Storm Exploration Inc.
TSX : SEO

Storm Exploration Inc.

February 22, 2007 22:24 ET

Storm Exploration Inc ("Storm" or the "Company") Is Pleased to Report Its Financial and Operational Results for the Three Month and Twelve Month Periods Ended December 31, 2006

CALGARY, ALBERTA--(CCNMatthews - Feb. 22, 2007) - Storm Exploration Inc (TSX:SEO):



Summarized comparative financial and operating amounts

Three Three
Months Months Year Year
Ended Ended Ended Ended
Highlights - in $CDN except December December December December
except volumetric amounts 31, 2006 31, 2005 31, 2006 31, 2005
--------------------------- ---------- ---------- ---------- ----------

Financial

Gas sales 19,339 (1) 19,758 59,841 (1) 53,375
NGL sales 1,168 1,835 5,595 8,206
Oil sales 2,841 1,935 13,690 7,918
Royalty Income 242 205 1,039 846
---------- ---------- ---------- ----------
Production Revenue 23,590 23,733 80,165 70,345
---------- ---------- ---------- ----------

Funds from operations 12,748 12,886 43,297 37,992
Per share - basic 0.30 0.33 1.04 0.98
Per share - diluted 0.29 0.32 1.03 0.93

Net income 3,049 13,507 11,505 26,533
Per share - basic 0.07 0.35 0.28 0.68
Per share - diluted 0.07 0.33 0.27 0.65

Capital expenditures, net of
dispositions 13,635 15,297 84,505 42,577

Debt, including working
capital deficiency 57,314 33,248 57,314 33,248

Weighted average common shares
outstanding
Basic 42,914 39,163 41,434 38,838
Diluted 43,564 40,905 41,935 40,810

Common shares outstanding
Basic 42,914 39,184 42,914 39,184
Fully Diluted 44,970 42,012 44,970 42,012

Operations

Oil Equivalent (6:1)
Barrels of oil equivalent
(000s) 501 337 1,723 1,213
Barrels of oil equivalent per
day 5,442 3,665 4,720 3,324
Average selling price ($CDN
per BOE) $ 46.63 (1) $ 69.78 $ 45.93 (1) $ 57.29

Gas production
Thousand cubic feet (000s) 2,601 1,687 8,669 5,824
Thousand cubic feet per day 28,271 18,338 23,752 15,957
Average selling price ($CDN
per mcf) $ 7.44 (1) $ 11.71 $ 6.91 (1) $ 9.16

NGL Production
Barrels (000s) 20 27 86 125
Barrels per day 217 299 234 342
Average selling price ($CDN
per barrel) $ 58.47 $ 66.80 $ 65.42 $ 65.71

Oil Production
Barrels (000s) 47 28 192 117
Barrels per day 513 310 527 322
Average selling price ($CDN
per barrel) $ 60.19 $ 67.90 $ 71.17 $ 67.40

Wells drilled
Gross 9.0 12.0 41.0 25.0
Net 5.7 7.2 25.0 15.2

(1) Includes proceeds from hedging activities


HIGHLIGHTS

- Fourth quarter production grew to 5,442 Boe per day, a 48% increase from production of 3,665 Boe per day in the same period one year ago. Fourth quarter production per basic share outstanding was up 36% from the same period one year ago.

- Average 2006 production increased to 4,720 Boe per day, representing growth of 42% from average production of 3,324 Boe per day in 2005. This is an increase of 33% on a weighted average basic share outstanding basis.

- Production exiting 2006 met guidance with production in December averaging 5,940 Boe per day, an increase of almost 50% from the 2005 exit rate of 4,000 Boe per day. Approximately 2/3 of the year over year growth, or 1,200 Boe per day, came from Storm's organically generated drilling program and 1/3 or 700 Boe per day came from acquisitions net of dispositions.

- Success with the drill bit continued in the fourth quarter with 80% or seven out of the nine wells drilled being cased for production with five gas wells (3.3 net), two oil wells (1.5 net), and two dry holes (0.9 net). For the year, Storm drilled 41 wells (25 net) resulting in 25 gas wells (15.6 net) and eight oil wells (5.4 net) for an 80% success rate.

- Cash flow for the year totaled $43.3 million or $1.03 per diluted share, an increase of 11% from cash flow of $0.93 per diluted share in the year earlier period. The increase is particularly notable given the 28% decline in natural gas prices year over year.

- Cash flow netback for 2006 was $25.13 per Boe, a decrease of 20% from the prior year cash flow netback of $31.32 per Boe. A 28% decline in the natural gas price was partially offset by a 4.2% reduction in the overall royalty rate and a 2.2% reduction in operating costs, which declined to average $7.07 per Boe for the year.

- Operating costs declined from $7.53 per Boe in the first quarter of 2006 to $6.80 per Boe in the fourth quarter as a result of successful cost reduction initiatives and production growth.

- Net income for the year was $11.5 million or $0.27 per diluted share, down from net income of $0.65 per diluted share in 2005. In addition to much lower natural gas prices, year-over-year net income was impacted by the requirement to record a future income tax provision in 2006; there was no equivalent charge in 2005. Further, in 2005, investment gains of $5.3 million were recognized; there were no equivalent gains in 2006.

- Capital expenditures for the year totaled $84.5 million which resulted in bank debt and working capital deficiency ending the year at $57.3 million or 1.1 times annualized fourth quarter cash flow.

- Proved reserves were added for $15.04 per Boe and proved plus probable reserves for $12.34 per Boe (includes change in future development costs and excludes acquisitions, dispositions and revisions in accordance with NI 51-101 requirements). Using the cash flow netback of $25.13 per Boe, this results in the recycle ratio being 1.7 for total proved reserve additions and 2.0 for total proved plus probable reserve additions.

- Total proved plus probable reserves were increased by 3.5 Boe for each Boe that was produced during 2006 (253% reserve replacement on a total proved plus probable basis).

- Total proved plus probable reserves grew by 47% to 13.38 Mmboe at December 31, 2006, an increase of 35% on a per share outstanding basis from the year earlier period (using basic shares outstanding at the end of each period).

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 net production averaging 3,950 Boe per day in the fourth quarter. Unexpected, temporary outages in October and November reduced fourth quarter production by approximately 200 Boe per day. We were very active in the fourth quarter and:

- Drilled 8 wells with 75% success resulting in two horizontal oil wells at Saddle Hills (1.5 net) one gas well at Teepee (0.5 net) and three gas wells (2.2 net) at Parkland.

- Tied in two successful Pouce/Bonanza wells (2.0 net) drilled in the third quarter, which are currently producing 400 Boe per day net.

- Tied in three Parkland wells (1.9 net) drilled in the third quarter, which are currently producing 600 Boe per day net.

- Began production from the two new Saddle Hills wells (1.5 net) drilled in the fourth quarter, which are currently producing 90 Bbls per day net.

- Installed compression at Pouce (70% WI), which increased current net production by 200 Boe per day.

- Installed compression at Teepee (50% WI), which increased current net production by 60 Boe per day.

The success of our fourth quarter program has resulted in current production increasing to approximately 4,700 Boe per day from this area with another 200 Boe per day (1/3 of test rates) to be added from wells awaiting tie-in.

Our 2007 drilling program is diversified in terms of risk and play type and includes 33 wells (23.4 net) with:

- 16 wells (12.2 net) at Parkland primarily targeting the Halfway and Doig formations,

- 3 horizontal infills (2.5 net) in Doe Creek oil pools at Saddle Hills and Sinclair,

- 4 infills (2 net) in Bluesky and Notikewin pools at Buick,

- 9 infills and step-outs (6.0 net) targeting the Bluesky, Paddy, Halfway, and Montney formations in the Grande Prairie area,

- 1 infill (0.7 net) in a Gething pool at Bonanza.

Many of these locations are follow-ups to successful wells that were drilled in 2006. Historically, we have been successful on approximately 80% of the wells we have drilled in this area.

During the first quarter of 2007, major projects will include:

- Drilling nine wells with five wells (3.9 net) at Parkland, two wells (1.0 net) at Buick, and two wells (0.9 net) at Clairmont.

- Expanding the capacity of the Parkland facility from 15 mmcf per day to 25 mmcf per day through the addition of a second compressor and the twinning of 4 miles of gathering system pipeline.

- Constructing an oil battery at Saddle Hills which is expected to reduce operating costs by $300,000 per year net to Storm.

The most significant property within this core area is Parkland where we drilled 13 wells in 2006 with a success rate of 85% resulting in 11 gas wells (8.1 net). Fourth quarter production averaged 1,300 Boe per day and current production has increased to approximately 1,600 Boe per day as a result of recent well tie-ins. Another 200 Boe per day is expected to be added in late February from additional wells awaiting tie-in. Our land position has increased by 6,400 net undeveloped acres in the first quarter of 2007 at a total cost of $900,000. We plan to construct a pipeline crossing the Peace River and tie-in to the McMahon gas plant at a cost net to Storm of $2.5 to $3.0 million. This will eliminate the potential for production curtailment due to gas processing capacity constraints and will also reduce operating costs by $1.25 million per year based on current total raw gas throughput of 15.5 mmcf per day and Storm net production of 10 mmcf per day. Construction is expected to be completed late in the third quarter of 2007. We also plan to drill 17 wells (12.8 net) in 2007 with most of these being step-out and delineation wells in the Halfway and Doig formations. Three to five of these wells will also test the deeper and higher impact Montney, Belloy, and Kiskatinaw formations. The potential for infill drilling in the Halfway and Doig continues to be evaluated and remains contingent on determining stabilized production rates on recently drilled wells and on completing the tie-in to the McMahon gas plant.

Cabin-Kotcho-Junior, North East British Columbia

Net production from this area averaged 1,250 Boe per day in the fourth quarter. As a result of increasing water production from a well drilled into the Petitot Slave Point A pool last winter, production in the quarter was reduced by 150 Boe per day. Current production is approximately 1,200 Boe per day.

This winter, Storm drilled 3 wells (1.5 net) targeting the Slave Point formation with one well drilled in the fourth quarter of 2006 and the other two wells drilled in the first quarter of 2007. Two of the wells flowed 1 mmcf per day of gas along with significant amounts of produced water (250 to 500 barrels of water per day) and the third well did not encounter any porous Slave Point reservoir. All three wells were abandoned after completion. We also plan to reactivate a suspended well (100% WI) which is expected to produce 1 to 2 mmcf per day from the Slave Point formation. Total expenditures in this area this winter will be $3 million net to Storm which represents less than 5% of the total 2007 capital investment program. No further drilling activity is planned for this area until next winter.

Storm's historical success rate has been approximately 50% when targeting the higher risk, higher reward Slave Point formation. Due to the higher level of risk associated with this play, we have typically maintained a 50% working interest in wells. Given the higher production rates and reserves associated with successful Slave Point wells and the inventory of land and seismic that we have accumulated, we plan to be active in this area next winter with a modest program of 2 to 3 wells targeting the Slave Point formation. We will also work at diversifying our drilling program to include wells targeting the shallower Bluesky/Debolt formations and the longer life reserves in the Jean Marie formation.

Red Earth, Alberta

Fourth quarter net production from this area averaged 175 Boe per day, a decline from third quarter production of 325 Boe per day due to normal initial declines on two prolific Granite Wash wells that began production in the first half of 2006. Current production is approximately 125 Boe per day.

Ten wells were drilled in this area in 2006 resulting in six oil wells (3.8 net) and one gas well (0.6 net) for a 70% success rate which is consistent with historical results. Offsetting the higher drilling risk associated with this area is:

- A field netback averaging $55 per barrel in 2006,

- A production rate averaging 100 barrels of oil per day in the first year (based on Storm's results since 2004) which results in quick payout of the capital invested to drill, complete, and equip wells, and

- The uphole Slave Point formation, which is often encountered, containing significant oil in place (5 to 6 million barrels of oil in place per section) and long life reserves with production rates of 15 to 20 barrels of oil per day being sustainable over a number of years.

In 2007, Storm plans to drill four wells (3.6 net) primarily targeting light oil from the Granite Wash formation and the uphole Slave Point formation. Two of these wells (1.6 net) will be drilled in the first quarter and the two remaining wells (2.0 net) will be drilled in the second half of 2007.

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 international exploration and exploitation opportunities.

During December 2006, SVI raised $43 million gross through the issuance of 8.5 million shares at $5 per share with proceeds being used to fund 2007 activities. Storm increased its investment in SVI by $1 million (200,000 shares) through this offering and did so primarily because of the success being experienced by SVI in the North Sea.

SVI's 50% owned affiliate, Silverstone Energy Limited, has been successful on the third well drilled in the North Sea which discovered a new gas pool which is internally estimated to have approximately 120 BCF of gas in place. The three wells drilled to date have all been in the Viking Fields area of the southern North Sea with the three discoveries having estimated gas in place totalling 250 to 300 BCF. One of these discoveries is expected to be developed in 2008. Initiating production and cash flow from these discoveries has the potential to make the North Sea area self-funding. During 2007, an additional two wells are planned in the North Sea with one well targeting a 40 to 100 million barrel medium gravity oil prospect in the Central North Sea Mariner-Gryphon area and the second well targeting a 50 BCF gas prospect in the Viking Fields area.

In Tunisia, SVI plans to drill an onshore well in 2007 that will test one of two large structures in the Remada Sud area that each have potential gas in place of 200 BCF. Offshore, a review of available 2-D seismic data over the Gulf of Hammamet lands has been completed and nine prospects have been identified. A 400 to 500 square kilometer marine 3-D seismic program is planned for the summer of 2007 to better define these prospects. These prospects offset eight existing pools containing 25 to 300 million barrels of oil in place.

SVI continues to evaluate additional development opportunities and exploration prospects in the North Sea, Tunisia, and other areas with low jurisdictional risk.

RESERVES AT DECEMBER 31, 2006

Storm's year-end reserve evaluation effective December 31, 2006 was prepared by Paddock Lindstrom & Associates Limited ('Paddock'). Paddock has evaluated 100% of Storm's reserves. The Paddock price forecast at December 31, 2006 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 36% to 9.55 million Boe (Mmboe) at December 31, 2006, an increase of 25% on a per share basis from the year earlier period (using basic shares outstanding at the end of each year).

- Total proved plus probable reserves grew by 47% to 13.38 Mmboe at December 31, 2006, an increase of 35% on a per share outstanding basis from the year earlier period (using basic shares outstanding at the end of each period).

- Total proved plus probable reserves were increased by 3.5 Boe for each Boe that was produced during 2006 (253% reserve replacement on a total proved plus probable basis).

- The total proved finding and development cost was $15.04 per Boe and the total proved plus probable finding and development cost was $12.34 per Boe. As per NI 51-101 requirements, 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 $14.06 and $11.45 per Boe.

- The all-in cost for adding reserves was $20.65 per Boe on a total proved basis and $15.78 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 $14.90 and $15.06 per Boe.

- Total proved plus probable 10% NPV before tax amounted to $242 million, an increase of 29% year over year which was accomplished even though forecast prices for the first two years declined by 20%.

- Total proved plus probable reserve additions from the acquisition completed on June 15, 2006 amounted to 2.113 Mmboe, very close to the internal estimate of 2.23 Mmboe that had been previously provided.

- A high quality reserve base was maintained with proved producing reserves representing 83% of total proved reserves and 60% of total proved plus probable reserves.

- The recycle or reinvestment ratio was 1.6 times in 2006 using the cash flow netback of $25.13 per Boe and the all-in total proved plus probable finding, development, and acquisition cost of $15.78 per Boe (includes the effect of future development capital, acquisitions, dispositions and revisions).



Gross Company Interest Reserves as at December 31, 2006
(Before deduction of royalties payable, not including royalties receivable)

---------------------------------------------
Light
Crude Sales 6:1 Oil
Oil Gas NGLs Equivalent
(Mbbls) (mmcf) (Mbbls) (Mboe)
---------------------------------------------
Proved Producing 771 40,658 411 7,958
Proved Non-Producing 13 4,072 63 755
---------------------------------------------
Total Proved Developed 784 44,730 474 8,713

Proved Undeveloped 135 3,935 41 832
---------------------------------------------
Total Proved 919 48,665 515 9,545
Probable Additional 515 18,998 154 3,835
---------------------------------------------
Total Proved plus Probable 1,434 67,663 669 13,380
---------------------------------------------
---------------------------------------------


Gross Company Reserve Reconciliation for 2006
(Gross company interest reserves before deduction of royalties payable)

--------------------------------
6:1 Oil Equivalent (Mboe)
Proved
Total plus
Proved Probable Probable
--------------------------------
December 31, 2005 - Opening Balance 7,025 2,054 9,079
Acquisitions 1,583 530 2,113
Revisions - existing properties (571) 194 (377)
Discoveries 1,936 708 2,644
Extensions 1,944 539 2,483
Dispositions (674) (190) (864)
Production (1,698) 0 (1,698)
--------------------------------
December 31, 2006 - Closing Balance 9,545 3,835 13,380
--------------------------------
--------------------------------


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

3 YEAR
2006 2005 TOTAL
---------------------------------------------------------------------------

Capital expenditures excluding
acquisitions and dispositions-$'000 $ 56,272 $ 41,452 $ 117,588

Net change from previously allocated
future development capital - $'000 $ 2,057 ($5,044) ($5,390)
-------- ---------- ----------

Total capital including the net change
in future capital - $'000 $ 58,329 $ 36,408 $ 112,198

Reserve additions excluding
acquisitions, dispositions and revisions
- MBoe 3,879 2,590 7,420

Total Proved Finding and Development
Costs -- per Boe $ 15.04 $ 14.06 $ 15.12
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Total Proved Plus Probable Finding & Development Cost - per NI 51-101

3 YEAR
2006 2005 TOTAL
----------------------------------

Capital expenditures excluding
acquisitions & dispositions-$'000 $ 56,272 $ 41,452 $ 117,588

Net change from previously allocated
future development capital - $'000 $ 6,976 ($4,001) $ 512
-------- ---------- ----------

Total capital including the net change in
future capital - $'000 $ 63,248 $ 37,451 $ 118,100

Reserve additions excluding acquisitions,
dispositions & revisions - MBoe 5,127 3,270 9,623

Total Proved plus Probable Finding and
Development Costs - per Boe $ 12.34 $ 11.45 $ 12.27
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Total Proved Finding, Development & Acquisition Cost
- All in including FDC, Acquisitions, Dispositions, Revisions

3 YEAR
2006 2005 TOTAL
---------------------------------------------------------------------------

Capital expenditures including
acquisitions & dispositions -$'000 $ 84,505 $ 42,577 $ 184,632

Net change from previously allocated
future development capital - $'000 $ 2,607 ($5,044) $ 3,082
-------- ---------- ----------

Total capital including the net change in
future capital - $'000 $ 87,112 $ 37,533 $ 187,714

Reserve additions including acquisitions,
dispositions & revisions - MBoe 4,218 2,519 9,481

Total Proved Finding and Development
Costs - $/Boe $ 20.65 $ 14.90 $ 19.80
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Total Proved Plus Probable Finding, Development & Acquisition Cost
- All in including FDC, Acquisitions, Dispositions, Revisions

3 YEAR
2006 2005 TOTAL
---------------------------------------------------------------------------

Capital expenditures including
acquisitions and dispositions -$'000 $ 84,505 $ 42,577 $ 184,632

Net change from previously allocated
future development capital - $'000 $ 10,176 ($4,001) $ 11,990
-------- ---------- ----------

Total capital including the net change in
future capital - $'000 $ 94,681 $ 38,576 $ 196,622
Reserve additions including acquisitions,
dispositions and revisions - MBoe 5,999 2,561 12,491

Total Proved plus Probable Finding and
Development Costs - $/Boe $ 15.78 $ 15.06 $ 15.74


Reserve revisions can mainly be attributed to newer wells that underperformed with respect to volumetric estimates that were relied upon for initial reserve bookings. Volumetric estimates are relied on in areas where there is limited performance information available from offsetting wells producing from the same formation.

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, 2006

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.

--------------------------------------------------------------
DISCOUNTED DISCOUNTED DISCOUNTED DISCOUNTED
UNDISCOUNTED AT 5% AT 10% AT 15% AT 20%
$'000 $'000 $'000 $'000 $'000
--------------------------------------------------------------
Proved
Producing $227,930 $188,335 $162,814 $144,622 $130,857

Proved Non-
Producing 18,837 15,435 13,141 11,492 10,249
--------------------------------------------------------------
Total Proved
Developed 246,767 203,770 175,955 156,114 141,106

Proved
Undeveloped 19,987 14,987 11,729 9,449 7,767
--------------------------------------------------------------

Total Proved 266,754 218,757 187,684 165,563 148,873

Probable
Additional 104,469 71,993 54,078 42,791 35,057
--------------------------------------------------------------

Total
Proved plus
Probable $371,223 $290,750 $241,762 $208,354 $183,930
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Paddock Lindstrom and Associates Escalating Price Forecast as at December
31, 2006

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

Edmonton Henry Hub AECO
WTI Light Natural Natural
Crude Oil Crude Oil Gas Gas Propane Butane
$US/bbl $CDN/bbl $US/mmbtu $CDN/mmbtu $CDN/bbl $CDN/bbl
---------------------------------------------------------------------------
2007 61.00 68.58 7.25 7.33 41.15 48.01
2008 60.00 67.40 7.75 7.91 40.44 47.18
2009 60.00 67.37 7.75 7.89 40.42 47.16
2010 58.00 65.04 7.75 7.87 39.03 45.53
2011 56.00 62.71 7.91 8.02 37.63 43.90
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2006 Actual 2006 Actual 2006 Actual
Price and Price and Price and
PLA Forecast Price PLA Forecast Price PLA Forecast Price
Storm Wellhead Storm Wellhead Storm Wellhead
Oil Price Gas Price Condensate Price
$CDN/bbl $CDN/mcf $CDN/bbl
---------------------------------------------------------------------------
2006 Actual 71.17 6.57 65.42
2007 66.01 7.29 68.31
2008 64.55 7.85 66.97
2009 64.46 7.81 67.09
2010 62.14 7.78 64.83
2011 59.79 7.93 62.87
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2007 OUTLOOK

Our investment on exploration and development activities in 2007 will increase from our initial estimate of $65 million to $68 million and this will be funded primarily by cash flow assuming a gas price of CDN $6.25/GJ at AECO, an oil price of CDN $73.00/bbl (US $66.00/bbl WTI), operating costs of $6.50 per Boe, a royalty rate of 22%, and cash general and administrative costs of $1.15 per Boe. We may enter into additional short-term hedges on our gas production to ensure that cash flow can be used to fund this level of investment. This investment is expected to result in production growing from a current level of 6,200 Boe per day to 7,100 Boe per day by the end of 2007. We will not be providing guidance on average annual production 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.

Highlights of the 2007 capital investment plan include:

- Allocating approximately 65% to drilling and completions, 15% to land/seismic/acquisitions, 15% to facilities and, 5% to workovers.

- A drilling program totaling 40 wells (28.5 net) with 33 (23.4 net) in the Peace River Arch, four (3.6 net) at Red Earth, two (1.0 net) at Cabin/Kotcho/Junior, and one at Brazeau (0.5 net).

- An investment of $24 million in the first quarter with $11 million for drilling and completions, $7 million for tie-ins and facility expansions, $1 million for workovers, and $5 million for land, seismic, and acquisitions. Drilling activity will include 12 wells (8.0 net) with eight (5.4 net) in the Peace River Arch, two (1.6 net) at Red Earth, and two (1.0 net) at Cabin/Kotcho/Junior.

The value of Storm's ownership position in SVI continues to increase mainly as a result of the drilling success experienced to date in the Viking Fields area of the North Sea. Three wells have been drilled to date resulting in the discovery of three new gas pools with total estimated gas in place of 250 to 300 BCF. One or two of these discoveries will be developed by the fall of 2008 leading to the initiation of production and cash flow. This will make the North Sea business self-funding which has the potential to significantly increase shareholder value, given SVI's inventory of 14 internally generated drilling prospects, most of which are low to medium risk offsets to the pools discovered to date.

Storm's business plan will continue to rely on both drilling and acquisitions for growth in 2007. This has proven to be very effective at increasing value for our shareholders throughout the commodity price cycle, as evidenced by year over year production per outstanding share growing by 33%, even though natural gas prices declined by 28%. We will maintain our disciplined approach to capital spending with cash flow being used to fund exploration and exploitation activities while debt along with limited amounts of equity will be used to fund strategic acquisitions. Our diversified inventory of opportunities totals 70 drilling locations and 25 exploitation projects and is simply more of what has worked so well for us over the last two years. With nearly two years of opportunities to pursue on our large, undeveloped land base totaling 251,000 net acres, we are well positioned for further growth in 2007.

In closing, I would like to thank the hard working and talented team of Storm employees for their efforts in making 2006 such a successful year, our shareholders for their continued confidence and, our Board of Directors for their invaluable advice and guidance.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND OPERATING RESULTS FOR THE YEAR AND QUARTER ENDED DECEMBER 31, 2006

Set out below is management's discussion and analysis of financial and operating results for Storm (or the "Company") for the year and quarter ended December 31, 2006. It should be read in conjunction with the audited financial statements for the year ended December 31, 2006 and other operating and financial information included in this press release. This management's discussion and analysis is dated February 22, 2007.

Introduction and Limitations:

Basis of Presentation - The financial data presented below has in part been derived from the Company's annual audited financial statements prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") and in accordance with accounting policies as set out in footnote 2 to the Company's financial statements. 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.

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

Non-GAAP Measurements - Within management's discussion and analysis, references are made to terms having widespread use in the oil and gas industry in Canada. 'Funds from operations', 'funds from operations per share', 'cash flow from operations' and 'netbacks' are not defined by GAAP in Canada and are regarded as non-GAAP measures. Measurement of funds from operations is detailed on the Statement of Cash Flows. Funds from operations per share is calculated based on the weighted average number of common shares outstanding consistent with the calculation of net income per share. Netbacks equal total revenue less royalties, transportation and operating costs, calculated on a Boe basis. Total Boe is calculated by multiplying the daily production by the number of days in the year or quarter as the case may be.



PRODUCTION AND REVENUE

Average Daily Production

---------------------------------------------------------------------------
Year to Year to
December 31, December 31, Percentage
2006 2005 Change
---------------------------------------------------------------------------
Natural gas (Mcf/d) 23,752 15,957 49%
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Natural gas liquids (Bbls/d) 234 342 (32%)
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Crude oil (Bbls/d) 527 322 64%
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Total (Boe/d) 4,720 3,324 42%
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The year-over-year increase in production came from Storm's successful drilling and exploitation programs throughout the year, coupled with an acquisition completed in June 2006. Production per million shares outstanding in 2006 averaged 114 Boe per day, compared to 86 Boe per day for the year to December 31, 2005, an increase of 33%.

Production as of the date of this report approximated 6,200 Boe per day. This represents growth of 590% since inception of oil and gas operations in July 2004.



Production Profile and Per Unit Prices

---------------------------------------------------------------------------
Year Ended Year Ended
December 31, 2006 December 31, 2005
-------------------------------------------------------------
Average Average Percentage
Selling Percentage Selling Change in
Percentage Price Before of Total Price Before Average
of Total Boe Transportation Boe Transportation Selling
Production Costs Production Costs Price
---------------------------------------------------------------------------
Natural
gas 84% $ 6.57 80% $ 9.16 (28%)
---------------------------------------------------------------------------
Natural
gas
liquids 5% $ 65.42 10% $ 65.71 (1%)
---------------------------------------------------------------------------
Crude
oil 11% $ 71.17 10% $ 67.40 6%
---------------------------------------------------------------------------
Per Boe $ 44.24 $ 57.29 (23%)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Storm's production base is largely natural gas and associated liquids, and has not changed materially year-over-year. For the year to December 31, 2006, the AECO C spot price for natural gas averaged $6.21 per GJ, compared to $8.36 for the year to December 31, 2005, a decrease of 26%. The Company generally produces higher heat content gas, which receives a premium price. For crude oil, Edmonton par price averaged $73.72 per barrel for 2006, compared to $69.85 for 2005, an increase of 6%. Natural gas liquids prices tended to track crude oil prices throughout 2006 and also in 2005.

Per unit prices in the table above do not include any gains from hedging realized during 2006.



Production by Area - Boe per Day

---------------------------------------------------------------------------
Year Ended Year Ended Percentage
December 31, 2006 December 31, 2005 Change
---------------------------------------------------------------------------
Peace River Arch 3,177 1,984 60%
---------------------------------------------------------------------------
Cabin-Kotcho-Junior 1,076 774 39%
---------------------------------------------------------------------------
Red Earth 250 38 558%
---------------------------------------------------------------------------
Other 217 528 (59%)
---------------------------------------------------------------------------
Total 4,720 3,324 42%
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The above sets out the average production from each of Storm's core areas. Within the Peace River Arch, production from the largest property, Parkland, averaged 951 Boe per day for the year ended December 31, 2006, compared to 550 Boe per day for 2005.



Production Revenue
---------------------------------------------------------------------------
Year Ended Year Ended Percentage
December 31, 2006 December 31, 2005 Change
---------------------------------------------------------------------------
Natural gas $ 56,936 $ 53,375 7%
---------------------------------------------------------------------------
Natural gas liquids 5,595 8,206 (32%)
---------------------------------------------------------------------------
Crude oil 13,690 7,918 73%
---------------------------------------------------------------------------
Hedging gains 2,905 - N/A
---------------------------------------------------------------------------
Revenue from
product sales $ 79,126 $ 69,499 14%
---------------------------------------------------------------------------
Royalty income 1,039 846 23%
---------------------------------------------------------------------------
Total Production
Revenue $ 80,165 $ 70,345 14%
---------------------------------------------------------------------------
---------------------------------------------------------------------------

A reconciliation of revenue from product sales between 2006 and 2005 is as
follows:

---------------------------------------------------------------------------
Natural
Gas
Natural Gas Liquids Crude Oil Total
---------------------------------------------------------------------------
Revenue from product sales
- 2005 $ 53,375 8,206 7,918 $ 69,499
---------------------------------------------------------------------------
Effect of increased
(decreased) production in 2006 26,330 (2,590) 5,044 28,784
---------------------------------------------------------------------------
Effect of (decreased) increased
product prices in 2006 (22,769) (21) 728 (22,062)
---------------------------------------------------------------------------
Contribution from hedging
gains in 2006 2,905 - - 2,905
---------------------------------------------------------------------------
Revenue from product sales
- 2006 $ 59,841 5,595 13,690 $ 79,126
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Royalty income for each of 2006 and 2005 is derived from ownership of overriding royalties, largely in the Peace River Arch. Royalty income in 2006 compared to 2005 reflects higher royalty volumes, net of lower product prices.



Hedging:

During 2006, the Company entered into hedging agreements as follows:

---------------------------------------------------------------------------
Product Volume Period Contract Price
---------------------------------------------------------------------------
7,500 GJ January to March Fixed price Average price of
Natural gas per day 2006 per month $13.09 per GJ
---------------------------------------------------------------------------
Floor Cdn $8.00 per GJ
13,000 GJ November to Costless Ceiling Cdn $9.90 per
Natural gas per day December 2006 Collar GJ
---------------------------------------------------------------------------
Floor Cdn $9.00 per GJ
January to March Costless Ceiling Cdn $11.45 per
Natural gas 13,000 GJ 2007 Collar GJ
---------------------------------------------------------------------------
5,000 GJ December 2006
Natural gas per day to March 2007 Fixed price Cdn $7.58 per GJ
---------------------------------------------------------------------------
April to June
Natural gas 7,000 GJ 2007 Fixed price Cdn $7.10 per GJ
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Storm follows hedge accounting rules and recognized a gain of $2.9 million or $1.69 per Boe during the year ended December 31, 2006 in respect of the completed portion of the above contracts. A mark-to-market valuation of contracts outstanding at December 31, 2006 would have resulted in the recognition of an additional gain of $4.1 million.



Storm had no hedges in place during 2005.

ROYALTIES

---------------------------------------------------------------------------
Year Ended Year Ended Percentage
December 31, 2006 December 31, 2005 Change
---------------------------------------------------------------------------
Charge for period $ 16,876 $ 17,714 (5%)
---------------------------------------------------------------------------
Royalties as a
percentage of revenue from
product sales
- Crown 19.1% 21.9% (13%)
- Other 2.2% 3.6% (37%)
---------------------------------------------------------------------------
Total 21.3% 25.5% (16%)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Per Boe $ 9.80 $ 14.60 (33%)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The decrease in the royalty charge and the royalty charge per Boe for 2006 compared to 2005 results from lower per unit commodity prices.



PRODUCTION COSTS

---------------------------------------------------------------------------
Year Ended Year Ended
December 31, December 31, Percentage
2006 2005 Change
---------------------------------------------------------------------------
Charge for period $ 12,188 $ 8,757 39%
---------------------------------------------------------------------------
Percentage of revenue
from product sales 15.4% 12.6% 22%
---------------------------------------------------------------------------
Per Boe $ 7.07 $ 7.22 (2%)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Total production costs in 2006 increased over 2005 in response to growing product sales. Production costs have also increased as a percentage of production revenue, as a result of lower product prices. The relatively constant year-over-year cost per Boe, and a downward trend in operating costs in the latter part of 2006, illustrates the Company's success in maintaining or reducing components of its cost structure in the face of industry-wide cost increases.

Storm's cash costs which comprise production, general and administrative costs and interest, amounted to $9.40 for 2006, compared to $9.65 for 2005.



TRANSPORTATION COSTS

---------------------------------------------------------------------------
Year Ended Year Ended
December 31, December 31, Percentage
2006 2005 Change
---------------------------------------------------------------------------
Charge for period $ 3,795 $ 2,836 34%
---------------------------------------------------------------------------
Percentage of revenue
from product sales 4.8% 4.0% 20%
---------------------------------------------------------------------------
Per Boe $ 2.20 $ 2.34 (6%)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Increased volumes have resulted in increases in total transportation costs. Increased transportation costs as a percentage of revenue in 2006 reflect declining per unit realizations from natural gas sales. However, lower per Boe transportation costs in 2006 reflect changes in the geographical profile of the Storm's production base; in particular, increased production from Parkland has resulted in a reduction in average transportation costs.



FIELD NETBACKS

Details of field netbacks per commodity unit are as follows:

---------------------------------------------------------------------------
Year Ended December 31, 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
---------------------------------------------------------------------------
---------------------------------------------------------------------------


---------------------------------------------------------------------------
Year Ended December 31, 2005
---------------------------------------------------------------------------
Natural
Crude Gas Natural
Oil Liquids Gas Total
($ Bbl) ($ Bbl) ($ Mcf) ($ Boe)
---------------------------------------------------------------------------
Product sales $ 67.40 $ 65.71 $ 9.16 $ 57.29
---------------------------------------------------------------------------
Hedging gains - - - -
---------------------------------------------------------------------------
Royalty income 1.58 0.30 0.11 0.70
---------------------------------------------------------------------------
Royalties (8.91) (23.28) (2.36) (14.60)
---------------------------------------------------------------------------
Production costs (6.39) - (1.37) (7.22)
---------------------------------------------------------------------------
Transportation (1.54) (1.57) (0.42) (2.34)
---------------------------------------------------------------------------
Field netback $ 52.14 $ 41.16 $ 5.12 $ 33.83
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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

As a result of lower product prices, average revenue per Boe before hedging gains and royalty income fell by 23% in 2006 when compared to 2005. However, lower royalties and production costs per Boe, coupled with contributions from hedging gains and higher royalty income, resulted in a less than pro rata reduction in field netback in 2006, which was 19% lower than in 2005. Field netback amounted to 62% of revenue per Boe in 2006, compared to 59% in 2005, reflecting lower royalties and costs.



INTEREST


---------------------------------------------------------------------------
Year Ended Year Ended
December 31, December 31, Percentage
2006 2005 Change
---------------------------------------------------------------------------
Charge for period $ 1,966 $ 1,055 86%
---------------------------------------------------------------------------
Per Boe $ 1.14 $ 0.87 31%
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Interest is paid on Storm's revolving bank facility. Bank debt for the first quarter of 2006 amounted to $25.0 million; for the second quarter of 2006 $39.2 million; for the third quarter of 2006 $50.6 million; and for the fourth quarter $48.9 million. Bank debt increased in the latter half of 2006 largely to fund a mid year property acquisition.



GENERAL AND ADMINISTRATIVE COSTS

Total costs:

---------------------------------------------------------------------------
Year Ended Year Ended
December 31, December 31, Percentage
2006 2005 Change
---------------------------------------------------------------------------
Gross general and administrative
costs $ 4,589 $ 3,431 34%
---------------------------------------------------------------------------
Capital and operating recoveries (2,546) (1,545) 65%
---------------------------------------------------------------------------
Net general and administrative costs $ 2,043 $ 1,886 8%
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Costs per Boe:

---------------------------------------------------------------------------
Year Ended Year Ended
December 31, December 31, Percentage
2006 2005 Change
---------------------------------------------------------------------------
Gross general and administrative
costs $ 2.66 $ 2.83 (6%)
---------------------------------------------------------------------------
Capital and operating recoveries (1.47) (1.27) 15%
---------------------------------------------------------------------------
Net general and administrative costs $ 1.19 $ 1.56 (24%)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Increases in gross general and administrative costs for 2006, when compared to 2005, were primarily due to increased compensation and accommodation costs. These cost increases were offset in part by increased capital and operating recoveries arising from the Company's expanded field programs.

Storm does not capitalize general and administrative costs. General and administrative costs per Boe for future quarters should be lower, due to higher capital and operating recoveries 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. In particular, in response to market conditions, staff compensation levels for 2007 have increased.



STOCK BASED COMPENSATION COSTS

---------------------------------------------------------------------------
Year Ended Year Ended
December 31, December 31, Percentage
2006 2005 Change
---------------------------------------------------------------------------
Charge for period $ 956 $ 381 151%
---------------------------------------------------------------------------
Per Boe $ 0.56 $ 0.31 81%
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The increase in stock based compensation costs reflects the mid year issue of stock options to certain managers who were not already participants in the Company's stock option program.



DEPLETION DEPRECIATION AND ACCRETION

---------------------------------------------------------------------------
Year Ended Year Ended
December 31, December 31, Percentage
2006 2005 Change
---------------------------------------------------------------------------
Depreciation and depletion charge for
period $ 24,593 $ 16,121 53%
---------------------------------------------------------------------------
Accretion charge for period 379 216 76%
---------------------------------------------------------------------------
Total $ 24,972 $ 16,337 53%
---------------------------------------------------------------------------
Total per Boe $ 14.49 $ 13.47 8%
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The increase in the charge for depreciation, depletion and accretion for 2006, when compared to 2005, is a consequence of higher production volumes as the depletion component of the charge is based on a cost per Boe.

The year-over-year increase in the cost per Boe is largely attributable to a mid 2006 property acquisition, as acquired reserves were purchased at a higher cost per Boe than Storm's historical finding costs. Accretion is the increase for the reporting period in the present value of the Company's asset retirement obligation, which is discounted using an interest rate of 8%.



INVESTMENT GAINS

In 2005 Storm realized investment gains as follows:

---------------------------------------------------------------------------
Year Ended Year Ended
December 31, 2006 December 31, 2005
---------------------------------------------------------------------------
Gain on sale of investment - $ 1,684
---------------------------------------------------------------------------
Dilution gain on share issue by Storm
Ventures International Inc. - 3,575
---------------------------------------------------------------------------
Total - $ 5,259
---------------------------------------------------------------------------
---------------------------------------------------------------------------


During 2005 Storm entered into a farmout agreement with a private industry partner, the terms of which included an investment by the Company in common shares. Subsequently the investee company completed an initial public offering and Storm sold its investment for net proceeds after transaction costs of $1.8 million.

Storm has an approximate 13% minority investment in a private company, Storm Ventures International Inc, ("SVI"), whose business is the exploitation of international exploration and development opportunities, currently in Tunisia and the UK Sector of the North Sea. In 2005, a private placement of common shares of SVI resulted in Storm recognizing a non-cash dilution gain, as the Company's ownership position was reduced from 26% to 16%. SVI completed a further private placement in 2006; however, no dilution gain was recognized, as Storm's ownership interest in SVI no longer met the 20% threshold necessary for the application of the equity accounting method.

INCOME AND OTHER TAXES

For the year ended December 31, 2006, Storm recorded a future income tax provision of $5.9 million, with the deferral of taxes to future periods largely resulting from resource pool deductions exceeding the accounting charge for depletion, depreciation and amortization. There was no comparable provision for future income taxes in 2005, as the Company eliminated income taxes by deducting certain operating losses of earlier years which had not been recognized as an asset for accounting purposes. In addition, in 2005, taxes on investment gains were eliminated through deduction of capital losses from earlier years. By December 31, 2005, Storm's inventory of operating losses had largely been exhausted; correspondingly the elimination of future income taxes through application of unrecognized tax losses in 2006 was minimal.

At December 31, 2006, Storm had tax pools carried forward estimated to be $167 million after deduction of Canadian Exploration Expense in the amount of $15.6 million to be incurred in 2006 and 2007. This amount has been renounced to subscribers to a flow through share offering completed in June 2006. In addition, Storm has a capital loss in the amount of $10 million available for application against future capital gains.

In 2005, Storm was subject to Large Corporations Tax. This tax was subsequently eliminated.

NET INCOME AND NET INCOME PER SHARE

Compared to 2005, net income for 2006 fell by 57% from $26.5 million to $11.5 million, or from $0.65 to $0.27 per diluted share. However, comparability between the two years was affected by certain non-operating items. Details are as follows:



---------------------------------------------------------------------------
Year Ended Year Ended
December 31, 2006 December 31, 2005
---------------------------------------------------------------------------
Per Per
diluted diluted
$ share-$ $ share-$
---------------------------------------------------------------------------
Income before investment
gains and income and other
taxes $ 17,369 $ 0.41 21,379 0.52
---------------------------------------------------------------------------
Investment gains - - 5,259 0.13
---------------------------------------------------------------------------
Income and other taxes (5,864) (0.14) (105) -
---------------------------------------------------------------------------
Net income for year $ 11,505 $ 0.27 $ 26,533 $ 0.65
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Investment gains, and the elimination of income and other taxes in 2005 through use of prior years' losses, had no equivalent in 2006 and are expected to be non-recurring.

FUNDS FROM OPERATIONS

Funds from operations increased by 14% to $43.3 million for 2006, or $1.03 per diluted share, compared to $38.0 million, or $0.93 per diluted share, for 2005.

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 $6.9 million at December 31, 2006 compared to $7.7 million at December 31, 2005. The working capital deficiency at each year end reflects the Company's preference to act as operator and the seasonality of its field operations.



Property and Equipment

Capital costs incurred were as follows:

---------------------------------------------------------------------------
Year Ended Year Ended
December 31, 2006 December 31, 2005
---------------------------------------------------------------------------
Land and lease, net $ 1,786 $ 4,315
---------------------------------------------------------------------------
Seismic 4,145 2,334
---------------------------------------------------------------------------
Drilling and completions 33,805 17,608
---------------------------------------------------------------------------
Facilities and equipment 16,420 16,963
---------------------------------------------------------------------------
Other 116 232
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Field Expenditures 56,272 41,452
---------------------------------------------------------------------------
Property acquisitions 39,540 4,416
---------------------------------------------------------------------------
Property dispositions (11,307) (3,291)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total $ 84,505 $ 42,577
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Bank Debt, Liquidity and Capital Resources

Storm has a revolving borrowing base bank credit facility of $66 million. The amount drawn on this facility at December 31, 2006 amounted to $50.4 million. Debt, including working capital deficiency, amounted to $57.3 million at December 31, 2006, resulting in a ratio of debt to annualized fourth quarter cash flow of 1.1 times. A growing production base, along with the Company's policy of limiting non-acquisition capital expenditures to cash flow, should result in this ratio falling during 2007.

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

Investment

At December 31, 2006 the Company's investment in SVI represented a 13% ownership position, comprising 4.3 million common shares. Late in 2006, SVI completed a private placement at $5.00 per share for gross proceeds of $43 million. Although Storm participated in the offering to the extent of $1 million, the Company's ownership position was reduced from 16% to 13%. The carrying amount of the investment on the Company's balance sheet comprises the Company's investment cost, plus a dilution gain recognized during the year ended December 31, 2005. This carrying amount should not be regarded as representative of the value of Storm's investment in SVI.

In 2006, in the United Kingdom, SVI, through its 50% owned affiliate as operator, successfully drilled three gas wells in the Viking fields of the southern UK sector of the North Sea, resulting in the discovery of gross gas in place of 250 - 300 BCF. Development plans are being put in place and initial production is scheduled for mid 2008. SVI has access through licences and farm-ins to approximately 500,000 gross acres in three separate areas on which at least 14 prospects have been identified. In 2007, SVI anticipates drilling two gross wells in addition to the southern North Sea development program.

In Tunisia SVI has licences in respect of 2.5 million acres in three blocks, onshore at Remada Sud and Jenein Centre and offshore in the Hammamet Basin. In early 2006, SVI completed a well in the Ghadames basin at Remada Sud which identified hydrocarbons in non-commercial quantities. No other drilling took place in 2006. For 2007, SVI anticipates drilling one well, completing up to three seismic programs.

Although Storm participated in the last two financings for SVI, in 2006 and 2005, the Company has no financing or other obligations to SVI, although certain administrative services are provided on a cost recovery basis.

Future Income Taxes

Future income taxes at December 31, 2006 represents the excess of the accounting amounts over the related tax bases of property and equipment and share capital.

Under the terms of a flow through share issue completed during 2006, Storm is obligated to renounce Canadian Exploration Expense to subscribers in the amount of $15.6 million and to incur these costs prior to December 31, 2007. At December 31, 2006, the Company considers that $6.8 million of these costs have been incurred.

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



---------------------------------------------------------------------------
As at Maximum Annual
December 31, 2006 deduction
---------------------------------------------------------------------------
Canadian oil and gas property expense $ 88,324 10%
---------------------------------------------------------------------------
Canadian development expense 27,208 30%
---------------------------------------------------------------------------
Canadian exploration expense (1) 10,587 100%
---------------------------------------------------------------------------
Undepreciated capital cost 43,900 20 - 100%
---------------------------------------------------------------------------
Other 1,582 20%
---------------------------------------------------------------------------
Total $ 171,601
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Operating losses $ 3,983
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Capital losses $ 10,000
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) Net of allocations of Canadian Exploration Expense in the amount of
$6.8 million to flow through share subscribers.


Asset Retirement Obligation

Storm's asset retirement obligation represents the present value of estimated future costs to be incurred to abandon and reclaim the Company's wells and facilities. Changes in amount of the obligation between December 31, 2006 and 2005 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 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 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, 2006 December 31, 2005
---------------------------------------------------------------------------
Common shares outstanding
- end of year 42,914 39,184
---------------------------------------------------------------------------
Share purchase warrants - 1,715
---------------------------------------------------------------------------
Performance warrants 122 240
---------------------------------------------------------------------------
Stock options 1,934 873
---------------------------------------------------------------------------
Fully diluted common shares
- end of year 44,970 42,012
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Weighted average common shares
- basic 41,434 38,838
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Weighted average common shares
- diluted 41,935 40,810
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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. Stock options outstanding are exercisable over five years on various dates beginning September 2005 at prices ranging from $2.60 to $6.70.



NET ASSET VALUE

An estimate of Storm's net asset value at December 31, 2006 is as follows:

---------------------------------------------------------------------------
December 31, December 31, Percentage
2006 2005 Change
---------------------------------------------------------------------------
Reserves discounted at 10% before
tax $ 241,762 $ 187,077 29%
---------------------------------------------------------------------------
Undeveloped land (1) 21,114 19,217 30%
---------------------------------------------------------------------------
Investment (2) 21,500 16,400 31%
---------------------------------------------------------------------------
Cash proceeds on exercise of
stock options 9,854 7,228 36%
---------------------------------------------------------------------------
Net debt (57,314) (33,248) 72%
---------------------------------------------------------------------------
Net Asset Value $ 236,916 $ 196,674 22%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Fully diluted common shares
outstanding (000s) 44,970 42,012 7%
---------------------------------------------------------------------------
Net Asset Value per Common Share $ 5.27 $ 4.68 14%
---------------------------------------------------------------------------
---------------------------------------------------------------------------

1. Undeveloped land was evaluated by Seaton Jordan and Associates as of
December 31, 2006. Storm's undeveloped land position totaled 251,000
net acres with an average valuation of $84 per acre.

2. Based on a private placement completed in December 2006 at $5.00 per
share.


FOURTH QUARTER RESULTS

Storm's summarized financial and operating results for the fourth quarter
of 2006 compared to the fourth quarter of 2005 are as follows:

---------------------------------------------------------------------------
Three Months Three Months
Ended Ended
December 31, December 31, Percentage
2006 2005 Change
---------------------------------------------------------------------------
Financial - $
---------------------------------------------------------------------------
Production revenue 23,590 23,733 (1%)
---------------------------------------------------------------------------
Funds from operations 12,748 12,886 (1%)
---------------------------------------------------------------------------
Per share - basic 0.30 0.33 (9%)
---------------------------------------------------------------------------
Per share - diluted 0.29 0.32 (9%)
---------------------------------------------------------------------------
Net income 3,049 13,507 (77%)
---------------------------------------------------------------------------
Per share - basic 0.07 0.35 (80%)
---------------------------------------------------------------------------
Per share - diluted 0.07 0.33 (79%)
---------------------------------------------------------------------------
Capital expenditures - net 13,635 15,297 (11%)
---------------------------------------------------------------------------
Debt, including working
capital deficiency 57,314 33,248 72%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Operations
---------------------------------------------------------------------------
Boe production per day 5,442 3,665 48%
---------------------------------------------------------------------------
Gas production per day - mcf 28,271 18,338 54%
---------------------------------------------------------------------------
NGL production per day - bbls 217 299 (27%)
---------------------------------------------------------------------------
Oil production per day- bbls 513 310 65%
---------------------------------------------------------------------------
Gross wells drilled 9.0 12 (25%)
---------------------------------------------------------------------------
Net wells drilled 5.7 7.2 (21%)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Netback Analysis - $ per Boe
---------------------------------------------------------------------------
Product sales 44.95 69.78 (36%)
---------------------------------------------------------------------------
Royalty income 0.48 0.61 (21%)
---------------------------------------------------------------------------
Hedging gains 1.68 - -
---------------------------------------------------------------------------
Royalties (10.25) (18.97) (46%)
---------------------------------------------------------------------------
Production costs (6.80) (7.64) (11%)
---------------------------------------------------------------------------
Transportation (2.18) (2.24) (3%)
---------------------------------------------------------------------------
Field netback 27.88 41.54 (33%)
---------------------------------------------------------------------------
Interest (1.29) (0.71) 82%
---------------------------------------------------------------------------
General and administrative costs (1.13) (2.49) (55%)
---------------------------------------------------------------------------
Capital taxes - (0.13) -
---------------------------------------------------------------------------
Cash net back 25.46 38.21 (33%)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Cash costs 9.22 10.97 (16%)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Production:

In the fourth quarter of 2006 average Boe per day volumes increased by 48% when compared to the fourth quarter of 2005, and by 10% when compared to the third quarter of 2006. Production of natural gas amounted to 87% of total Boe production in the fourth quarter of 2006, compared to 83% in the fourth quarter of 2005 and 82% in the third quarter of 2006. Production increases in the final quarter of 2006 largely came from additional wells at Parkland and Pouce Coupe.

Production Revenue:

Production revenue for the fourth quarter of 2006 fell marginally when compared to the fourth quarter of 2005, but grew by 24% when compared to the immediately preceding quarter. Year-over-year, the volume increase would have resulted in production revenue increasing by 48%; however this was offset by a price reduction of 52%, less hedging gains of 4%. Volume growth provided 10% of the 24% increase between the fourth and third quarters of 2006; strengthening prices another 10%; and hedging gains 4%. 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 equivalent hedging gains in 2005.

Royalties:

Royalties for the fourth quarter of 2006 amounted to $5.1 million, a decrease of 20% when compared to the same quarter of 2005 and an increase of 37% compared to the third quarter of 2006. Volume increases and price reductions account for the changes. The royalty rate in the fourth quarter of 2006 was 22.0%; for the fourth quarter of 2005, 27.2%; and for the third quarter of 2006, 20.0%. Changing prices largely account for varying royalty rates.

Production Costs:

Production costs for the quarter increased by 32% to $3.4 million when compared to the final quarter of 2005 and by 8% when compared to the third quarter of 2006. Production costs have grown in response to increasing production volumes. Per Boe, operating costs fell by 11% in the final quarter of 2006, when compared to the final quarter of 2005, and by 2% when compared to the third quarter of 2006. The reduction in production costs per Boe is contrary to industry trends and is attributable to the spread of a fixed cost component over a wider production base and the continuing efforts of Storm's field operations staff to reduce costs.

Cash costs per Boe, comprising production costs, interest and general and administrative costs, amounted to $9.22 for the final quarter of 2006, $10.97 for the equivalent quarter of 2005 and $9.06 for the third quarter of 2006.

Transportation Costs:

Transportation costs for the final quarter of 2006 amounted to $1.1 million, an increase of 44% over 2005 and 2% over the immediately preceding quarter. Costs per Boe amounted to $2.18 in the fourth quarter of 2006, compared to $2.24 in the same quarter of 2005 and to $2.35 in the third quarter of 2006.

Interest:

Interest costs for the final quarter of 2006 increased by 169% to $0.6 million compared to the same quarter in 2005 and fell marginally compared to the third quarter of 2006. The large year-over-year increase is attributable to increased bank borrowings to fund a mid 2006 acquisition. Interest costs per Boe amounted to $1.29 in the fourth quarter of 2006, compared to $0.71 in the same quarter of 2005 and $1.46 in the third quarter of 2006. Growing production, and largely constant bank borrowings in the final two quarters of 2006, account for the per Boe reduction in the final quarter of 2006.

General and Administrative:

Gross general and administrative costs for the final quarter of 2006 increased by 22% to $1.5 million when compared to the final quarter of 2005 and by 48% compared to the third quarter of 2006. 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 2006 compared to the third quarter is due to the inclusion in the final quarter of certain costs related to the Company's year end. Recoveries increased to $0.9 million in the final quarter of 2006; the equivalent amounts for the final quarter of 2005 and the third quarter of 2006 amounted to $0.4 million and $0.7 million, respectively. Net general and administrative costs amounted to $0.6 million in the final quarter of 2006; amounts for the comparable quarter in 2005 were $0.8 million and $0.3 million in the third quarter of 2006.

Per Boe, the gross charge for general and administrative costs before recoveries amounted to $2.98 in the fourth quarter of 2006; $3.62 in the same quarter of 2005 and $2.22 for the third quarter of 2006. Net general and administrative costs per Boe for the same periods were $1.13, $2.49 and $0.63, respectively.

Stock Based Compensation:

Stock based compensation grew by 255% in the final quarter of 2006 compared to the same quarter of 2005 and by 7% when compared to the third quarter of 2006. Options issued in mid 2006 resulted in the year-over-year increase in stock based compensation costs.

Depletion, Depreciation and Accretion:

Increased production and a higher cost asset base resulted in the charge for depletion, depreciation and accretion increasing by 69% in the final quarter of 2006, compared to the same quarter in 2005 and by 10% compared to the third quarter of 2006. Per Boe, depletion, depreciation and accretion amounted to $15.28 in the final quarter of 2006; the charge for the final quarter of 2005 amounted to $13.47 and for the third quarter of 2006, $15.26.

Net Income:

Net income for the fourth quarter of 2006 fell by 77% compared to the same quarter of 2005, and increased by 67% over net income for the third quarter of 2006. Per diluted share amounts were $0.07 for the final quarter of 2006; $0.33 for the final quarter of 2005; and $0.04 for the third quarter of 2006.

Income for the final quarter of 2005 included investment gains related to the sale of shares held by Storm in another junior oil and gas company and a dilution gain related to the Company's investment in SVI. Such unusual amounts totaled $5.3 million, or $0.13 per diluted share. In addition, Storm recorded a future income tax provision of $1.7 million in the final quarter of 2006, equivalent to $0.04 per share. There was no equivalent provision in the final quarter of 2005.

Cash Flow:

Cash flow for the fourth quarter of 2006 fell marginally to $12.7 million from $12.9 million in the fourth quarter of 2005, and increased by 27% compared to the third quarter of 2006. Per diluted share amounts were $0.29 for the final quarter of 2006; $0.32 for the final quarter of 2005; and $0.23 for the third quarter of 2006.

Capital expenditures:

Capital expenditures for the final quarter of 2006 amounted to $13.7 million compared to $15.3 million in 2005 and to $7.6 million in the third quarter of 2006.



QUARTERLY RESULTS

Set out below are key performance indicators by quarter for Storm for the
last two years:

---------------------------------------------------------------------------
Quarter Ended December September June March
31, 2006 30, 2006 30, 2006 31, 2006
---------------------------------------------------------------------------
Production revenue $ 23,590 $ 18,973 $ 17,598 $ 20,004
---------------------------------------------------------------------------
Funds from operations 12,748 10,053 9,186 11,310
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
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
- Boe $ 27.88 $ 24.24 $ 24.86 $ 33.85
---------------------------------------------------------------------------
Net capital expenditures $ 13,635 $ 7,619 $ 47,570 $ 15,681
---------------------------------------------------------------------------
---------------------------------------------------------------------------


---------------------------------------------------------------------------
Quarter Ended December September June March
31, 2005 30, 2005 30, 2005 31, 2005
---------------------------------------------------------------------------
Production revenue $ 23,733 $ 17,694 $ 15,951 $ 12,968
---------------------------------------------------------------------------
Funds from operations 12,886 10,317 8,701 6,718
Per share
- basic $ 0.33 $ 0.27 $ 0.21 $ 0.17
- diluted $ 0.32 $ 0.25 $ 0.20 $ 0.17
---------------------------------------------------------------------------
Net income $ 13,507 $ 6,310 $ 3,643 $ 3,073
Per share
- basic $ 0.35 $ 0.16 $ 0.09 $ 0.08
- diluted $ 0.33 $ 0.15 $ 0.09 $ 0.08
---------------------------------------------------------------------------
Average daily production
- Boe 3,665 3,208 3,481 2,933
---------------------------------------------------------------------------
Average field netback
- Boe $ 41.54 $ 37.22 $ 27.50 $ 27.79
---------------------------------------------------------------------------
Net capital expenditures $ 15,297 $ 12,680 $ 4,261 $ 10,339
---------------------------------------------------------------------------
---------------------------------------------------------------------------


SHARE TRADING ACTIVITY

Set out below is share trading activity for Storm for 2006 and 2005:

---------------------------------------------------------------------------
Total for
2006 2006-Q1 2006-Q2 2006-Q3 2006-Q4 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
---------------------------------------------------------------------------
---------------------------------------------------------------------------

---------------------------------------------------------------------------
Total for
2005 2005-Q1 2005-Q2 2005-Q3 2005-Q4 2005
---------------------------------------------------------------------------
High $ 4.55 $ 4.65 $ 6.30 $ 7.00 $ 7.00
---------------------------------------------------------------------------
Low $ 3.63 $ 3.50 $ 4.25 $ 4.60 $ 3.50
---------------------------------------------------------------------------
Close $ 3.87 $ 4.25 $ 6.30 $ 6.70 $ 6.70
---------------------------------------------------------------------------
Volume traded ('000) 5,796 5,374 7,237 3,194 21,601
---------------------------------------------------------------------------
Value traded ('000) $ 24,219 $ 20,507 $ 37,598 $ 18,494 $ 100,818
---------------------------------------------------------------------------
Weighted average trading
price $ 4.18 $ 3.82 $ 5.20 $ 5.79 $ 4.67
---------------------------------------------------------------------------
---------------------------------------------------------------------------


SELECTED ANNUAL FINANCIAL INFORMATION

---------------------------------------------------------------------------
Year Ended Year Ended Six Months Ended
December 31, December 31, December 31,
2006 2005 2004
---------------------------------------------------------------------------
Production revenue $ 80,165 $ 70,345 $ 11,414
---------------------------------------------------------------------------
Funds from operations $ 43,297 $ 37,992 $ 5,114
---------------------------------------------------------------------------
Per share basic $ 1.04 $ 0.98 $ 0.15
---------------------------------------------------------------------------
Per share diluted $ 1.03 $ 0.93 $ 0.14
---------------------------------------------------------------------------
Net Income $ 11,505 $ 26,533 $ 6,496
---------------------------------------------------------------------------
Per share basic $ 0.28 $ 0.68 $ 0.19
---------------------------------------------------------------------------
Per share diluted $ 0.27 $ 0.65 $ 0.18
---------------------------------------------------------------------------
Total assets $ 202,652 $ 146,989 $ 107,948
---------------------------------------------------------------------------
Total long-term
liabilities $ 57,935 $ 29,324 $ 39,495
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Comparability of production revenue between the three periods is affected by the following:

- 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; and 4,720 Boe per day in 2006, 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; and in 2006 the average selling price was $45.93.

Comparability of net income between the three 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 income and other taxes were largely eliminated through use of prior years' losses. Also, in 2005, Storm realized investment gains for which there was no equivalent in 2004 and 2006.

Earnings per share, and per diluted share, are affected by variations in net income, the issue of common shares in late 2004 and in mid-2006, and the periodic issue of stock options. Increases in total assets for each period reflect the Company's growth in production and reserves.

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

OUTLOOK FOR 2007

Storm's Board of Directors has approved a capital budget of $68 million for 2007 which is expected to generate production volumes of 7,100 Boe per day by year end. The capital budget will be funded largely from Storm's anticipated cash flow which is based on an AECO gas price of $6.25 per GJ and a WTI price of US$66.00 per barrel. The Company's cash costs for 2007 are estimated to be $8.95, compared to $9.40 in 2006. The Company's investment program will involve the drilling of 40 gross (29 net) wells, of which 33 will be drilled in the Peace River Arch, with four at Red Earth, two at Cabin and Junior and one at Brazeau. The Company also anticipates completing two 3-D seismic programs at Parkland and Red Earth. In 2007, Storm anticipates an expansion of its bank facility from the 2006 amount of $66 million.

CONTRACTUAL OBLIGATIONS

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

- purchase of services

- royalty agreements

- operating agreements

- processing agreements

- right of way agreements

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

All such contractual obligations reflect market conditions at the time of contract and do not involve related parties.



Obligations with a fixed term are as follows:

---------------------------------------------------------------------------
($000's) 2007 2008 2009 2010 2011
---------------------------------------------------------------------------
Lease of premises $ 200 - - - -
---------------------------------------------------------------------------
Equipment leases 11 11 - - -
---------------------------------------------------------------------------

Total $ 211 $ 11 - - -
---------------------------------------------------------------------------
---------------------------------------------------------------------------


In mid 2007, Storm will be obliged to lease new premises for its Calgary office. At present the duration and annual rental of new office accommodation is not determinable, but it is highly likely that costs for future office rent will increase considerably and the obligation will be for a period of at least five years.

CRITICAL ACCOUNTING ESTIMATES

Financial amounts included in the Company's Management's Discussion and Analysis and in the audited financial statements for the year ended December 31, 2006 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 financial statements.

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 proven reserves established 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 it 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 is based on the independent reserves report, which reflects future events which are subject to a high degree of estimation.

Asset Retirement Obligation

Storm records as a liability the estimated present 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 income and other tax liabilities and assets, including losses carried forward and asset pools, requires interpretation of 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 future option grants.

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. The following reviews the business risks faced by Storm.

Exploration

Storm's exploration program requires sophisticated and scarce technical skills as well as capital 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 control.

- Geophysical techniques such as seismic are utilized where appropriate.

Commodity Price Fluctuations

Pricing for the Company's products, particularly natural gas, has a material effect on the Company's re-investment capacity, and hence ultimate growth potential and profitability. High netback production, a low cost structure, along with a stable balance sheet, help 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 acceleration of decline rates, resulting in reduced overall corporate volumes. 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 inter period production. Long life gas reserves, operated under prudent production practices, and a range of producing horizons mitigates exposure to high decline well or pool exposure.

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. 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. However, 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.

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. Due to high commodity prices, demand for oil and gas properties, undeveloped land, drillable prospects, services and qualified staff was particularly strong throughout most of 2006. Storm competes by maintaining a large inventory of self-generated exploration and development locations, by acting as operator where possible, and through facility 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. Further, 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.

Reserves 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 from the properties, future operating costs and potential changes to the Company's operations arising from regulatory amendments. 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 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 and if on favourable 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 of its capacity to control or influence. Crude oil prices are affected by worldwide supply and demand while natural gas prices are affected by North American supply and demand. Storm attempts to mitigate these risks as follows:

- Natural gas properties are developed in areas where there is a 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. The evolution of public policy 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.

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. No circumstance suggesting a possible breach of disclosure controls was identified by the Disclosure Committee in 2006.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

As at December 31, 2006, 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 under the Company's supervision formally document Storm's internal controls over financial reporting. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the design of internal control over financial reporting is sufficiently effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. It should be recognized, however, that no system of internal control over financial reporting can provide more than reasonable assurance as to the effectiveness of such reporting. Further, in a company such as Storm, limited staff numbers preclude comprehensive segregation of duties.

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.



Storm Exploration Inc.
Balance Sheets

December 31, 2006 December 31, 2005
------------------ ------------------
($000s)
ASSETS

Current
Accounts receivable $ 13,161 $ 12,683
Prepaid expenses 2,508 1,012
------------------ ------------------
15,669 13,695

Property and Equipment - Net (Note 3) 177,708 116,051

Investments (Note 8) 9,275 8,275

Future Income Taxes (Note 4) - 8,968
------------------ ------------------

$ 202,652 $ 146,989
------------------ ------------------
------------------ ------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current
Accounts payable and accrued
liabilities $ 22,573 $ 21,420
------------------ ------------------
22,573 21,420

Bank Indebtedness (Note 5) 50,410 25,523
Asset Retirement Obligation (Note 6) 5,925 3,801
Future Income Taxes (Note 4) 1,600 -
------------------ ------------------
80,508 50,744
------------------ ------------------

Shareholders' Equity (Note 7)
Share capital 76,285 62,762
Contributed surplus 1,325 454
Retained earnings 44,534 33,029
------------------ ------------------
122,144 96,245
------------------ ------------------

$ 202,652 $ 146,989
------------------ ------------------
------------------ ------------------


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

Three Months Three Months
Ended Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
2006 2005 2006 2005
----------------------------------------------------

Revenue
Production revenue 23,590 23,733 80,165 70,345
Royalties (5,132) (6,395) (16,876) (17,714)
----------------------------------------------------
18,458 17,338 63,289 52,631
----------------------------------------------------

Expenses
Production 3,404 2,576 12,188 8,757
Transportation 1,091 756 3,795 2,836
Interest 647 240 1,966 1,055
General and
administrative 568 837 2,043 1,886
Stock based
compensation 348 98 956 381
Depletion,
depreciation and
accretion 7,657 4,540 24,972 16,337
----------------------------------------------------
13,715 9,047 45,920 31,252
----------------------------------------------------

Income before the
following: 4,743 8,291 17,369 21,379

Investment gains
(Note 8) - 5,259 - 5,259

Income and other taxes
(Note 4)
Future income taxes (1,694) - (5,864) -
Capital taxes - (43) - (105)
----------------------------------------------------
(1,694) (43) (5,864) (105)
----------------------------------------------------

Net income for the
year 3,049 13,507 11,505 26,533

Retained earnings,
beginning of year 41,485 19,522 33,029 6,496

----------------------------------------------------
Retained earnings,
end of year 44,534 33,029 44,534 33,029
----------------------------------------------------
----------------------------------------------------

Net Income per share
(Note 9)
- basic 0.07 0.35 0.28 0.68
- diluted 0.07 0.33 0.27 0.65


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


Three Months Three Months
Ended Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
2006 2005 2006 2005
----------------------------------------------------

Operating activities
Net income for the year 3,049 13,507 11,505 26,533
Less: Investment gains - (5,259) - (5,259)
Add non-cash items:
Depletion,
depreciation and
accretion 7,657 4,540 24,972 16,337
Future income tax 1,694 - 5,864 -
Stock based
compensation 348 98 956 381
----------------------------------------------------
Funds from operations 12,748 12,886 43,297 37,992
Net change in non-cash
working capital items
(Note 10) (1,452) (2,224) (2,944) 2,045
----------------------------------------------------
11,296 10,662 40,353 40,037
----------------------------------------------------

Financing activities
Issue of common shares
- net of expenses (49) 105 18,143 878
Increase (Decrease) in
bank indebtedness 3,029 2,611 24,887 1,858
----------------------------------------------------
2,980 2,716 43,030 2,736
----------------------------------------------------

Investing activities
Investment in Storm
Ventures International
Inc. (1,000) (2,000) (1,000) (2,000)
Gain on Sale of
Investments - 1,684 - 1,684
Additions to property
and equipment (13,544) (15,626) (97,515) (45,868)
Disposals of property
and equipment (91) 329 13,010 3,291
Net change in non-cash
working capital items
(Note 10) 359 2,235 2,122 120
----------------------------------------------------
(14,276) (13,378) (83,383) (42,773)
----------------------------------------------------

Change in cash during
the year - - - -

Cash, beginning of
year - - - -
----------------------------------------------------

Cash, end of year - - - -
----------------------------------------------------
----------------------------------------------------


STORM EXPLORATION INC.

NOTES TO FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 2006

Tabular amounts in thousands

1. BASIS OF PRESENTATION

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 became a reporting issuer on July 2, 2004 upon the completion of a Plan of Arrangement (the "Plan") involving, inter alia, the Company, Storm Energy Ltd. and Harvest Energy Trust.

2. SIGNIFICANT ACCOUNTING POLICIES

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

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

Joint Operations

Certain of the Company's exploration and production activities are conducted jointly with others through unincorporated joint ventures. 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.

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 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 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.

Financial Instruments

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.

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.



3. PROPERTY AND EQUIPMENT

December 31, 2006 December 31, 2005
---------------------------------------

Petroleum and natural gas properties $ 220,701 $ 134,567
Furniture and equipment 466 350
---------------------------------------
221,167 134,917
Accumulated depletion and
depreciation (43,459) (18,866)
---------------------------------------
$ 177,708 $ 116,051
---------------------------------------
---------------------------------------


At December 31, 2006, the depletion calculation excluded unproved properties of $14.4 million (2005 - $12.2 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, 2006 were:


Annual %
increase
2007 2008 2009 2010 2011 to 2022
---------------------------------------------

Natural Gas ($/mcf) 7.30 7.89 7.86 7.84 7.99 2.2%

Crude Oil ($/barrel) 66.09 64.66 64.54 62.20 59.94 1.9%

Natural Gas Liquids
($/barrel) 61.91 60.78 60.62 58.52 56.81 1.8%


4. 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 and operating tax losses (which generally expire in the period 2009 to 2011) of approximately $167 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 $15.6 million prior to December 31, 2007. As at December 31, 2006 the Company had incurred an estimated $6.8 of qualifying expenditures. The full amount of $15.6 million has been renounced to the subscribers at December 31, 2006 and this amount has been deducted from the Company's tax pool balance.

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 year. The differences are as follows:



---------------------------------------------------------------------------
2006 2005

Statutory combined federal and provincial income tax rate 34.7% 38.1%
---------------------------------------------------------------------------

---------------------------------------------------------------------------
Expected income taxes $ 6,020 $ 10,118
---------------------------------------------------------------------------
Add (deduct) the income tax effect of:
---------------------------------------------------------------------------
Non-deductible crown charges 1,802 3,779
---------------------------------------------------------------------------
Resource allowance (1,612) (3,338)
---------------------------------------------------------------------------
Gain on investments - (1,684)
---------------------------------------------------------------------------
Other (163) 167
---------------------------------------------------------------------------
Benefit of losses not previously recognized (183) (9,042)
---------------------------------------------------------------------------
Provision for income tax 5,864 -
---------------------------------------------------------------------------

---------------------------------------------------------------------------
Large corporations tax - 105
---------------------------------------------------------------------------

---------------------------------------------------------------------------
$ 5,864 $ 105
---------------------------------------------------------------------------
-------------------

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

---------------------------------------------------------------------------
2006 2005
---------------------------------------------------------------------------

---------------------------------------------------------------------------
Property and equipment $(3,970) $ 7,356
---------------------------------------------------------------------------
Asset retirement obligation 1,896 1,284
---------------------------------------------------------------------------
Share issue costs 474 328
---------------------------------------------------------------------------

---------------------------------------------------------------------------
Future Income Taxes $(1,600) $ 8,968
---------------------------------------------------------------------------
-------------------


5. BANK INDEBTEDNESS

The Company has an extendible revolving bank facility based on the Company's producing reserves in the amount of $66 million (2005 - $37 million). 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 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.

6. ASSET RETIREMENT OBLIGATION

The estimated future asset retirement obligation is based on the Company's net ownership interest in wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The total undiscounted amount required to settle the Company's asset retirement obligations is approximately $11.8 million (2005 - $7.3 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 $5.9 million (2005 - $3.8 million).

7. 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, 2004 38,673 $ 61,831
Common shares issued on exercise of warrants (v) 385 770
Common shares issued under performance warrant
plan (vi) 90 39
Stock options exercised (vii) 36 131
Share issue costs (9)
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
-----------------------------
-----------------------------


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 $14,000 and related prior stock compensation expense of $1,000 was added to share capital.

v) During the third quarter of 2005, 385,000 warrants were exercised and 385,000 common shares were issued for proceeds of $770,000, based on the exercise price of $2.00 per share.

vi) On June 29, 2005, 170,833 warrants under the performance warrant plan were exercised. Based on a closing price of $4.25, a total of 90,000 common shares were issued. Related prior stock compensation expense of $39,000 was added to share capital.

vii) During 2005, 36,000 stock options were exercised for proceeds of $117,000 and related prior stock based compensation of $14,000 was added to share capital.

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 December 31, 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 2,850,000 common shares has been reserved for issuance. Options to purchase 1,933,800 common shares issued to directors and employees of the Company were outstanding at the end of the year as follows:



December 31, 2006 December 31, 2005

Outstanding at beginning of year 873 296
Issued during year 1,074 744
Cancelled during year (10) (131)
Exercised during year (3) (36)
---------------------------------------
1,934 873

Weighted average exercise price $5.10 $4.35
Average remaining life 4.0 years 4.4 years
Number exercisable at end of year 248 -
Option prices $2.60 - $ 6.70 $2.60 - $ 6.70


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


Weighted Weighted Weighted
Range of Number of Average Average Number of Average
Exercise Options Remaining Exercise Options Exercise
Price Outstanding Life (years) Price Outstanding Price
---------------------------------------------------------------------------
$2.60 to
$3.61 320 3.1 $ 3.28 113 $ 3.15
$3.91 to
$5.71 1,514 4.2 $ 5.40 123 $ 4.82
$6.03 to
$6.70 100 4.28 $ 6.39 12 $ 6.70
-------------------------------------------------------------
1,934 4.0 $ 5.10 248 $ 4.15
-------------------------------------------------------------
-------------------------------------------------------------


Using the Black-Scholes pricing model, the weighted average fair value of the options granted in 2006 was estimated to be $1.92 (2005 - $1.48), using risk-free interest rates of 6.00%, 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.

8. INVESTMENT GAINS

i) As part of a 2005 asset sale and farm out agreement with an industry partner, the Company purchased common shares for a total cost of $100,000. After the completion of an initial public offering by the investee company, Storm sold its shareholding for $1,784,000, realizing a gain of $1,684,000 in 2005.

ii) The Company is a holder of common shares in a private company, Storm Ventures International Inc. ("SVI") In October 2005 the Company participated in a private placement of common shares in SVI for an amount of $2,000,000. However, the terms of the private placement were such that the Company's ownership position, formerly 26%, was reduced to 16.5%. As the shares issued under the private placement were sold at a per share price greater than the per share price of Storm's initial investment, the Company recognized a dilution gain of $3,575,000. As the Company's ownership position now is below the threshold applicable to equity accounting, it accounts for this investment using the cost method. Correspondingly gains or losses are only recognized upon disposal of the shares held. Storm participated in another private placement in December 2006 and invested an additional $1,000,000. As a result of this private placement the Company's ownership position has been further reduced to 12.9%.



9. PER SHARE AMOUNTS

---------------------------------------------------------------------------
Year ended Year ended
December 31, 2006 December 31, 2005
---------------------------------------------------------------------------
Basic
---------------------------------------------------------------------------
Net income per share $0.28 $0.68
---------------------------------------------------------------------------
Weighted average number of shares
outstanding ('000) 41,434 38,838
---------------------------------------------------------------------------

---------------------------------------------------------------------------
Diluted
---------------------------------------------------------------------------
Net income per share $0.27 $0.65
---------------------------------------------------------------------------
Weighted average number of shares
outstanding ('000) 41,935 40,810
---------------------------------------------------------------------------


The reconciling items between the basic and diluted average common shares
are the warrants, performance warrants and stock options described in
Note 7.

10. SUPPLEMENTAL CASH FLOW INFORMATION

Changes in non-cash working capital

Year ended Year ended
December 31, 2006 December 31, 2005
----------------------------------------

Accounts receivable $ (478) $ (5,047)
Prepaid expenses (1,497) (571)
Accounts payable and accrued
liabilities 1,153 7,783
----------------------------------------
Change in non-cash working capital $ (822) $ 2,165
----------------------------------------
----------------------------------------

Relating to:

Financing activities $ - $ -
Investing activities 2,122 120
Operating activities (2,944) 2,045
----------------------------------------
$ (822) $ 2,165
----------------------------------------
----------------------------------------


---------------------------------------------------------------------------
Year ended Year ended
December 31, 2006 December 31, 2005
---------------------------------------------------------------------------
Interest paid during the period $ 1,966 $ 1,055
---------------------------------------------------------------------------
Income taxes paid during the period $ - $ -
---------------------------------------------------------------------------


11. FINANCIAL INSTRUMENTS

The Company's financial instruments recognized on the 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, 2006, Storm has hedged the following gas volumes:

Volume Term

Costless
collar Floor Ceiling
13,000 GJ/d $ 9.00 / GJ - $ 11.45 / GJ - AECO January 1, 2007 -
March 31, 2007

Fixed price financial sale
5,000 GJ/d $ 7.58 / GJ - AECO January 1, 2007 -
March 31, 2007
7,000 GJ/d $ 7.10 / GJ - AECO April 1, 2007 -
June 30, 2007


These financial instruments have been designated as meeting the criteria for hedge accounting and as at December 31, 2006, the market value of these contracts was approximately $4.1 million.

Contact Information

  • Storm Exploration Inc.
    Brian Lavergne
    President & CEO
    (403) 264-3520
    or
    Storm Exploration Inc.
    Donald McLean
    Chief Financial Officer
    (403) 264-3520
    (403) 264-3552 (FAX)
    or
    Storm Exploration Inc.
    3250, 205 - 5th Avenue, SW
    Calgary, Alberta, T2P 2V7
    Website: www.stormexploration.com