniture and Equipment

Furniture and equipment is recorded at cost and is depreciated on a straight line basis over its expected useful life of 10 years.

Joint Operations

Significantly all of the Company's exploration and production activities are conducted through unincorporated joint ventures, under joint operating agreements. The accounts of the Company reflect its proportionate interest in such activities.

Investment

The Company's investment is comprised of a 12.9% interest in Storm Ventures International Inc. and is accounted for using the cost method, adjusted for a dilution gain. Storm Ventures International Inc. is involved in the identification and exploitation of international oil and gas exploration and development opportunities, primarily in the United Kingdom sector of the North Sea and in the Tunisian Republic.

Asset Retirement Obligation

The Company recognizes the fair value of the retirement obligation associated with tangible properties in the period in which this liability arises and when reasonable estimates of this fair value can be made. The fair value of the liability is calculated as the present value of the expected future costs of abandonment and reclamation. The obligation is recorded as a long term liability with a corresponding increase to the carrying amount of property and equipment. The liability is increased each reporting period through the accretion of interest up to the future amount of the liability. The charge for accretion is recorded as an expense in the Company's consolidated financial statements. The addition to the carrying amount of the asset is amortized on the same basis as property and equipment. Actual costs incurred upon settlement of the abandonment obligation are charged against the liability.

Revenue Recognition

Revenues from the sale of crude oil, natural gas liquids and natural gas are recorded when title passes to a third party.

Income Taxes

Income taxes are calculated using the liability method of tax accounting. Temporary differences arising from the difference between the tax basis of an asset or liability and its carrying amount on the balance sheet are used to calculate future income tax assets and liabilities. Future income tax assets and liabilities are calculated using tax rates anticipated to apply in the periods that the temporary differences are expected to reverse.

Flow-Through Shares

Flow-through shares were issued in 2006 and 2007 at a fixed price, with the proceeds used to fund qualifying exploration expenditures within a defined period. Expenditures funded by flow-through arrangements are renounced to investors in accordance with tax legislation. Share capital is reduced and the future tax liability is increased by the total estimated future income tax cost of the renounced tax deductions at the time of renunciation to the shareholders.

Stock Based Compensation

The Company has issued performance warrants and options to employees to acquire common shares. These warrants and options are accounted for using the fair value method which estimates the value of the warrants and options at the date of the grant using the Black-Scholes option pricing model. The fair value thus established is recognized as an expense over the life of the warrants and options with a corresponding increase to contributed surplus.

Per Share Amounts

Net income per share is calculated using the weighted average number of shares outstanding during the period. Diluted net income per share is calculated using the treasury stock method to determine the dilutive effect of performance warrants and stock options. The treasury stock method assumes that the proceeds received from the exercise of "in the money" stock options are used to purchase common shares at the market price at the end of the period.

Measurement Uncertainty

The amounts recorded for depletion and depreciation of capital assets, the provision for the asset retirement obligation and amounts used for ceiling test calculations are based on estimates of reserves, production rates and future prices and costs. These estimates of reserves and related future cash flows are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be material.

Future accounting changes

The CICA issued three new accounting standards, section 1535 "Capital Disclosures", section 3862 "Financial Instruments - Disclosures", and section 3863 "Financial Instruments - Presentation". These standards become effective for Storm in 2008.

Section 1535 requires the disclosure of Storm's objectives, policies and processes for managing capital.

Sections 3862 and 3863 replace section 3861 "Financial Instruments - Disclosure and Presentation" which revises and enhances financial instruments disclosure requirements and leaves unchanged its presentation requirements. These new standards place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how Storm manages those risks.

2. PROPERTY AND EQUIPMENT



December 31, 2007 December 31, 2006
-----------------------------------------
Petroleum and natural gas
properties $ 314,953 $ 220,701
Furniture and equipment 634 466
-----------------------------------------
315,587 221,167
Accumulated depletion and
depreciation (77,849) (43,459)
-----------------------------------------
$ 237,738 $ 177,708
-----------------------------------------
-----------------------------------------


At December 31, 2007, the depletion calculation excluded unproved properties of $21.0 million (2006 - $14.4 million).

The prices used, in Canadian dollars, in the ceiling test evaluation of the Company's natural gas, crude oil and natural gas liquids reserves at December 31, 2007 were:



Annual
%
increase
2008 2009 2010 2011 2012 to 2023
---------------------------------------------
Natural Gas ($/mcf) 7.11 7.68 7.84 8.00 8.16 2.3%
Crude Oil ($/barrel) 82.66 80.53 76.43 74.27 72.10 1.8%
Natural Gas Liquids ($/barrel) 75.65 74.16 70.47 68.66 67.01 2.1%


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 and share capital.

The Company has tax pools associated with property and equipment of approximately $195 million as well as capital losses of approximately $10 million, 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. 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 Company must incur an estimated $13.1 million of qualifying expenditures prior to December 31, 2008. Under the terms of a flow-through share issue in June 2006, the Company was obligated to incur Canadian Exploration Expenditures in the amount of $15.6 million prior to December 31, 2007. As at December 31, 2007, the Company considers that it has fulfilled all expenditure obligations related to this share issue.

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 year. The differences are as follows:



----------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------
Statutory combined federal and provincial
income tax rate 32% 35%
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Expected income taxes $ 5,126 $ 6,020
----------------------------------------------------------------------------
Add (deduct) the income tax effect of :
----------------------------------------------------------------------------
Non-deductible crown charges - 1,802
----------------------------------------------------------------------------
Resource allowance - (1,612)
----------------------------------------------------------------------------
Stock -based compensation 398 331
----------------------------------------------------------------------------
Benefit of losses not previously recognized - (183)
----------------------------------------------------------------------------
Rate adjustments (719) (489)
----------------------------------------------------------------------------
Other 5 (5)
----------------------------------------------------------------------------
Provision for income tax 4,810 5,864
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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

----------------------------------------------------------------------------
2007 2006

Property and equipment $ 13,073 $ 3,970
Asset retirement obligation (2,006) (1,896)
Share issue costs (548) (474)

-------------------------
Future Income Tax Liability $ 10,519 $ 1,600
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The measurement of Storm's income tax liability and tax asset pools requires interpretation of complex laws and regulations. All tax filings and compliance with tax regulations are subject to audit and reassessment, potentially several years after the initial filing. Accordingly, actual income tax assets or liabilities may differ significantly from the amounts initially estimated.

4. BANK INDEBTEDNESS

The Company has an extendible revolving bank facility based on the Company's producing reserves in the amount of $94 million (2006 - $66 million). The revolving facility is available to the Company until May 29, 2008, but may be extended at the Company's request until May 28, 2009, subject to the bank's review of the Company's reserves 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 credit facility will be retired by 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 undiscounted amount required to settle the Company's asset retirement obligations is approximately $13.1 million (2006 - $11.8 million), which will be incurred over the next 20 years, with the majority of costs incurred between 2015 and 2025. A credit adjusted risk-free rate of eight percent was used to calculate the present value of the asset retirement obligations, amounting to $6.9 million (2006 - $5.9 million).

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


Issued

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.



Number of Shares Amount
-----------------------------
Balance as at December 31, 2005 39,184 $ 62,762
Flow-through common shares issued (i) 1,900 15,580
Common shares issued on exercise of
warrants (ii) 1,715 3,430
Common shares issued under performance
warrant plan (iii) 112 83
Stock options exercised (iv) 3 14
Tax effect of flow-through share renunciations (4,986)
Share issue costs (net of income tax benefit) (598)
-----------------------------
Balance as at December 31, 2006 42,914 $ 76,285
Flow-through common shares issued (v) 1,400 15,050
Common shares issued under performance
warrant plan (vi) 131 127
Stock options exercised (vii) 87 518
Tax effect of flow-through share renunciations (4,365)
Share issue costs (net of income tax benefit) (621)
-----------------------------
Balance as at December 31, 2007 44,532 $ 86,994
-----------------------------
-----------------------------


Common Share Issues

i) On June 1, 2006, 1,900,000 flow-through common shares were issued at a price of $8.20 per share for total proceeds of $15,580,000, before commission and expenses. The terms of this share issue require the Company to renounce to subscribers Canadian Exploration Expenditures in the amount of $15,580,000, to be incurred prior to December 31, 2007.

ii) In 2006, 1,715,000 warrants were exercised and 1,715,000 common shares were issued for proceeds of $3,430,000 based on the exercise price of $2.00 per share. As of December 31, 2006, all warrants have been exercised.

iii) On June 29, 2006, 170,833 warrants under the performance warrant plan were exercised. Based on a closing price of $5.75, 112,000 common shares were issued. Proceeds were one cent per share and related prior stock compensation expense of $83,000 was added to share capital.

iv) In June 2006, 3,000 stock options were exercised for proceeds of $13,000 and related prior stock compensation expense of $1,000 was added to share capital.

v) On September 6, 2007, 1,400,000 flow-through common shares were issued at a price of $10.75 per share for total proceeds of $15,050,000, before commission and expenses. The terms of this share issue require the Company to renounce to subscribers Canadian Exploration Expenditures in the amount of $15,050,000, to be incurred prior to December 31, 2008.

vi) On June 29, 2007, 170,834 warrants under the performance warrant plan were exercised. Based on a closing price of $8.55, 131,000 common shares were issued. Proceeds were one cent per share and related prior stock compensation expense of $127,000 was added to share capital.

vii) During 2007, 87,000 stock options were exercised for proceeds of $406,000 and related prior stock compensation expense of $112,000 was added to share capital.

Stock Based Compensation Plans

(i) The Company had a performance warrant plan under which 512,500 warrants were issued to employees to acquire common shares. The number of common shares issuable upon exercise of the warrants was based on a formula using the closing price of the share on the day immediately preceding the exercise date. The warrants were exercisable in three equal annual amounts commencing June 29, 2005. All warrants were exercised and the plan terminated on June 29, 2007.

(ii) 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 2,850,000 common shares has been reserved for issuance. During 2007, 378,000 options were granted at an average price of $8.15 per option. Details of the options outstanding at December 31, 2007 are as follows:



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

December 31, 2007 December 31, 2006

Outstanding at beginning of year 1,934 873
Issued during year 378 1,074
Cancelled during year (59) (10)
Exercised during year (87) (3)
-----------------------------------------
2,166 1,934
-----------------------------------------

Weighted average exercise price $ 5.62 $ 5.10
Average remaining life 3.3 years 4.0 years
Number exercisable at end of year 670 248
Option prices $ 2.60 - $ 8.57 $ 2.60 - $ 6.70
----------------------------------------------------------------------------



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

$ 2.60 to $ 3.61 320 2.1 $ 3.28 193 $ 3.20

$ 3.91 to $ 5.71 1,408 3.2 $ 5.43 449 $ 5.30

$ 6.03 to $ 8.57 438 4.6 $ 7.94 28 $ 6.66
----------------------------------- -----------------------
2,166 3.3 $ 5.62 670 $ 4.75
----------------------------------- -----------------------
----------------------------------- -----------------------


In December 2007, an additional 230,000 options, issuable to officers and directors, at a price of $8.27, were approved by the Board of Directors. The issue of these options is subject to future shareholder approval.

Using the Black-Scholes pricing model, the weighted average fair value of the options granted in 2007 was estimated to be $2.75 (2006 - $1.92), using risk-free interest rates of 6.0 -6.25%, volatility of 40% and an expected average life of 30 months. The amortized cost of the options is charged as stock based compensation on the consolidated income statement with an equivalent offset to contributed surplus.

7. PER SHARE AMOUNTS



----------------------------------------------------------------------------
Year ended Year ended
December 31, 2007 December 31, 2006
----------------------------------------------------------------------------
Basic
----------------------------------------------------------------------------

Net income per share $ 0.25 $ 0.28
----------------------------------------------------------------------------
Weighted average number of
shares outstanding ('000) 43,449 41,434
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Diluted
----------------------------------------------------------------------------

Net income per share $ 0.25 $ 0.27
----------------------------------------------------------------------------
Weighted average number of
shares outstanding ('000) 44,132 41,935
----------------------------------------------------------------------------


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

8. SUPPLEMENTAL CASH FLOW INFORMATION

Changes in non-cash working capital



Year ended Year ended
December 31, 2007 December 31, 2006
--------------------------------------
Accounts receivable $ 1,212 $ (478)
Prepaid expenses 563 (1,497)
Accounts payable and accrued
liabilities 1,530 1,153
--------------------------------------
Change in non-cash working capital $ 3,305 $ (822)
--------------------------------------

Relating to:

Financing activities $ - $ -
Investing activities (905) 2,122
Operating activities 4,210 (2,944)
--------------------------------------
$ 3,305 $ (822)
--------------------------------------
--------------------------------------



----------------------------------------------------------------------------
Year ended Year ended
December 31, 2007 December 31, 2006
----------------------------------------------------------------------------
Interest paid during the period $ 3,811 $ 1,966
----------------------------------------------------------------------------
Income taxes paid during the period $ - $ -
----------------------------------------------------------------------------


9. FINANCIAL INSTRUMENTS

The Company's financial instruments recognized on the consolidated balance sheet consist of accounts receivable, bank debt, accounts payable and accrued liabilities. The fair value of these financial instruments approximates their carrying amounts based on the short term to maturity.

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 these concentrations of credit risk to be minimal, as commodity purchasers are major industry participants, and receivables from partners are protected by effective industry standard legal remedies.

As at December 31, 2007, Storm had no hedge contracts in place.

Contact Information

  • Storm Exploration Inc.
    Brian Lavergne
    President and CEO
    (403) 264-3520
    or
    Storm Exploration Inc.
    Donald McLean
    CFO
    (403) 264-3520