Storm Exploration Inc.
TSX : SEO

Storm Exploration Inc.

August 09, 2006 23:58 ET

Storm Exploration Inc: Quarterly Report

CALGARY, ALBERTA--(CCNMatthews - Aug. 9, 2006) - Storm Exploration Inc. (TSX:SEO) is pleased to announce its financial and operating results for the three and six months ended June 30, 2006.



Storm Exploration Inc.
QUARTERLY REPORT

Unaudited



Highlights - in Three Months Three Months Six Months Six Months
$CDN except Ended Ended Ended Ended
volumetric June 30, June 30, June 30, June 30,
amounts 2006 2005 2006 2005
------------------------------------------------------------------------

Financial

Gas sales 12,291,000 11,581,000 28,062,000 20,372,000
NGL sales 1,577,000 2,143,000 3,094,000 4,306,000
Oil sales 3,536,000 2,075,000 6,009,000 3,818,000
Royalty Income 194,000 152,000 437,000 423,000
------------ ------------ ----------- ------------
Production
Revenue 17,598,000 15,951,000 37,602,000 28,919,000
------------ ------------ ----------- ------------

Funds from
operations 9,186,000 8,071,000 20,496,000 14,789,000
Per share
- basic 0.23 0.21 0.51 0.38
Per share
- diluted 0.23 0.20 0.51 0.37

Net income 1,767,000 3,643,000 6,628,000 6,716,000
Per share
- basic 0.05 0.09 0.17 0.17
Per share
- diluted 0.04 0.09 0.16 0.17

Capital expenditures,
net of
dispositions 47,570,000 4,261,000 63,251,000 14,600,000

Debt, including
working capital
deficiency 57,795,000 29,032,000 57,795,000 29,032,000

Weighted average
common shares
outstanding
Basic 40,582,000 38,678,000 39,930,000 38,675,000
Diluted 40,871,000 40,149,000 40,219,000 40,141,000

Common shares
outstanding
Basic 42,914,000 38,768,000 42,914,000 38,768,000
Fully Diluted 43,883,000 41,853,000 43,883,000 41,853,000

Operations

Oil Equivalent (6:1)
Barrels of oil
equivalent 408,000 317,000 768,000 581,000
Barrels of oil
equivalent per day 4,478 3,481 4,245 3,209
Average selling
price ($CDN
per BOE) $42.71 $49.90 $48.37(1) $49.06
Royalties 21.3% 25.9% 22.9% 25.7%

Gas production
Thousand cubic
feet 2,039,000 1,506,353 3,836,000 2,720,671
Thousand cubic
feet per day 22,402 16,553 21,195 15,031
Average selling
price ($CDN mcf) $ 6.03 $ 7.69 $ 7.31(1) $ 7.49


NGL Production
Barrels 22,000 33,920 46,000 67,304
Barrels per day 244 373 253 372
Average selling
price ($CDN
per barrel) $71.00 $63.17 $67.52 $63.98

Oil Production
Barrels 46,000 31,812 83,000 60,055
Barrels per day 500 350 459 332
Average selling
price ($CDN
per barrel) $77.67 $65.37 $72.32 $63.58

Wells drilled
Gross 4.0 1.0 17.0 6.0
Net 3.3 0.0 10.1 3.0

(1) Includes proceeds from fixed price natural gas contract


Highlights for the Quarter Ended June 30, 2006

- Production averaged 4,478 Boe per day in the second quarter, a 29% increase from production of 3,481 Boe per day in the same period one year ago and a 12% increase from production of 4,009 Boe per day in the first quarter of 2006. Second quarter production per share is up 22% from the same period one year ago.

- Success with the drill bit has continued with four wells (3.3 net) drilled in the second quarter resulting in one gas well (0.75 net) and two oil wells (1.6 net) for a 75% success rate. Subsequent to the end of the quarter, two of these wells were tied in and are currently producing 500 Boe per day net to Storm.

- Closed a $40 million acquisition of properties producing 1,000 Boe per day within Storm's existing Peace River Arch and Cabin/Kotcho/Junior core areas. The acquisition was financed through an expansion of Storm's credit facility to $66 million.

- Completed a bought deal private placement of 1.9 million flow-through common shares at $8.20 per flow-through common share for gross proceeds of $15.58 million which will be used to fund ongoing exploration activities.

- Cash flow totaled $9.2 million or $0.23 per diluted share, an increase of 15% from cash flow of $0.20 per diluted share in the year earlier period.

- Net income fell to $1.8 million or $0.04 per diluted share, down from net income of $0.09 per diluted share in the second quarter of last year. The primary reason for the reduction in year-over-year net income was the requirement to record a future income tax provision in 2006; there was no equivalent charge in 2005.

- Storm's field net back was $24.86 per Boe in the second quarter, a decrease of 12% from the first quarter field netback of $28.13 per Boe (prior to hedging gain). The decrease was largely due to a 21% reduction in natural gas prices which was partially offset by a 5% drop in operating costs and a 3.1 % decline in the overall royalty rate.

- Second quarter capital expenditures totaled $47.6 million leaving a debt and working capital deficiency of $57.8 million at the end of the quarter. Operations capital expenditures, which exclude acquisitions and dispositions, were $9.0 million in the quarter.

- Storm remains on track to meet or exceed production guidance which consists of exiting 2006 at 5,900 Boe per day. Current production is approximately 5,600 Boe per day and another 300 Boe per day is expected to be added from three recently completed wells once they are tied in at the end of August.

Core Area Review

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

The Peace River Arch is the largest of Storm's core areas, with current net production of approximately 3,500 Boe per day. The recently completed asset acquisition added approximately 600 Boe per day of production in this area.

During the second quarter, Storm drilled 3 wells resulting in one gas well (0.75 net) at Parkland, one oil well (1.0 net) at LaGlace, and one dry hole (1.0 net) at Parkland. The gas well was recently tied in and is producing 3 mmcf/d (375 Boe per day net). Two workovers were also successful with the completion of a zone in a standing gas well (0.8 net) adding 250 mcf per day and the reactivation of a suspended gas well (0.75 net) adding 350 mcf per day.

Second quarter production from this area was affected by third party gas plant turnarounds which reduced quarterly production by 120 Boe per day.

To date in the third quarter:

- At Pouce, a gas well (0.3 net) drilled in the first quarter was completed and tested 1.4 mmcf per day from the Doig formation. This well is expected to be tied in by late August.

- Three wells have been drilled at Parkland resulting in 3 gas wells (2.3 net). Two of these have been completed with final test rates on each well being 1.2 mmcf per day. The two completed wells (1.8 net) will be tied in by the end of August with the third well to be completed and tied in by mid-September.

- A gas well (0.5 net) drilled in the first quarter was recently tied in and is producing 1.5 mmcf per day (115 Boe per day net) from the Gething formation.

- A wellsite compressor was installed on an oil well (1.0 net) at Teepee which resulted in incremental production of 40 barrels of oil per day.

- One gas well was drilled at Teepee (0.5 net) and evaluation is ongoing.

Storm has deferred previously identified drilling locations at Pouce Coupe (5 gross, 3.0 net) and Buick Creek (3 gross, 1.5 net) and the following lower risk projects have been added to the 2006 capital program in their place:

- Five workovers at the Parkland and Teepee properties.

- A compressor will be installed at Teepee to increase production and reserve recovery from a Montney pool.

As a result, during the second half of 2006, Storm expects to drill 15 wells in the Peace River Arch core area with nine wells (6.8 net) at Parkland, five wells (3.9 net) at Teepee, and one well (1.0 net) at Pouce Coupe.

Cabin-Kotcho-Junior, North East British Columbia

Net production from this area has grown to current rates of approximately 1,600 Boe per day. The recently completed asset acquisition added approximately 400 Boe per day of production in this area.

During the second quarter, Storm completed the following projects:

- Tied in the third and last well from the winter program at the end of April. This well (50% Storm working interest) is producing from the Petitot Slave Point A pool at a restricted rate of 3.5 mmcf per day or 250 Boe per day of net sales.

- Reactivated a Slave Point gas well (1.0 net) that is currently producing 600 mcf per day of sales gas.

Third quarter production from this area will be affected by an outage at the Fort Nelson Gas Plant which will result in all of Storm's gas production (9.7 mmcf per day net) being shut-in for 20 to 22 days in July and early August.

This past winter's drilling program was highly successful with the three wells that were drilled resulting in three gas wells for a 100% success rate. As a result, next winter's drilling program will expand to include the drilling of five wells (2.7 net) consisting of two wells in the Petitot Slave Point A pool and three wells targeting new pools or extensions to existing pools.

Red Earth, Alberta

As a result of recent drilling success, current net production from this area has grown to 400 Boe per day. In the second quarter, Storm drilled one well resulting in one oil well (0.55 net) that is currently producing at a rate of 250 barrels of oil per day (140 barrels of oil per day net) from the Granite Wash formation. To date in the third quarter, two additional wells have been drilled resulting in two oil wells (1.05 net). These wells will be completed in the Granite Wash formation by the end of August.

During the second half of 2006, Storm expects to drill five wells (2.9 net) targeting light oil in the Granite Wash formation.

Brazeau-Pembina, West Central Alberta

Storm has sold the majority of its production and lands in this area for proceeds of $9.5 million. The effective date of this disposition is July 1, 2006 and the divested assets include current production of 270 Boe per day and 9,800 net acres of undeveloped land. As a result of this disposition, Storm's net production from this area is currently 80 Boe per day.

During the remainder of 2006, Storm plans to participate in the drilling of one infill (0.5 net) offsetting a well drilled in the first quarter that is producing 800 mcf per day from the Notikewin formation.

Storm Ventures International Inc.

Storm owns 16% of the common shares of Storm Ventures International ("SVI"), a Calgary based, private energy company focused on international exploration and exploitation opportunities.

In the North Sea, SVI's 50% owned affiliate, Silverstone Energy Limited, drilled one well in the first quarter that resulted in a new pool gas discovery (internally estimated to be 12.5 BCF recoverable) that can be tied in by drilling a long reach development well from an existing platform. Development of this pool will move forward once a larger portfolio of development projects exists. Two additional exploration prospects are expected to be drilled this fall as part of the Viking Fields farm-in.

In Tunisia, SVI has begun a technical review of available 2-D seismic data over its offshore Gulf of Hammamet lands and expects to identify several leads that will result in a 3-D seismic program being recorded later this year or early in 2007.

Outlook

Production has grown to current levels of approximately 5,600 Boe per day (net of the Brazeau asset disposition) and we expect to meet or exceed production guidance which consists of exiting 2006 at 5,900 Boe per day. Operating costs are expected to continue to trend lower towards $6.50 per Boe in the second half of 2006 as a result of volume growth, cost reduction initiatives, and the disposition of a higher cost property. Capital investment will total $80 million in 2006 with $50 million directed towards operations capital expenditures and $30 million for acquisitions (net of dispositions). The majority of the operations capital expenditures will be directed towards the drilling of 38 wells (25.5 net) with 21 wells (15.4 net) being drilled in the second half of 2006. Cash flow and a modest amount of debt will be used to fund this level of investment. Storm's balance sheet remains strong given that proceeds from the Brazeau asset disposition will reduce our total debt to $48 million and our credit facility is unchanged at $66 million.

Storm's focus on maximizing capital efficiency and growing our production at a rate that offsets commodity price volatility has left us well positioned in the currently challenging business environment brought on by rapidly inflating capital costs and gas price volatility (54% decline in average monthly natural gas prices at AECO from December, 2005 to July, 2006). However, we remain excited about our future growth prospects given our continued success with the drill bit, our strong financial position, and our large undeveloped land base.

Respectfully,



Brian Lavergne,
President and Chief Executive Officer
August 9, 2006


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND OPERATING RESULTS FOR THE QUARTER ENDED JUNE 30, 2006

Set out below is management's discussion and analysis of financial and operating results for Storm (or the "Company") for the quarter ended June 30, 2006. It should be read in conjunction with the unaudited interim financial statements for the three and six months ended June 30, 2006 included in this quarterly report, and the audited financial statements for the year ended December 31, 2005. This management's discussion and analysis is dated August 4, 2006.

Introduction and Limitations:

Basis of Presentation - The financial data presented below has in part been derived from the Company's unaudited interim financial statements for the three and six months ended June 30, 2006, which have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") and in accordance with specific accounting policies as set out in footnote 2 to the Company's audited financial statements for the year ended December 31, 2005. The reporting and the measurement currency is the Canadian dollar.

Forward-Looking Statements - Certain information set forth in this document, including management's assessment of Storm's future plans and operations, contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond the Company's control, including the effect of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources. Readers are
advised that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Storm's actual results, performance or achievement, could differ materially from those expressed in, or implied by, these forward-looking statements. Storm disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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 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 and funds from operations per share are not defined by GAAP in Canada and are correspondingly regarded as non-GAAP measures. Measurement of funds from operations is detailed on the Statement of Cash Flows. Funds from operations per share is calculated based on the weighted average number of common shares outstanding consistent with the calculation of net income per share. Netbacks equal total revenue less royalties, transportation and operating costs, calculated on a Boe basis. Total Boe is calculated by multiplying the daily production by the number of days in the reporting period.

PRODUCTION AND REVENUE



Average Daily Production

------------------------------------------------------------------------
Three Three Six Six
Months to Months to Months to Months to
Period June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Natural gas (Mcf/d) 22,402 16,553 21,195 15,031
------------------------------------------------------------------------
Natural gas liquids (Bbls/d) 244 373 253 372
------------------------------------------------------------------------
Crude oil (Bbls/d) 500 350 459 332
------------------------------------------------------------------------
Total (Boe/d) 4,478 3,481 4,244 3,209
------------------------------------------------------------------------
------------------------------------------------------------------------


For the three months ended June 30, 2006, the Company's production averaged 4,478 Boe per day, an increase of 29% over average production for the three months ended June 30, 2005 and an increase of 12% over the immediately prior quarter ended March 31, 2006. Production for the six months ended June 30, 2006 was 32% higher than production for the equivalent period in 2005. Period-over-period increases in production came from the Company's successful drilling and exploitation programs and, for the three months ended June 30, 2006, a contribution from a property acquisition completed late in the quarter. Scheduled maintenance on natural gas facilities resulted in the reduction of production of 120 Boe per day in the quarter ended June 30, 2006; there was no equivalent reduction in 2005. Production per million shares outstanding in the second quarter of 2006 averaged 110 Boe per day, compared to 90 Boe per day for the second quarter of 2005, an increase of 22%. For the six month periods ended June 30, 2006 and 2005, production averaged 106 Boe per million shares outstanding and 83 Boe per million shares outstanding respectively, a year-over-year increase of 28%.

Production as of the date of this report approximated 5,600 Boe per day. This represents more than six-fold growth since oil and gas operations began in June 2004. However third quarter average production will be affected by plant maintenance, particularly gas production from the Company's Kotcho-Cabin-Junior properties.



Production Profile and Per Unit Prices

------------------------------------------------------------------------
Three Months Ended Three Months Ended
Period June 30, 2006 June 30, 2005
------------------------------------------------------------------------
Average Average
Percentage Selling Percentage Selling
of Price Per of Price Per
Total Boe Unit Before Total Boe Unit Before
Production Transportation Production Transportation
Costs Costs
------------------------------------------------------------------------
Natural gas 83% $ 6.03 79% $7.69
Natural gas liquids 6% $71.00 11% $63.17
Crude oil 11% $77.67 10% $65.37
Per Boe $42.71 $49.90
------------------------------------------------------------------------

------------------------------------------------------------------------
Six Months Ended Six Months Ended
Period June 30, 2006 June 30, 2005
------------------------------------------------------------------------
Average Average
Percentage Selling Percentage Selling
of Price Per of Price Per
Total Boe Unit Before Total Boe Unit Before
Production Transportation Production Transportation
Costs Costs
------------------------------------------------------------------------
Natural gas 83% $ 6.78 78% $ 7.49
Natural gas liquids 6% $67.52 12% $63.98
Crude oil 11% $72.32 10% $63.58
Per Boe $45.68 $49.06
------------------------------------------------------------------------


The Company's production base is largely natural gas and associated liquids. For the three months to June 30, 2006, the AECO C spot price for natural gas averaged Cdn$6.02 per Mmbtu, compared to Cdn$7.37 for the three months ended June 30, 2005, a decline of 18%. The AECO C average price for the second quarter of 2006 was 21% lower than the price for the first quarter of 2006, which averaged $7.59 per Mmbtu. For the six months ended June 30, 2006, AECO C averaged Cdn$6.81, compared to Cdn$7.14 for the six months ended June 30, 2005, a decline of 5%. For crude oil, Edmonton par price averaged Cdn$80.64 per barrel for the quarter ended June 30, 2006, compared to Cdn$66.81 for the quarter to June 30, 2005, an increase of 21%. The above per unit realized prices do not include the benefit of a fixed price natural gas sales contract in place during the quarter ended March 31, 2006 which resulted in a gain of $0.54 per Mcf, or $2.69 per Boe for the six months ended June 30, 2006. There were no fixed sales price contracts in place at June 30, 2006.



Production by Area - Boe per Day

------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
Period 2006 2005 2006 2005
------------------------------------------------------------------------
Peace River Arch 2,695 1,745 2,749 1,758
------------------------------------------------------------------------
Cabin-Kotcho-Junior 1,180 1,100 927 813
------------------------------------------------------------------------
Red Earth 273 36 251 43
------------------------------------------------------------------------
Brazeau-Pembina 330 600 318 595
------------------------------------------------------------------------
Total 4,478 3,481 4,245 3,209
------------------------------------------------------------------------
------------------------------------------------------------------------


The above sets out the average production from each of the Company's principal areas of operations and the evolution of the Company's production base.



Production Revenue

------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
Period 2006 2005 2006 2005
------------------------------------------------------------------------
Natural gas $12,291,000 $11,581,000 $25,999,000 $20,372,000
------------------------------------------------------------------------
Natural gas liquids 1,577,000 2,143,000 3,094,000 4,306,000
------------------------------------------------------------------------
Crude oil 3,536,000 2,075,000 6,009,000 3,818,000
------------------------------------------------------------------------
Gain on fixed price
sales contract - - 2,063,000 -
------------------------------------------------------------------------
Revenue from
product sales $17,404,000 $15,799,000 $37,165,000 $28,496,000
------------------------------------------------------------------------
Royalty income 194,000 152,000 437,000 423,000
------------------------------------------------------------------------
Total Production
Revenue $17,598,000 $15,951,000 $37,602,000 $28,919,000
------------------------------------------------------------------------
------------------------------------------------------------------------


In the three months ended June 30, 2006, revenue from product sales before royalty income increased by 10% over the three months to June 30, 2005. Volume increases of 29% were offset by price decreases of 19%. For the six months period to June 30, 2006, revenue from product sales before royalty income increased by 30% over the equivalent period in 2005. Volume increases represented 32%; pricing a negative 9%; and hedging gains 7%.

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



ROYALTIES

------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
Period June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Charge for period $3,699,000 $4,080,000 $8,004,000 $7,352,000
------------------------------------------------------------------------
Royalties as a
percentage of revenue
from product sales
before hedging gains
- Crown 21% 23% 21% 22%
- Overriding 1% 3% 2% 4%
------------------------------------------------------------------------
Total 22% 26% 23% 26%
------------------------------------------------------------------------
Per Boe $ 9.08 $ 12.88 $ 10.42 $ 12.66
------------------------------------------------------------------------


The decrease of 10% in the total royalty charge and the 30% reduction in the charge per Boe for the three months ended June 30, 2006 when compared to the same quarter of 2005 is primarily related to the fall in gas prices and to the beneficial effect of royalty incentives.



PRODUCTION COSTS

------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
Period June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Charge for period $2,905,000 $2,340,000 $5,622,000 $4,151,000
------------------------------------------------------------------------
Percentage of revenue
from product sales 17% 15% 15% 15%
before hedging gains
------------------------------------------------------------------------
Per Boe $ 7.13 $ 7.38 $ 7.32 $ 7.15
------------------------------------------------------------------------
------------------------------------------------------------------------


Total production costs for each period have increased in response to growing product sales. The increase in production costs as a percentage of revenue in the three months ended June 30, 2006, when compared to other periods, is attributable to lower per unit revenues realized in this quarter. The reasonably constant cost per Boe for the various reporting periods indicates that the Company has managed to control operating costs in the face of industry wide cost pressures.

The reasonably constant cost per Boe for the various reporting periods indicates that the Company has managed to control operating costs in the face of industry wide cost pressures.

Storm's cash costs, which comprise operating, general and administrative costs, interest and large corporations tax, amounted to $9.45 per Boe for the second quarter of 2006 compared to $9.40 per Boe for the second quarter of 2005. For the six month periods ended June 30, cash costs amounted to $9.72 per Boe in 2006 compared to $9.30 in 2005.



TRANSPORTATION COSTS
------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
Period June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Charge for period $863,000 $822,000 $1,636,000 $1,370,000
------------------------------------------------------------------------
Percentage of revenue
from product sales before
hedging gains 5% 5% 5% 5%
------------------------------------------------------------------------
Per Boe $ 2.12 $ 2.59 $ 2.13 $ 2.36
------------------------------------------------------------------------
------------------------------------------------------------------------


Increased volumes have resulted in increases in total transportation costs. However lower per Boe transportation costs in 2006 reflect changes in the geographical profile of the Company's production base.

FIELD NETBACKS

Details of field netbacks per commodity unit are as follows:




Period Three Months Ended June 30, 2006
------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($ Bbl) ($ Bbl) ($ Mcf) ($ Boe)
------------------------------------------------------------------------
Product sales $ 77.67 $ 71.00 $ 6.03 $ 42.71
------------------------------------------------------------------------
Royalty income 1.06 0.56 0.07 0.48
------------------------------------------------------------------------
Gain on fixed price sales
contract - - - -
------------------------------------------------------------------------
Royalties (12.83) (16.65) (1.35) (9.08)
------------------------------------------------------------------------
Production costs (6.46) - (1.28) (7.13)
------------------------------------------------------------------------
Transportation (1.52) (1.55) (0.37) (2.12)
------------------------------------------------------------------------
Field netback $ 57.92 $ 53.36 $ 3.10 $ 24.86
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Period Three Months Ended June 30, 2005
------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($ Bbl) ($ Bbl) ($ Mcf) ($ Boe)
------------------------------------------------------------------------
Product sales $ 65.37 $ 63.17 $ 7.69 $ 49.90
------------------------------------------------------------------------
Royalty income 0.81 0.20 0.08 0.45
------------------------------------------------------------------------
Royalties (6.76) (25.78) (1.99) (12.88)
------------------------------------------------------------------------
Production costs (6.54) - (1.41) (7.38)
------------------------------------------------------------------------
Transportation (1.85) (1.28) (0.48) (2.59)
------------------------------------------------------------------------
Field netback $ 51.03 $ 36.31 $ 3.89 $ 27.50
------------------------------------------------------------------------
------------------------------------------------------------------------

Period Six Months Ended June 30, 2006
------------------------------------------------------------------------
Natural Natural
Crude Gas Gas
Oil Liquids Oil Total
($ Bbl) ($ Bbl) ($ Mcf) ($ Boe)
------------------------------------------------------------------------
Product sales $ 72.32 $ 67.52 $ 6.78 $ 45.68
------------------------------------------------------------------------
Royalty income 1.10 0.78 0.08 0.57
------------------------------------------------------------------------
Gain on fixed price
sales contract - - 0.54 2.69
------------------------------------------------------------------------
Royalties (9.67) (17.14) (1.67) (10.42)
------------------------------------------------------------------------
Production costs (6.55) - (1.32) (7.32)
------------------------------------------------------------------------
Transportation (1.47) (1.60) (0.38) (2.13)
------------------------------------------------------------------------
Field netback $ 55.73 $ 49.56 $ 4.03 $ 29.07
------------------------------------------------------------------------
------------------------------------------------------------------------

------------------------------------------------------------------------
Period Six Months Ended June 30, 2005
------------------------------------------------------------------------
Natural Natural
Crude Gas Gas
Oil Liquids Oil Total
($ Bbl) ($ Bbl) ($ Mcf) ($ Boe)
------------------------------------------------------------------------
Product sales $ 63.58 $ 63.98 $ 7.49 $ 49.06
------------------------------------------------------------------------
Royalty income 1.15 0.20 0.13 0.73
------------------------------------------------------------------------
Royalties (5.95) (25.26) (1.95) (12.66)
------------------------------------------------------------------------
Production costs (6.26) - (1.39) (7.15)
------------------------------------------------------------------------
Transportation (1.53) (1.28) (0.44) (2.36)
------------------------------------------------------------------------
Field netback $ 50.99 $ 37.64 $ 3.84 $ 27.62
------------------------------------------------------------------------
------------------------------------------------------------------------


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

Average field netback per Boe fell by 10% in the three months ended June 30, 2006 when compared to the equivalent period in 2005, because of lower prices for natural gas. For the six month period ended June 30, 2006, the average field netback increased by 5%. Included in the field netback measurement for the six months ended June 30, 2006 is a gain from a fixed price natural gas sales contract totalling $2.69 per Boe. Excluding this amount, average field netback for the six months to June 30, 2006 amounted to $26.38, a reduction of 4% when compared to the equivalent period in 2005.



INTEREST

------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
Ended June Ended June Ended June Ended June
Period 30, 2006 30, 2005 30, 2006 30, 2005
------------------------------------------------------------------------
Charge for period $ 417,000 $ 261,000 $ 655,000 $ 551,000
------------------------------------------------------------------------
Per Boe $ 1.02 $ 0.82 $ 0.85 $ 0.95
------------------------------------------------------------------------
------------------------------------------------------------------------


Interest is paid on the Company's revolving bank facility. Average bank debt for the second quarter of 2006 amounted to $33 million; the second quarter of 2005 $25 million; for the six months to June 30, 2006, $28 million; and for the six months to June 30, 2005, $25 million.



GENERAL AND ADMINISTRATIVE COSTS

Total costs:

------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
Period Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Gross general and
administrative costs $ 1,106,000 $ 728,000 $ 2,408,000 $ 1,615,000
------------------------------------------------------------------------
Capital and operating
recoveries (416,000) (280,000) (935,000) (778,000)
------------------------------------------------------------------------
Net general and
administrative costs 690,000 448,000 1,473,000 837,000
------------------------------------------------------------------------
Stock based
compensation costs (140,000) (88,000) (284,000) (168,000)
------------------------------------------------------------------------
Cash general and
administrative costs $ 550,000 $ 360,000 $ 1,189,000 $ 669,000
------------------------------------------------------------------------
------------------------------------------------------------------------


Costs per Boe:

------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
Period Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------------------------
Gross general and
administrative costs $ 2.71 $ 2.29 $ 3.13 $ 2.77
------------------------------------------------------------------------
Capital and operating
recoveries (1.02) (0.88) (1.22) (1.34)
------------------------------------------------------------------------
Net general and
administrative costs 1.69 1.41 1.91 1.43
------------------------------------------------------------------------
Stock based
compensation costs (0.34) (0.27) (0.37) (0.29)
------------------------------------------------------------------------
Cash general and
administrative costs
per Boe $ 1.35 $ 1.14 $ 1.54 $ 1.14
------------------------------------------------------------------------
------------------------------------------------------------------------


Gross general and administrative costs for the three months ended June 30, 2006 increased by 51% when compared to the three months ended June 30, 2005. Increases were primarily due to additions to staff, increased compensation levels in response to market conditions, increased accommodation costs and increased costs associated with being a public company. These changes also affected the six months to June 30, 2006. Cash general and administrative costs per Boe for future quarters should be lower, due to higher capital and operating recoveries and an increased production base. Nevertheless, although Storm's general and administrative costs are low, the Company faces industry - wide pressures on many components of its cost structure. Non-cash stock based compensation costs are estimated to increase by $0.40 per Boe for the remainder of 2006.

The Company does not capitalize general and administrative or exploration overhead.



DEPLETION DEPRECIATION AND ACCRETION

------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
Period 2006 2005 2006 2005
------------------------------------------------------------------------
Depreciation
and depletion
charge for period $5,573,000 $4,294,000 $10,215,000 $7,813,000
------------------------------------------------------------------------
Accretion charge
for period 91,000 46,000 170,000 92,000
------------------------------------------------------------------------
Total $5,664,000 $4,340,000 $10,385,000 $7,905,000
------------------------------------------------------------------------
Total per Boe $ 13.90 $ 13.70 $ 13.52 $ 13.60
------------------------------------------------------------------------
------------------------------------------------------------------------


The increase in the total charge for depreciation, depletion and accretion for the quarter ended June 30, 2006 compared to the equivalent quarter in 2005 results from higher production volumes as the depletion component of the charge is based on a cost per Boe. The largely uniform charge per Boe indicates that the Company has been able to find or acquire reserves during each of the reporting periods at a largely consistent cost, in spite of industry wide increases in costs of equipment and services. Accretion represents the increase in the present value of the Company's asset retirement obligation which is discounted using an interest rate of 8%.

INCOME AND OTHER TAXES

At June 30, 2006 the Company had resource pools and operating tax losses carried forward estimated to be $184 million. In addition, the Company has a capital tax loss in the amount of $10 million available for application against future capital gains. Through application of operating losses carried forward, the expected provisions for future income taxes on the Company's income for the three and six months ended June 30, 2005 in the amounts of $1.3 million and $2.6 million respectively, have been eliminated. However by December 31, 2005 the Company's inventory of accumulated operating losses upon commencement of oil and gas operations in July 2004 had been largely used up and future income tax provisions have been recorded for the three and six months ended June 30, 2006. As a consequence, deferral of cash taxes into future periods will be subject to the amount and quality of the Company's resource pools. Nevertheless, subject to commodity pricing, the Company does not expect to pay cash taxes in 2006 and 2007. In periods prior to the quarter ended June 30, 2006, the Company did provide for large corporations tax. However this tax was eliminated by legislation passed during the three months ended June 30, 2006 with the result that prior provisions no longer required are shown as a recovery in the quarter to June 30, 2006.

NET INCOME AND NET INCOME PER SHARE

Net income for the three months ended June 30, 2006 fell by 51% to $1.8 million or $0.04 per diluted share, when compared to the three months ended June 30, 2005. For the six months to June 30, 2006 net income fell by 1% to $6.6 million or $0.16 per diluted share. This reduction is attributable to lower natural gas prices in the second quarter of 2006 and the requirement to provide for future income taxes in both reporting periods in 2006. Equivalent provisions in 2005 were eliminated through application of losses carried forward.

FUNDS FROM OPERATIONS

Funds from operations increased by 14% to $9.2 million for the three months ended June 30, 2006, or $0.23 per diluted share, compared to $8.1 million, or $0.20 per diluted share, for the three months to June 30, 2005. For the six month period to June 30, 2006, funds from operations amounted to $20.5 million or $0.51 per diluted share, compared to $14.8 million or $0.37 per diluted share for the equivalent period in 2005, an increase of 39%. Year-over-year growth in product volumes was offset by falling natural gas prices in the second quarter of 2006.

INVESTMENT AND FINANCING

Working Capital

Receivables comprise production revenue receivables, receivables in respect of operating and capital costs and net receivables in respect of cash calls issued to partners regarding capital projects. Prepaid costs include unamortized insurance premiums, field equipment and deposits.

Accounts payable include operating, administrative and capital costs payable. Estimates of amounts owing but not yet invoiced to the Company have been included in accounts payable.

The Company had a working capital deficiency of $4.0 million at June 30, 2006 compared to $2.9 million at June 30, 2005 and $11.6 million at March 31, 2006. The decrease in the working capital deficiency at June 30, 2006 when compared to March 31, 2006 is due to the pay down of accounts payable accumulated during the first quarter of the year. This corresponds to the cyclicality of the Company's business whereby working capital deficiency is normally highest at the end of the first and fourth quarter each year as a result of high field activity levels in winter months.



Property and Equipment

Capital costs incurred were as follows:

------------------------------------------------------------------------
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
Period 2006 2005 2006 2005
------------------------------------------------------------------------
Land and lease $ 881,000 $ 571,000 $ 2,642,000 $ 975,000
------------------------------------------------------------------------
Seismic 1,073,000 877,000 4,177,000 1,830,000
------------------------------------------------------------------------
Drilling and
completions 5,188,000 760,000 13,002,000 4,451,000
------------------------------------------------------------------------
Facilities and
equipment 1,884,000 2,143,000 7,765,000 10,306,000
------------------------------------------------------------------------
Property
acquisitions 39,361,000 - 39,361,000 -
------------------------------------------------------------------------
Property
dispositions (817,000) (90,000) (3,696,000) (2,962,000)
------------------------------------------------------------------------
Total $47,570,000 $4,261,000 $63,251,000 $14,600,000
------------------------------------------------------------------------
------------------------------------------------------------------------


Bank Debt, Liquidity and Capital Resources

The Company has a revolving borrowing base bank credit facility of $66 million. The amount drawn on this facility at June 30, 2006 amounted to $53.8 million. Debt, including working capital deficiency, amounted to $57.8 million at June 30, 2006, resulting in a debt to annualized trailing quarterly cash flow of 1.6 times. However cash flow for the second quarter of 2006 included results of only one month from a debt-financed acquisition which was completed during the quarter: a normalized debt to cash flow ratio would approximate 1.3 times. Further, a property disposal completed subsequent to June 30, 2006 will be applied in reduction of bank debt, leaving the Company with the financial capacity for acquisitions or expansion of field capital programs.

The Company funds its field capital programs through cash flow and bank borrowings. Acquisitions are funded by a combination of debt and, if required, equity. Field capital programs tend to be concentrated in the winter months, with the result that capital expenditures in the first and fourth quarters of the year will exceed cash flow, which is compensated by lower capital expenditures in the second and third quarters. In quarters of high field activity, the Company operates with a substantial working capital deficiency, which is paid down in quarters of lower field activity.

Investment

At June 30, 2006 the Company's investment in Storm Ventures International Inc.("SVI") represented a 16% ownership position. The carrying amount of the investment on the Company's balance sheet represents the transfer value of the investment in SVI to the Company under a Plan of Arrangement completed effective July 2004, a subsequent investment, plus the dilution gain accruing to Storm as a result of a private placement by SVI during 2005. This carrying amount should not be regarded as representative of the value of Storm's investment in SVI. In Tunisia, prospects have been identified in the Ghadames basin and other opportunities are being evaluated in southern Tunisia and in SVI's offshore block in northeast Tunisia. In the North Sea, a 50% UK based affiliate of SVI, with SVI as operator, drilled an offshore well in the prolific Viking fields earlier in 2006. Substantial quantities of gas in place were encountered, but not in sufficient quantity to warrant an immediate stand-alone tie in program. However, later this year, SVI, through its UK affiliate, will drill an additional two wells, also in the Viking fields; the interest in these two wells by SVI's affiliate is 100% and 50% respectively. At June 30, 2006 SVI had approximately Cdn$30 million on hand, sufficient to satisfy its short and medium term obligations. Opportunities in other regions are subject to constant operational, economic and financial review; however SVI's primary focus is on the UK sector of the North Sea and on and offshore Tunisia.

Storm has no financing or other obligations to SVI, although certain administrative services are provided on a cost recovery basis.

Future Income Taxes

The future income tax asset is made up of the excess of the tax bases of property and equipment transferred to the Company in 2004 over the related accounting amounts, plus the tax value of share issue costs and the provision for future income taxes for the first six months of 2006.

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



------------------------------------------------------------------------
As at Maximum Annual
June 30, 2006 deduction
------------------------------------------------------------------------
Canadian oil and gas property
expense $ 99,331,000 10%
------------------------------------------------------------------------
Canadian development expense $ 21,312,000 30%
------------------------------------------------------------------------
Canadian exploration expense $ 8,728,000 100%
------------------------------------------------------------------------
Undepreciated capital cost $ 46,033,000 20 - 100%
------------------------------------------------------------------------
Total $ 175,404,000
------------------------------------------------------------------------
------------------------------------------------------------------------
Operating losses $ 8,554,000
------------------------------------------------------------------------
------------------------------------------------------------------------
Capital losses $ 9,666,000
------------------------------------------------------------------------
------------------------------------------------------------------------


Asset Retirement Obligation

The Company's asset retirement obligation represents the present value of estimated future costs to be incurred to abandon and reclaim the Company's wells and facilities. Changes in amount of the obligation between June 30, 2006 and December 31, 2005 comprise the present value of additional obligations accruing to the Company as a result of field activity and asset acquisitions during the six month period ended June 30, 2006, less costs paid in settlement of abandonment obligations, plus the quarter-by-quarter 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 the Company's properties are based on an evaluation conducted by an external environmental consulting firm.

Share Capital

Details of outstanding share capital and dilutive elements:



------------------------------------------------------------------------
June 30, December 31,
As at 2006 2005
------------------------------------------------------------------------
Common shares outstanding
- end of period 42,914,000 39,184,000
------------------------------------------------------------------------
Share purchase warrants - 1,715,000
------------------------------------------------------------------------
Performance warrants 109,000 240,000
------------------------------------------------------------------------
Stock options 860,000 873,000
------------------------------------------------------------------------
Fully diluted common shares
- end of period 43,883,000 42,012,000
------------------------------------------------------------------------
------------------------------------------------------------------------


Share purchase warrants were exercisable at a price of $2.00 on or before June 30, 2006. All of the outstanding share purchase warrants were exercised for proceeds of $1.9 million. Outstanding performance warrants total 170,834 and are convertible into common shares using a formula based on the market price on the date of conversion. At June 30, 2006, 109,000 common shares would have been issuable if the performance warrants were all converted on that date. Stock options outstanding are exercisable over five years on various dates beginning September 2005 at prices ranging from $2.60 to $6.70. Subsequent to June 30, 2006 the Company issued an additional 986,000 options to acquire a like amount of common shares. These options expire on July 12, 2011 and are exercisable at a price of $5.67.

CONTRACTUAL OBLIGATIONS

In the course of its business the Company 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 none are with related parties.

Obligations with a fixed term are as follows:



------------------------------------------------------------------------
($000's) 2006 2007 2008 2009 2010
------------------------------------------------------------------------
Lease of premises 340 343 352 352
------------------------------------------------------------------------
Equipment leases 28 11 - -
------------------------------------------------------------------------

------------------------------------------------------------------------
Total 368 354 352 352
------------------------------------------------------------------------
------------------------------------------------------------------------


CRITICAL ACCOUNTING ESTIMATES

Financial amounts included in the Company's Management's Discussion and Analysis and in the unaudited financial statements for the three and six months ended June 30, 2006 are based on accounting policies, estimates and judgement which reflect information available to management at the time of preparation. Information with respect to the accounting policies selected by the Company and its use of estimates is set out in the Company's annual report for the year ended December 31, 2005.

RISK ASSESSMENT

There are a number of risks facing participants in the Canadian oil and gas industry. Some of the risks are common to all businesses while others are specific to the sector and others are specific to Storm. Information with respect to such risks is set out in the Company's annual report for the year ended December 31, 2005.



Storm Exploration Inc.
Balance Sheets

Unaudited
June 30, December 31,
2006 2005
------------- -------------

ASSETS

Current
Accounts receivable $ 10,864,000 $ 12,683,000
Prepaid expenses 2,098,000 1,012,000
------------- -------------
12,962,000 13,695,000

Property and Equipment - Net (Note 2) 170,583,000 116,051,000

Investments 8,275,000 8,275,000

Future Income Taxes (Note 3) 6,030,000 8,968,000
------------- -------------

$197,850,000 $146,989,000
------------- -------------
------------- -------------


LIABILITIES AND SHAREHOLDERS' EQUITY

Current
Accounts payable and accrued liabilities $ 16,931,000 $ 21,420,000
------------- -------------
16,931,000 21,420,000

Bank Indebtedness (Note 4) 53,826,000 25,523,000
Asset Retirement Obligation (Note 5) 5,468,000 3,801,000

------------- -------------
76,225,000 50,744,000
------------- -------------

Shareholders' Equity (Note 6)
Share capital 81,315,000 62,762,000
Contributed surplus 653,000 454,000
Retained earnings 39,657,000 33,029,000
------------- -------------
121,625,000 96,245,000
------------- -------------

$197,850,000 $146,989,000
------------- -------------
------------- -------------



Storm Exploration Inc.
Statements of Income and Retained Earnings
Unaudited


Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------ ------------ ----------- ------------

Revenue
Production
revenue 17,598,000 $15,951,000 37,602,000 28,919,000
Royalties (3,699,000) (4,080,000) (8,004,000) (7,352,000)
------------ ------------ ----------- ------------
13,899,000 11,871,000 29,598,000 21,567,000
------------ ------------ ----------- ------------

Expenses
Production 2,905,000 2,340,000 5,622,000 4,151,000
Transportation 863,000 822,000 1,636,000 1,370,000
Interest 417,000 261,000 655,000 551,000
General and
administrative 690,000 448,000 1,473,000 837,000
Depletion,
depreciation and
accretion 5,664,000 4,340,000 10,385,000 7,905,000
------------ ------------ ----------- ------------
10,539,000 8,211,000 19,771,000 14,814,000
------------ ------------ ----------- ------------

Income before
the following: 3,360,000 3,660,000 9,827,000 6,753,000

Income and other
taxes (Note 3)
Future income
taxes (1,615,000) - (3,199,000) -
Capital taxes 22,000 (17,000) - (37,000)
------------ ------------ ----------- ------------
(1,593,000) (17,000) (3,199,000) (37,000)
------------ ------------ ----------- ------------

Net income for
the period 1,767,000 3,643,000 6,628,000 6,716,000

Retained earnings,
beginning
of period 37,890,000 9,569,000 33,029,000 6,496,000
------------ ------------ ----------- ------------

Retained earnings,
end of period 39,657,000 13,212,000 39,657,000 13,212,000
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------


Net Income per
share (Note 7)
- basic 0.05 0.09 0.17 0.17
- diluted 0.04 0.09 0.16 0.17



Storm Exploration Inc.
Statements of Cash Flows
Unaudited


Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------ ------------ ----------- ------------

Operating activities
Net income for
the period 1,767,000 3,643,000 6,628,000 6,716,000
Add non-cash items:
Depletion,
depreciation and
accretion 5,664,000 4,340,000 10,385,000 7,905,000
Future income
tax 1,615,000 - 3,199,000 -
Stock based
compensation 140,000 88,000 284,000 168,000
------------ ------------ ----------- ------------
Funds from
operations 9,186,000 8,071,000 20,496,000 14,789,000
Net change in
non-cash working
capital items
(Note 8) (3,028,000) 1,142,000 (2,924,000) 4,101,000
------------ ------------ ------------ -----------
6,158,000 9,213,000 17,572,000 18,890,000
------------ ------------ ----------- ------------

Financing activities
Issue of common
shares - net
of expenses 16,691,000 3,000 18,207,000 3,000
Increase (Decrease)
in bank
indebtedness 29,288,000 5,383,000 28,303,000 2,485,000
------------ ------------ ----------- ------------
45,979,000 5,386,000 46,510,000 2,488,000
------------ ------------ ----------- ------------

Investing activities
Additions to property
and equipment (48,387,000) (4,351,000) (66,947,000) (17,562,000)
Disposals of
property and
equipment 817,000 90,000 3,696,000 2,962,000
Net change in
non-cash working
capital items
(Note 8) (4,567,000) (10,338,000) (831,000) (6,778,000)
------------ ------------ ----------- ------------
(52,137,000) (14,599,000) (64,082,000) (21,378,000)
------------ ------------ ----------- ------------

Change in cash
during the period - - - -

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

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


STORM EXPLORATION INC.
NOTES TO FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2006
(UNAUDITED)


1. SIGNIFICANT ACCOUNTING POLICIES

These interim unaudited financial statements of the Company have been prepared by management in accordance with accounting policies generally accepted in Canada, following the same accounting policies and methods of computation as those in the financial statements for the year ended December 31, 2005. The interim financial statement note disclosures do not include all of those disclosures applicable for annual financial statements. Accordingly, the interim financial statements should be read in conjunction with the financial statements and the notes thereto contained in the Company's annual report for the year ended December 31, 2005.



2. PROPERTY AND EQUIPMENT

June 30, 2006 December 31, 2005
----------------------------------

Petroleum and natural gas properties $199,263,000 $134,567,000
Furniture and equipment 402,000 350,000
----------------------------------
199,665,000 134,917,000
Accumulated depletion and depreciation (29,082,000) (18,866,000)
----------------------------------
$170,583,000 $116,051,000
----------------------------------
----------------------------------


At June 30, 2006, the depletion calculation excluded unproved properties of $14,616,000 (December 31, 2005 - $12,207,000).


3. FUTURE INCOME TAXES

The future income tax asset is made up of the excess of the accounting amounts over the related tax bases of property and equipment of the Company, less the effect of tax deductions associated with share issue costs.

The Company has tax pools associated with property and equipment and operating tax losses (which generally expire in the period 2008 to 2011) of approximately $184 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 June 2006, the Company is obligated to incur Canadian Exploration Expenditures in the amount of $15,580,000 prior to December 31, 2007.

The federal large corporation tax has been eliminated, retroactively effective to January 1, 2006.

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

The differences are as follows:



Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------

Statutory combined
federal and
provincial income
tax rate 35% 38% 35% 38%
Expected income
taxes $1,161,000 $1,393,000 $3,445,000 $2,569,000
Add (deduct) the
income tax effect
of:
Non-deductible
crown charges 414,000 882,000 890,000 1,580,000
Resource
allowance (287,000) (566,000) (696,000) (1,190,000)
Benefit of losses
not previously
recognized 512,000 (1,646,000) (183,000) (3,028,000)
Other (185,000) (63,000) (257,000) 69,000
------------------------------------------------------

Future Income Tax 1,615,000 - 3,199,000 -

Large corporations
tax (22,000) 17,000 - 37,000
------------------------------------------------------
$1,593,000 $ 17,000 $3,199,000 $ 37,000
------------------------------------------------------
------------------------------------------------------


4. BANK INDEBTEDNESS

The Company has an extendible revolving bank facility in the amount of $66,000,000 (December 31, 2005 - $37,000,000), based on the Company's producing reserves. The revolving facility is available to the Company until May 31, 2007, but may be extended at the Company's request until May 30, 2008, subject to the bank's review of the Company's reserve lending base. If the revolving facility is not renewed at the end of the current revolving phase, the facility moves into a term phase whereby the loan is to be retired with one payment on the 366th day following the last day of the revolving phase, in an amount equal to the outstanding principal. Interest is payable on the revolving facility at bank prime rate or banker's acceptance rates plus a stamping fee. Security comprises a floating charge demand debenture on the assets of the Company. Interest paid on the revolving facility in the three and six months to June 30, 2006 amounted to $417,000 and $655,000 (2005 - $261,000 and $551,000).

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 of the estimated cash flows required to settle the Company's asset retirement obligations is approximately $11 million (December 31, 2005 - $7.3 million), which is to be incurred over the next 15 years, with the majority of costs to be incurred between 2015 and 2020. A credit adjusted risk-free rate of eight percent was used to calculate the present value of the asset retirement obligations, amounting to $5,468,000 (December 31, 2005 - $3,801,000).

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

Except for voting rights, non-voting and voting common shares are identical.




Issued

Number of Shares Amount
--------------------------------

Balance as at December 31, 2005 39,184,000 $ 62,762,000

Flow-through common shares issued (i) 1,900,000 15,580,000
Common shares issued on exercise of
warrants (ii) 1,715,000 3,430,000
Common shares issued under the
performance warrant plan (iii) 112,000 83,000
Stock options exercised (iv) 3,000 14,000
Share issue costs (net of income tax
benefit) - (554,000)

--------------------------------
Balance as at June 30, 2006 42,914,000 $ 81,315,000
--------------------------------
--------------------------------


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) During the first six months of 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.

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.

Warrants

As part of a June 29, 2004 private placement of common shares, the Company issued warrants to acquire 2,100,000 common shares at a price of $2.00. As of June 30, 2006 all warrants have been exercised.

Stock Based Compensation Plans

(i) The Company has a performance warrant plan under which 512,500 warrants have been issued to employees to acquire common shares. The number of common shares issuable upon exercise of the warrants is the number of warrants held, multiplied by that percentage of a common share represented by the closing price of the share on the day immediately preceding the exercise date, less $2.00, divided by the closing price. The warrants are exercisable in three equal annual amounts commencing June 29, 2005. On both June 29, 2005 and June 29, 2006 170,833 warrants were exercised resulting in 170,834 warrants outstanding as at June 30, 2006.

Using the Black-Scholes pricing model, the fair value of each warrant was estimated to be $0.51 using a risk-free interest rate of 4.25%, volatility of 40% and an expected average life of two years. The cost of the warrant thus determined is amortized over its expected life, the expense being included in general and administrative costs with an equivalent allocation to contributed surplus.

(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 2,337,500 common shares has been reserved for issuance. Options to purchase 860,000 common shares issued to directors and employees of the Company were outstanding at the end of the period as follows:



Outstanding at December 31, 2005 873,000

Exercised during 2006 (3,000)
Cancelled during 2006 (10,000)

--------------
Outstanding at June 30, 2006 860,000
--------------
Weighted average exercise price $4.36
Average remaining life at June 30, 2006 3.89 years
Number exercisable at June 30, 2006 125,000
Option prices $2.60 - $ 6.70


Using the Black-Scholes pricing model, the weighted average fair value of the options granted in 2005 was estimated to be $1.48 (2004 - $0.93), using risk-free interest rates of 4.25% - 5.00%, volatility of 40% and an expected average life of 30 months. The amortized cost of the options is included in general and administrative costs with an equivalent allocation to contributed surplus.

7. PER SHARE AMOUNTS



Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------------------------------------------------
Basic

Net income per
share $0.05 $0.09 $0.17 $0.17
Weighted average
number of shares
outstanding ('000) 40,582 38,678 39,930 38,675

Diluted

Net income per
share $0.04 $0.09 $0.16 $0.17
Weighted average
number of shares
outstanding ('000) 40,871 40,149 40,219 40,141


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

8. SUPPLEMENTAL CASH FLOW INFORMATION



Changes in non-cash working capital

Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
----------------------------------------------------

Accounts
receivable $ (822,000) $ 384,000 $ 1,819,000 $ 845,000
Prepaid expenses (536,000) 17,000 (1,086,000) (39,000)
Accounts payable
and accrued
liabilities $ (6,237,000) (9,597,000) (4,488,000) (3,484,000)
--------------------------------------------------------
Change in non-
cash working
capital $ (7,595,000) $ (9,196,000) $(3,755,000) $(2,678,000)
--------------------------------------------------------
--------------------------------------------------------

Relating to:

Financing
activities $ - $ - $ - $ -
Investing
activities (4,567,000) (10,338,000) (831,000) (6,778,000)
Operating
activities (3,028,000) 1,142,000 (2,924,000) 4,100,000
--------------------------------------------------------

$ (7,595,000) $ (9,196,000) $(3,755,000) $(2,678,000)
--------------------------------------------------------
--------------------------------------------------------



Six months ended Six months ended
June 30, 2006 June 30, 2005
------------------------------------

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


9. FINANCIAL INSTRUMENTS

The Company's financial instruments recognized on the balance sheet consist of cash and short-term investments, accounts receivable, 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.







Contact Information

  • Storm Exploration Inc.
    Brian Lavergne
    President and Chief Executive Officer
    (403) 264-3520