Storm Resources Ltd. — Annual Report 2020

Mar 4, 2021

FINANCIALS

MANAGEMENT'S REPORT

To the Shareholders of Storm Resources Ltd.

The financial statements of Storm Resources Ltd. were prepared by management in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board. Management has used estimates and careful judgment, particularly in those circumstances where transactions affecting current periods are dependent on information not known for certain until a future period. The financial and operational information contained in this year-end report is consistent with that reported in the financial statements.

Management is responsible for the integrity of the financial and operational information contained in this report. The Company has designed and maintains internal controls to provide reasonable assurance that assets are properly safeguarded and that the financial records are well maintained and provide relevant, timely and reliable information to management. The financial statements have been prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized in the notes to the financial statements.

External auditors appointed by the shareholders have conducted an independent examination of the corporate and accounting records in order to express their opinion on the financial statements. The Audit Committee has met with the external auditors and management in order to determine if management has fulfilled its responsibilities in the preparation of the financial statements. The Board of Directors has approved the financial statements on the recommendation of the Audit Committee.

Michael J. Hearn Chief Financial Officer

Emily Wignes Vice President, Finance

March 2, 2021

INDEPENDENT AUDITORS' REPORT

To the Shareholders of Storm Resources Ltd.

Opinion

We have audited the consolidated financial statements of Storm Resources Ltd. and its subsidiaries ("Storm"), which comprise the consolidated statements of financial position as at December 31, 2020 and 2019, and the consolidated statements of income and comprehensive income, consolidated statements of changes in shareholders equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of Storm as at December 31, 2020 and 2019, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRSs).

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of Storm in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the consolidated financial statements of the current period. These matters were addressed in the context of the audit of the consolidated financial statements as a whole, and in forming the auditor's opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditor's responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements.

Impairment of non-financial assets

The Company's balance sheet includes $509 million in property and equipment, and $99 million in exploration and evaluation assets. Note 3 of the consolidated financial statements describes the Company's accounting policy for impairment. Note 6 of the consolidated financial statements includes the Company's impairment disclosures. The Company performs an assessment of each cash-generating unit ("CGU") comprising this amount for indicators of impairment at each reporting date. Where indicators of impairment are identified, a detailed analysis to quantify the recoverable amount is required. Significant judgment is required in assessing the existence or non-existence of impairment indicators, and in performing the impairment test when indicators are identified, and therefore we have identified this as a key audit matter.

The Company concluded that indicators of impairment were present for the Umbach CGU due to the market capitalization of the Company being less than its net asset value, and therefore an impairment test was performed. The recoverable amounts used in the impairment test were estimated based on the fair value less costs of disposal ("FVLCD") method. Through our risk assessment procedures, we identified three key assumptions in the impairment test: the discount rate, long-term forecast commodity prices, and reserve estimates.

Among other procedures, we involved our internal valuations specialists to assess the methodology applied and the discount rate used to determine the recoverable amount by referencing current industry, economic, and comparable company information. We recalculated the recoverable amount and agreed inputs to applicable sources. We compared the forecast commodity prices relative to other third-party published forecast prices. We performed procedures to assess the competence, capability, and objectivity of the Company's external reserve engineer as a specialist. We assessed key reserve report figures for reasonability through comparison to historical results, third party sources, and the Company's budget. We assessed the completeness and accuracy of the Company's impairment disclosures in note 6 of the consolidated financial statements.

Other Information

Management is responsible for the other information. The other information comprises:

• Management's Discussion & Analysis
• The information, other than the consolidated financial statements and our auditor's report thereon, in the Annual Report

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.

We obtained Management's Discussion & Analysis prior to the date of this auditor's report. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

The Annual Report is expected to be made available to us after the date of the auditor's report. If based on the work we will perform on this other information, we conclude there is a material misstatement of other information, we are required to report that fact to those charged with governance.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing Storm's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate Storm or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing Storm's financial reporting process.

Auditor's Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Storm's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on Storm's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause Storm to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within Storm to express an opinion on the financial statements. We are responsible for the direction, supervision, and performance of Storm's audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

The engagement partner on the audit resulting in this independent auditor's report is Ryan MacDonald.

Chartered Professional Accountants Calgary, Alberta

March 2, 2021

Consolidated Statements of Financial Position

(Canadian $000s)	Notes	December 31, 2020		December 31, 2019
ASSETS
Current
Accounts receivable	15	$	19,283	$21,961
Prepaids and deposits			1,124	764
Risk management contracts	15		-	1,113
			20,407	23,838
Risk management contracts	15		233	-
Exploration and evaluation	5		98,886	99,737
Property and equipment	6		508,524	490,264
Right-of-use asset	9		2,220	2,657
		$	630,270	$616,496
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities	15	$	17,721	$30,018
Current portion of decommissioning liability	10		1,939	448
Current portion of lease liability	9		512	507
Risk management contracts	15		8,483	2,042
			28,655	33,015
Bank indebtedness	7, 15		134,391	121,608
Risk management contracts	15		101	904
Lease liability	9		1,850	2,234
Decommissioning liability	10		30,915	27,667
Deferred income taxes	11		10,823	9,360
			206,735	194,788
Shareholders' equity
Share capital	12		391,752	391,444
Contributed surplus	13		19,338	17,605
Retained earnings			12,445	12,659
			423,535	421,708
Commitments	19
		$	630,270	$616,496

See accompanying notes to the consolidated financial statements.

On behalf of the Board:

Director

Director

Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

(Canadian $000s except per-share amounts)	Notes	Year EndedDecember 31, 2020		Year EndedDecember 31, 2019
Revenue
Revenue from product sales	8	$	155,065	$173,422
Royalties			(6,589)	(8,169)
		$	148,476	$165,253
Realized gain (loss) on risk management contracts	15		7,542	(8,833)
		$	156,018	$156,420
Expenses
Production			39,401	43,274
Transportation			45,566	41,703
General and administrative			6,309	6,883
Share-based compensation	13		1,817	2,464
Depletion and depreciation	6, 9		46,578	40,506
Exploration and evaluation costs expensed	5		745	1,140
Accretion	10		338	492
Interest and finance costs			7,403	5,158
Unrealized (gain) loss on risk management contracts	15		6,518	(1,527)
Unrealized revaluation loss on investment			94	87
			154,769	140,180
Net income (loss) and comprehensive income (loss) before income taxes			1,249	16,240
Deferred income tax expense	11		1,463	4,927
Net income (loss) and comprehensive income (loss)		$	(214)	$11,313
Net income (loss) per share – basic and diluted	14	$	(0.00)	$0.09

See accompanying notes to the consolidated financial statements.

Consolidated Statements of Changes in Shareholders' Equity

(Canadian $000s)				Year Ended December 31, 2020
			Contributed	Retained
	Notes	Share Capital	Surplus	Earnings	Total Equity
Balance, beginning of year		$ 391,444	$ 17,605	$ 12,659	$ 421,708
Net loss for the year		-	-	(214)	(214)
Issue of common shares	12	224	-	-	224
Share-based compensation	13	-	1,817	-	1,817
Share-based compensation on
stock options exercised	12	84	(84)	-	-
Balance, end of year		$ 391,752	$ 19,338	$ 12,445	$ 423,535

(Canadian $000s)				Year Ended December 31, 2019
	Notes	Share Capital	ContributedSurplus	RetainedEarnings	Total Equity
Balance, beginning of year		$ 391,444	$ 15,141	$1,346	$ 407,931
Net income for the year		-	-	11,313	11,313
Share-based compensation	13	-	2,464	-	2,464
Balance, end of year		$ 391,444	$ 17,605	$ 12,659	$ 421,708

See accompanying notes to the consolidated financial statements.

Consolidated Statements of Cash Flows

(Canadian $000s)	Notes	Year EndedDecember 31, 2020	Year EndedDecember 31, 2019
Operating activities
Net income (loss) for the year		$(214)	$11,313
Non-cash items:
Unrealized (gain) loss on risk management	15	6,518	(1,527)
Depletion, depreciation and accretion	6, 9, 10	46,916	40,998
Share-based compensation	13	1,817	2,464
Lease interest	9	128	147
Exploration and evaluation costs expensed	5	745	1,140
Unrealized revaluation loss on investment		94	87
Deferred income tax expense	11	1,463	4,927
Decommissioning expenditures	10	(643)	-
Funds flow		56,824	59,549
Net change in non-cash working capital items	18	(4,165)52,659	8,95768,506
Financing activities
Payment on lease liability	9	(507)	(500)
Proceeds from issue of common shares	12	224	-
Increase in bank indebtedness		12,783	34,832
		12,500	34,332
Investing activities
Additions to property and equipment	6	(58,505)	(95,757)
Additions to exploration and evaluation assets	5	(746)	(2,169)
Disposition of exploration and evaluation assets	5	-	1,083
Net change in non-cash working capital items	18	(5,908)	(5,995)
		(65,159)	(102,838)
Change in cash during the year		-	-
Cash, beginning of year		-	-
Cash, end of year		$-	$-

See accompanying notes to the consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

As at and for years ended December 31, 2020 and 2019

Tabular amounts in thousands of Canadian dollars, except per share amounts

1. REPORTING ENTITY

Storm Resources Ltd. (the "Company" or "Storm"), is a crude oil and natural gas exploration and development company incorporated in the province of Alberta, Canada on June 8, 2010 and is listed on the TSX under the symbol "SRX". The Company operates primarily in the province of British Columbia and its head office is located at Suite 600, 215 – 2nd Street S.W., Calgary, Alberta T2P 1M4. The Company became a reporting issuer in August 2010.

These audited consolidated financial statements (the "financial statements") include the accounts of Storm and its wholly-owned subsidiary, Storm Gas Resource Corp. All inter-entity transactions have been eliminated upon consolidation. Storm's operations are viewed as a single operating segment by the chief decision maker of the Company for the purpose of resource allocation and assessing asset performance.

2. BASIS OF PRESENTATION

Statement of Compliance

The financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). All financial information is reported in thousands of Canadian dollars, which is the functional currency of the Company.

These financial statements were authorized for issue by the Board of Directors on March 2, 2021.

Basis of Measurement

The Company's financial statements have been prepared on a going concern basis consistent with prior years, and follow the historical cost convention, except for certain financial assets and financial liabilities, which are measured at fair value, as explained in Note 15.

3. SUMMARY OF ACCOUNTING POLICIES

Exploration and Evaluation Expenditures

Exploration and evaluation ("E&E") expenditures are accounted for in accordance with IFRS 6 - Exploration for and Evaluation of Mineral Resources, whereby costs associated with the exploration for and evaluation of crude oil and gas reserves are accumulated on an area-by-area basis and are capitalized as E&E assets when incurred. Future decommissioning costs relating to E&E activities are also included. Costs incurred in advance of land acquisition are charged to the consolidated statement of income in the period in which they are incurred.

E&E costs are not subject to depletion or depreciation until they are reclassified from E&E to property and equipment ("P&E"). E&E costs are accumulated by field or exploration area pending determination of technical feasibility and commercial viability. Technical feasibility and commercial viability is typically considered to be achieved when proved reserves are determined to exist. Once reserves are assigned to specific lands, the associated E&E assets are tested for impairment and the lesser of cost and the estimated recoverable amount is reclassified to P&E.

Property and Equipment

P&E represents both intangible and tangible costs incurred in developing crude oil and natural gas reserves and maintaining or enhancing production from such reserves. Future decommissioning costs, related to producing assets, are also capitalized. P&E is carried at cost, less accumulated depletion and depreciation and accumulated impairment losses. Gains and losses on disposal of P&E are determined as the difference between proceeds from disposal and the carrying amount of the asset sold and are recognized in the consolidated statement of income.

Depletion and Depreciation

The net carrying amount of intangible crude oil and natural gas assets, categorized as P&E, is depleted using the unitof-production method based on estimated proved plus probable reserves, taking into account the future development costs required to produce the reserves.

Year-end proved plus probable reserves are determined by independent engineers in accordance with Canadian National Instrument 51-101. Production and reserves of natural gas are converted to equivalent barrels of crude oil on the basis of six thousand cubic feet of natural gas to one barrel of crude oil. Changes in estimates used in prior periods, such as proved plus probable reserves, that affect the unit-of-production calculations, do not give rise to prior year adjustments and are dealt with prospectively. Proved plus probable reserves at the end of each interim reporting period are based on reserves determined at the immediately prior year end, adjusted for production and internal estimates of changes to reserves since the prior year end.

Tangible costs, such as processing facilities and well equipment, are depreciated on a straight-line basis over the estimated useful life of the facilities and equipment. Where facilities and equipment includes major components having different useful lives, they are depreciated separately.

Depreciation rates, useful lives and residual values are reviewed at each reporting date.

Impairment of Non-Financial Assets

The carrying amounts of P&E and E&E assets are reviewed separately at each reporting date to determine whether there is any indication of impairment. If such an indication exists, the estimated recoverable amount is calculated.

For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows that are largely independent of the cash flows of other assets or group of assets (the "cash generating unit" or "CGU"). CGU's are determined by similar geological formation and proximity, shared infrastructure, product type and similar exposure to market risks. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs of disposal. E&E assets are assessed for impairment at the operating segment level.

In assessing value in use, the estimated future cash flows are adjusted for the risks specific to the CGU and are discounted to their present value using a discount rate and future commodity prices that reflect current market assumptions. Fair value less costs of disposal ("FVLCD") is the amount obtainable from the sale of an asset or CGU in an arm's length transaction between knowledgeable, willing parties, less the costs of disposal. The Company calculates FVLCD by reference to the after-tax future cash flows expected to be derived from production of proved plus probable reserves less estimated selling costs. The estimated after-tax cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognized in the consolidated statement of income if the carrying amount of an asset or CGU exceeds its estimated recoverable amount.

Impairment losses previously recognized are assessed at each reporting date for indications that the loss has decreased or no longer exists. If there has been an increase in the estimate of the recoverable amount an impairment loss is reversed to the extent that the asset's new carrying amount does not exceed the original carrying amount, net of related accumulated depletion and depreciation.

Lease Liabilities and Right-of-Use Assets

A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. At the lease commencement date, a lease liability is recognized at the present value of future lease payments, using the Company's incremental borrowing rate when the rate implicit in the lease is not readily available. A corresponding right-of-use asset is recognized at the amount of the lease liability, adjusted for lease incentives received and initial direct costs. The Company has elected not to recognize leases with a term of twelve months or less, or leases for low-value assets. Payments are applied against the lease liability and interest expense is recognized on the lease liability using the effective interest rate method. Depreciation is recognized on the right-of-use asset over the lease term.

Decommissioning Liability

Decommissioning liabilities are measured as the present value of management's best estimate of the expenditure required to settle the future decommissioning liability at the reporting date using a risk-free discount rate. This estimate is recognized when a legal or constructive obligation arises and is capitalized as part of E&E assets or P&E as appropriate. The amount capitalized to P&E is amortized on a unit-of-production basis consistent with the measurement of depletion. The obligation is adjusted at the end of each reporting period to reflect the passage of time and changes in the estimated future costs underlying the obligation. The increase in the obligation due to the passage of time is recognized as accretion expense in the consolidated statement of income whereas increases or decreases due to changes in the estimated future costs are capitalized. Actual costs incurred upon settlement of decommissioning obligations are charged against the liability; if actual costs exceed the liability recorded, the difference is charged to the consolidated statement of income.

Revenue Recognition

Revenue recognition from the sale of commodities is calculated by reference to consideration specified in contracts with customers and recognized when control of the product is transferred to the buyer. This is generally at the time the customer obtains legal title to the product and when it is physically transferred to the delivery mechanism agreed with the customer, often pipelines or other transportation methods.

The Company sells its production pursuant primarily to variable price contracts. The transaction price for variable priced contracts is based on the commodity price, adjusted for quality, location or other factors depending on the contract terms. Under its contracts, the Company is required to deliver volumes of natural gas, condensate and NGL to the contract counterparty. The amount of revenue recognized is based on the agreed transaction price, whereby any variability in revenue relates specifically to fluctuations in commodity prices. Natural gas, condensate and NGL are mostly sold under contracts of varying price and volume terms. Revenues are typically collected on the 25th day of the month following production.

The Company evaluates its arrangements with third parties and partners to determine if the Company acts as the principal or as an agent. In making this evaluation, management considers if the Company obtains control of the product delivered, which is indicated by the Company having the primary responsibility for the delivery of the product, having the ability to establish prices or having inventory risk. If the Company acts in the capacity of an agent rather than as a principal in a transaction, then the revenue is recognized on a net basis, only reflecting the fee, if any, realized by the Company from the transaction.

Transportation

Transportation expenses include costs incurred by the Company to transport natural gas and condensate from the wellhead to the point of title transfer.

Share-Based Compensation

The Company has a stock option plan, performance award incentive plan and a director share award plan (collectively, the "Plans"). Stock options are issued to directors, officers and employees. Performance awards can be issued to officers, employees, consultants and other service providers while director share awards are issued solely to directors.

Stock options are accounted for using the fair-value method which estimates the value of the options at the date of the grant using the Black-Scholes option pricing model. The fair value of the performance awards and director share awards is calculated based on the volume weighted average trading price over the five trading days immediately preceding the date of grant. Awards granted under the performance and director share awards plans may be settled in cash or in common shares purchased on the open market at the sole discretion of the Company. The total fair value associated with the Plans is recognized over the service period using graded vesting as share-based compensation expense with an equivalent increase to contributed surplus. An estimated forfeiture rate is applied to the total fair value at the grant date and is subsequently adjusted to reflect the actual number of options and share awards that vest. A performance multiplier is applied to grants under the performance award incentive plan and is estimated on the date of grant to reflect the number of performance awards that are expected to vest. The performance multiplier is based on an assessment of the Company's achievement of predefined corporate performance measures, as approved by the Board of Directors of the Company. At the time at which options and share awards vest, the previously recognized fair value in contributed surplus is transferred to share capital. Consideration received by the Company on the exercise of options is recorded as an increase to share capital.

Government Grants

Government grants are recognized when there is reasonable assurance that the Company will comply with the conditions attached to them and the grants will be received. When the conditions of a grant relate to income or expenses, it is recognized in the consolidated statement of income in the period in which the expenditures are incurred or income is earned. When the conditions of a grant relate to an underlying asset, it is recognized as a reduction to the carrying amount of the related asset and amortized into income on a systematic basis over the expected useful life of the underlying asset through reduced depletion and depreciation expense.

Financial Instruments

Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are de-recognized when the rights to receive cash flows from the instruments have expired, or when the Company has transferred substantially all risks and rewards of ownership.

Financial instruments are measured at fair value upon initial recognition. Measurement in subsequent periods is dependent on the financial instrument's classification, as described below:

• Fair value through profit or loss ("FVTPL") Financial assets and liabilities designated at fair value through profit or loss are initially recognized and subsequently measured at fair value with subsequent changes in fair value charged to the consolidated statement of income. The Company classifies its risk management contracts as FVTPL financial instruments.
• Amortized cost Certain financial assets and liabilities are initially recognized at fair value, net of directly attributable transaction costs, and subsequently measured at amortized cost using the effective interest rate method, net of any impairment. The Company includes accounts receivable, accounts payable and accrued liabilities and bank indebtedness within the amortized cost category.
• Fair value through other comprehensive income ("FVTOCI") Financial assets designated at fair value through other comprehensive income are measured at fair value with changes in fair value recognized in other comprehensive income, net of tax. The Company does not currently have any financial assets classified as FVTOCI.

Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position when there is a legally enforceable right to offset the recognized amounts, and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

Any subsequent reclassification of financial assets and liabilities from their initial recognition will be reclassified on the first day of the reporting period.

Impairment of financial assets

Impairment of financial assets is determined by measuring the assets' expected credit losses ("ECLs"). Due to the nature of its financial assets, the Company measures loss allowances at an amount equal to expected lifetime ECLs. Lifetime ECLs are the anticipated ECLs that result from all possible default events over the expected life of a financial asset. ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls, which is measured as the difference between the present value of the cash flows due to the Company and the cash flows that the Company expects to receive. In making an assessment as to whether financial assets are credit impaired, the Company considers historically realized bad debts, evidence of a deterioration of a debtor's financial condition, evidence that a debtor will enter bankruptcy, increase in the number of days the debtor is past due and changes in economic condition that could correlate to increased risk of default. ECLs are discounted at the effective interest rate of the related financial asset. The Company does not have any financial assets that contain a financing component since accounts receivable are due within one year or less.

Risk management contracts

Risk management contracts may be used by the Company to manage exposure to market risks related to commodity prices, exchange rates and interest rates. Storm does not use derivative contracts for speculative purposes. The Company does not designate its derivative contracts as hedges and, as such, does not apply hedge accounting. All derivative contracts are classified as fair value through profit and loss financial instruments.

Income Tax

Income tax comprises current and deferred taxes. Income tax is recognized in the consolidated statement of income except to the extent that it relates to items recognized directly in other comprehensive income or elsewhere in shareholders' equity, in which case the related income tax expense or recovery is similarly recognized in the appropriate account.

Current tax expense is the expected cash tax payable on the taxable income for the year, using tax rates enacted, or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

In general, deferred income tax expense and the related liability is recognized in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted at the reporting date and are expected to continue to apply when the deferred tax asset or liability is settled. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered. Deferred income tax assets and liabilities are presented as non-current on the consolidated statement of financial position.

Joint Arrangements

Interests in joint arrangements are classified as either joint operations or joint ventures, depending on the rights and obligations of the parties to the arrangement. Joint operations arise when the Company has rights to the assets and obligations for the liabilities of the arrangement. Certain of the Company's exploration and production activities are conducted through joint operations and, accordingly, the financial statements reflect the Company's share of these assets, liabilities, revenues and expenses. Joint control exists for contractual arrangements governing the Company's assets whereby the Company has less than 100% working interest, all of the partners have control of the arrangement collectively, and spending on the project requires unanimous consent of all parties that collectively control the arrangement and share the associated risks.

Share Capital

Proceeds from the issuance of common shares are classified as shareholders' equity. Costs directly attributable to the issuance of shares are recognized as a deduction from shareholders' equity.

Per-Share Amounts

Basic net income (loss) per share is calculated by dividing the net income (loss) attributable to equity owners for the reporting period by the weighted average number of common shares outstanding during the reporting period.

Diluted net income (loss) per share is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments. The Company's potentially dilutive instruments comprise stock options granted to directors, officers and employees. The number of shares included with respect to options is computed using the treasury stock method, which assumes that proceeds received from the exercise of in-the-money stock options are used to purchase common shares at average market prices during the period.

4. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS

The preparation of the financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, shareholders' equity, revenue and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are continuously reviewed with the financial statement effect being recognized in the reporting period that the changes to estimates are made.

In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The rapid outbreak and subsequent measures intended to limit the spread of COVID-19 have contributed to a significant increase in economic uncertainty, with more volatile commodity prices, currency exchange rates and interest rates. The duration and severity of the business disruptions and reduction in consumer activity internationally and the resulting financial effect is difficult to reliably estimate. The results of the economic downturn and any potential resulting direct or indirect effect on the Company has been considered in management's estimates at period end. However, there could be further prospective material effects in future periods.

Critical judgments applied by management to accounting policies that have the most significant effect on the amounts in the financial statements are as follows:

Classification and Carrying Amount of Exploration and Evaluation Assets

Each reporting period, E&E assets are subject to an internally conducted impairment review. Factors brought into the consideration of impairment include the Company's future plans for the property, lease expiries, drilling and development results on proximate or analogous properties, facility and pipeline access, views as to future commodity prices, operating and development costs and availability of capital for exploration and development programs. Judgment is required to determine the level at which E&E is assessed for impairment. E&E assets are assessed for impairment at the operating segment level. An impairment assessment is also completed when the costs of E&E assets are transferred to P&E on a specific identification basis.

Carrying Amount of Property and Equipment

Each reporting period, P&E is subject to an impairment review applied at the CGU level. The impairment review gives recognition to changes in geological interpretation or development plans, drilling results, development costs, changes to reserve estimates and values, future commodity prices, facility and pipeline access, operating results, operating and future development costs, industry activity in the area, access to markets and availability of development capital.

Depletion, Impairment and Reserves

The amounts recorded for depletion and impairment testing are based on estimates of proved plus probable reserves. Significant judgment and estimates are required to calculate the recoverable amount on non-financial assets. The Company estimates the recoverable amount of non-financial assets, including P&E and E&E, based on its FVLCD, calculated using the after-tax future cash flows expected to be derived from production of proved plus probable crude oil and natural gas reserves, less estimated selling costs, discounted using market-based rates to reflect a market participant's view of the risks associated with the assets.

Assumptions that are valid at the time of reserve estimation may change materially as new information becomes available. Reserves estimates are based on engineering data, forward price estimates, production and future development costs, recovery rates or decommissioning costs, all of which may change the economic status of reserves and may ultimately result in reserves used for measurement purposes being removed from similar calculations in future reporting periods. Reserves have been evaluated at December 31, 2020 and 2019 by the Company's independent qualified reserves evaluator.

Decommissioning Liability

Measurement of the Company's decommissioning liability involves estimates as to the cost and timing of incurrence of future decommissioning programs. It also involves assessment of appropriate discount rates, rates of inflation applicable to future costs and the rate used to measure the accretion charge for each reporting period. Measurement of the liability also reflects current engineering methodologies as well as current and expected future environmental legislation and standards.

Measurement and Utilization of Tax Assets

The Company has tax pools which may be applied in reduction of future income. The amount of such pools is subject to audit by taxing authorities, possibly several years after the initial measurement. In addition, future changes to tax laws may result in the loss or limitation of use of such pools.

Measurement of Share-Based Compensation

The charge for share-based compensation involves the estimate of the fair value of stock options at time of issue. The estimate involves assumptions regarding the life of the option, dividend yields, interest rates, and volatility of the security subject to the option. The charge is measured using the Black-Scholes option pricing model, which could be replaced by a pricing model producing different results.

Carrying Amounts of Financial Instruments

Financial instruments are subject to valuation at the end of each reporting period. Generally the valuation is based on active and efficient markets. However, certain financial instruments may not be traded on an efficient market, or the market may disappear or be subject to circumstances or controls that impede the efficiency of the market.

5. EXPLORATION AND EVALUATION

	Year EndedDecember 31, 2020	Year EndedDecember 31, 2019
Balance, beginning of year	$99,737	$	102,277
Additions	746		2,169
Dispositions	-		(1,083)
Expiries - exploration and evaluation costs expensed	(745)		(1,140)
Future decommissioning costs	35		178
Transfer to property and equipment	(887)		(2,664)
Balance, end of year	$98,886	$	99,737

For the year ended December 31, 2020, the Company determined certain of its E&E assets to be technically feasible and commercially viable and they were, therefore, transferred to P&E. An impairment test was conducted prior to the transfer (determined using the same methodology outlined in Note 6 – Property and Equipment), but no impairment was recognized as the recoverable amount of these assets exceeded the carrying value.

As at December 31, 2020, management reviewed the carrying amounts of the remaining assets in E&E for indicators of potential impairment and concluded that there are no indicators of potential impairment.

6. PROPERTY AND EQUIPMENT

	Year Ended	Year Ended
	December 31, 2020	December 31, 2019
Cost
Balance, beginning of year	$746,515	$	646,983
Additions	58,505		95,757
Future decommissioning costs	5,009		1,111
Transfer from exploration and evaluation assets	887		2,664
Balance, end of year	$810,916	$	746,515
Accumulated depletion and depreciation
Balance, beginning of year	$(256,251)	$	(216,182)
Depletion and depreciation	(46,141)		(40,069)
Balance, end of year	$(302,392)	$	(256,251)
Net book value, beginning of year	$490,264	$	430,801
Net book value, end of year	$508,524	$	490,264

Future capital costs required to develop proved plus probable reserves in the amount of $504.9 million (December 31, 2019 - $566.2 million) are included in the depletion calculation.

As at December 31, 2019, the balance of assets under construction not subject to depreciation or depletion was $65.0 million and related to construction of the Nig Creek Gas Plant located in northeast British Columbia. In February 2020, construction of the Nig Creek Gas Plant was completed and the gas plant is being depreciated on a straight-line basis over its estimated useful life of 35 years.

Impairment Assessment and Testing

In accordance with IFRS, an impairment test is performed if the Company identifies an indicator of impairment. At December 31, 2020, the Company determined that an indicator of impairment existed for its material producing CGU at Umbach as the market capitalization of the Company was less than the net asset value.

Given the ongoing changes in the overall business environment and current uncertainties in commodity markets, the Company reviewed externally available forward commodity prices and noted specifically a decline in WTI crude oil prices. Although there was a decline in crude oil prices, the Company earns revenues through a diversified marketing strategy including approximately 80% of production attracting natural gas pricing.

An impairment is recognized if the carrying value of an asset exceeds the recoverable amount. The Company determines the recoverable amount by using discounted future cash flows of proved plus probable reserves using forecast prices and costs.

Forecast future prices, as prepared by an independent qualified reserve evaluator, used in the impairment evaluation as at December 31, 2020, reflect the benchmark prices set forth in the table below, adjusted for basis differentials to determine local reference prices, transportation costs and tariffs, heat content and quality.

	2021	2022	2023	2024	2025	2026	2027(1)
WTI Cushing Oklahoma (US$/Bbl)	48.00	51.00	54.00	55.08	56.18	57.31	58.45
NYMEX Henry Hub (US$/Mmbtu)	2.85	2.91	2.97	3.02	3.08	3.15	3.21
AECO-C Spot (Cdn$/Mmbtu)	2.80	2.71	2.62	2.67	2.73	2.78	2.84
Station 2 (Cdn$/Mmbtu)	2.75	2.66	2.57	2.62	2.68	2.73	2.79
Exchange rate (US$/Cdn$)	0.77	0.77	0.77	0.77	0.77	0.77	0.77

(1) Prices escalate at 2% thereafter.

Recoverable amounts were estimated based on a fair value less costs of disposal ("FVLCD") methodology, using the present value of the CGUs expected after-tax future cash flows. The cash flow information was derived from a report on the Company's crude oil and natural gas reserves which was prepared by an independent qualified reserve evaluator. The projected cash flows used in the FVLCD calculation reflect market assessments of key assumptions as at December 31, 2020, including long-term forecasts of commodity prices, inflation rates and foreign exchange rates (Level 3 fair value inputs as described in Note 15). Future cash flow estimates are discounted using after-tax risk-adjusted discount rates. The after-tax discount rate applied in the impairment calculation as at December 31, 2020 was 10%. All else being equal, a 1% increase in the assumed discount rate or a 10% decrease in future planned funds flows would not result in an impairment for the year ended December 31, 2020.

As at December 31, 2020, the Company determined that there was no impairment to P&E.

7. BANK INDEBTEDNESS

As at December 31, 2020, the Company had an extendible revolving credit facility in the amount of $190 million (December 31, 2019 - $205 million) based on a bank determined borrowing base related to the Company's producing reserves. Although the borrowing base was set at $205 million, the Company voluntarily reduced the credit facility amount to $190 million in order to reduce the associated fees. The credit facility is available to the Company until May 28, 2021, at which time the borrowing base amount will be reviewed and in the ordinary course of business the Company will have the option to extend the facility for an additional year. If the credit facility is not extended, the facility moves into a term phase whereby the outstanding loan amount is to be repaid in full one year later. In the event that the lenders reduce the borrowing base below the amount drawn, the Company would have 90 days to eliminate any borrowing base shortfall by repaying the amount drawn in excess of the re-determined borrowing base or by providing additional security or other consideration satisfactory to the lenders. Repayments of principal are not required provided that the borrowings under the credit facility do not exceed the authorized borrowing amount. Interest is paid on the utilized portion of the credit facility at bankers' acceptance rates plus a stamping fee. Collateral comprises a floating charge demand debenture on the assets of the Company.

As at December 31, 2020, the Company had issued letters of credit in the amount of $13.7 million (December 31, 2019 - $10.0 million) in support of future natural gas transportation and processing obligations.

At December 31, 2020, bank debt including outstanding letters of credit amounted to $148.1 million, representing approximately 78% of the available credit facility.

8. REVENUE FROM PRODUCT SALES

The following table presents the Company's revenue from product sales disaggregated by revenue source:

		Year Ended	Year Ended
	December 31, 2020		December 31, 2019
Natural gas	$	107,943	$	115,488
Condensate		38,939		51,522
NGL		8,183		6,412
Total	$	155,065	$	173,422

Storm's revenue was generated mostly in British Columbia where production was sold primarily to three major energy customers with investment grade credit ratings which accounted for 91% and 92% of the Company's total revenue from product sales for the three months and year ended December 31, 2020, respectively (December 31, 2019 - 80% and 81%, respectively, from two major customers). The majority of revenue is derived from variable price contracts based on index prices at each sales point. Of total natural gas revenue for the year ended December 31, 2020, 54% received Chicago pricing, 19% received BC Station 2 pricing, 14% received AECO pricing, 8% received Sumas pricing and the remaining 5% received ATP pricing.

9. RIGHT-OF-USE ASSET AND LEASE LIABILITY

Right-of-Use Asset

The following table provides a reconciliation of the carrying amount of the right-of-use asset pertaining to the Company's corporate office lease in Calgary:

	Year EndedDecember 31, 2020	Year EndedDecember 31, 2019
Cost
Balance, beginning of year	$3,094	$	3,094
Additions	-		-
Balance, end of year	$3,094	$	3,094
Accumulated depreciation
Balance, beginning of year	$(437)	$	-
Depreciation	(437)		(437)
Balance, end of year	$(874)	$	(437)
Net book value, beginning of year	$2,657	$	3,094
Net book value, end of year	$2,220	$	2,657

As at December 31, 2020, the net book value of the right-of-use asset for the Company's corporate office lease in Calgary is $2.2 million (December 31, 2019 - $2.7 million) with a remaining lease term to the year 2026.

Lease Liability

The following table provides a reconciliation of the carrying amount of the liability pertaining to the Company's corporate office lease in Calgary:

	Year EndedDecember 31, 2020		Year EndedDecember 31, 2019
Balance, beginning of year	$	2,741	$3,094
Lease payments		(507)	(500)
Lease interest		128	147
Balance, end of year	$	2,362	$2,741
Less current portion		512	507
Long-term portion	$	1,850	$2,234

The lease liability was measured at the present value of the remaining lease payments discounted at the Company's weighted average incremental borrowing rate of 5%.

As at December 31, 2020, the total undiscounted amount of the estimated future cash flows to settle the Company's lease liability over the remaining lease term is $2.7 million.

Short-term leases are leases with a lease term of twelve months or less. During the year ended December 31, 2020, short-term lease costs of approximately $2.2 million (December 31, 2019 - $1.7 million) were incurred primarily relating to the lease of drilling equipment which was captured within property and equipment costs.

10. DECOMMISSIONING LIABILITY

The Company provides for the future cost of decommissioning crude oil and natural gas production assets, including well sites, gathering systems and facilities. The total decommissioning liability is estimated based on the Company's net ownership interest in wells and facilities, the estimated costs to abandon and reclaim the wells, gathering systems and facilities and the estimated timing of future costs. The total estimated inflated and undiscounted liability required to settle the Company's decommissioning obligation is approximately $40.5 million (December 31, 2019 - $38.3 million), with the majority of payments being made in the years 2034 to 2054. A risk-free discount rate of 1.2% (December 31, 2019 – 1.7%) and an inflation rate of 1.5% (December 31, 2019 – 1.4%) was used to calculate the present value of the decommissioning obligation, amounting to $32.9 million at December 31, 2020.

The following table provides a reconciliation of the carrying amount of the obligation:

	Year Ended	Year Ended
	December 31, 2020		December 31, 2019
Balance, beginning of year	$28,115	$	26,334
Obligations incurred	1,282		2,706
Obligations settled	(643)		(246)
Change in estimates(1)	3,762		(1,171)
Accretion expense	338		492
Balance, end of year	$32,854	$	28,115
Less current portion	1,939		448
Long-term portion	$30,915	$	27,667

(1) Relates to changes in risk-free discount rates, inflation rates and estimated settlement dates.

11. DEFERRED INCOME TAXES

Deferred income tax assets and liabilities are based on the differences between the accounting amounts and the related tax bases of the Company's E&E and P&E assets, risk management contracts, decommissioning liability and unrealized gains and losses on investments.

Storm was not required to pay income taxes in the current or prior year as the Company had sufficient income tax deductions available to shelter taxable income. The Company has tax pools associated with E&E and P&E of approximately $306 million as well as non-capital losses of approximately $200 million. The non-capital losses begin to expire in 2027.

The provision for deferred 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:

	Year EndedDecember 31, 2020	Year EndedDecember 31, 2019
Net income before income taxes	$1,249	$16,240
Statutory combined federal and provincial income tax rate	26.3%	26.8%
Expected income tax expense	$328	$4,353
Add (deduct) the income tax effect of:
Share-based compensation	477	660
Change in estimated tax pool balances	305	-
Change in corporate tax rate	(152)	(471)
Other	505	385
Deferred income tax expense	$1,463	$4,927

The components of the deferred income tax assets and liabilities are as follows:

	As at	As at
	December 31, 2020	December 31, 2019
Deferred tax assets:
Non-capital losses	$51,193	$50,494
Decommissioning liability	8,388	7,145
Fair value of risk management contracts	2,132	466
Investments	-	283
Deferred tax liabilities:
Property and equipment in excess of tax basis	$(72,536)	$(67,748)
Deferred income tax asset (liability)	$(10,823)	$(9,360)

12. SHARE CAPITAL

Authorized

An unlimited number of voting common shares without nominal or par value An unlimited number of first preferred shares without nominal or par value

Issued

	Number of Common Shares (000s)	Consideration
Balance as at December 31, 2019	121,557	$391,444
Shares issued on stock option exercises	132	308
Balance as at December 31, 2020	121,689	$391,752

During 2020, 132,000 common shares were issued upon the exercise of stock options for proceeds of $224,000 and related prior period share-based compensation of $84,000 was transferred to share capital from contributed surplus.

For the period from January 1, 2021 to March 2, 2021, the date of this report, 24,000 common shares were issued upon the exercise of stock options for proceeds of $34,320.

13. SHARE-BASED COMPENSATION

Stock Options

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. Options are granted at the volume weighted average price of the shares on the TSX for the five trading days immediately preceding the date of grant, have a four-year term and vest in one-third tranches over three years. Under the stock option plan, at December 31, 2020, a total of 12,168,881 common shares were available for issuance, options in respect of 10,192,330 common shares were issued and outstanding and options in respect of 1,976,551 common shares were available for future issue.

At March 2, 2021, the date of this report, options in respect of 10,034,330 common shares are issued and outstanding and options in respect of 2,136,951 common shares are available for future issue.

Details of the options outstanding at December 31, 2020 and 2019 are as follows:

		Weighted Average
	Number of Options (000s)	Exercise Price
Outstanding at December 31, 2018	9,088	$	3.29
Granted during the year	3,017	$	1.52
Cancelled/forfeited during the year	(184)	$	3.34
Expired during the year	(1,733)	$	3.38
Outstanding at December 31, 2019	10,188	$	2.74
Granted during the year	2,435	$	2.00
Exercised during the year	(132)	$	1.70
Cancelled/forfeited during the year	(325)	$	2.16
Expired during the year	(1,974)	$	5.39
Outstanding at December 31, 2020	10,192	$	2.09
Number exercisable at December 31, 2020	4,346	$	2.30

Range of Exercise Price	Outstanding Options				Exercisable Options
	Number of	Weighted	Weighted	Number of	Weighted
	Options	Average	Average	Options	Average
	Outstanding	Remaining	Exercise	Outstanding	Exercise
	(000s)	Life (years)	Price	(000s)	Price
$1.11 - $1.70	2,942	3.0	$1.47	901	$1.49
$1.71 - $2.13	4,472	2.9	$1.94	1,535	$1.81
$2.14 - $5.27	2,778	1.0	$2.98	1,910	$3.07
Total	10,192	2.4	$2.09	4,346	$2.30

The fair value of employee stock options is measured using the Black-Scholes option pricing model. Measurement inputs include the share price on measurement date, exercise price of the instrument, expected volatility, forfeiture rate, weighted average expected life of the instruments (based on historical experience and general option holder behaviour), expected dividends and the risk-free interest rate (based on government bonds).

The weighted average inputs used in the Black-Scholes pricing model to determine the fair value of the options granted during the year ended December 31, 2020 of $0.72 per share (2019 - $0.56 per share) include the following:

	2020	2019
Share price	$1.11 - $2.20	$1.36 - $2.35
Exercise price	$1.11 - $2.20	$1.36 - $2.35
Volatility	48%	48%
Forfeiture rate	2%	2%
Expected option life (years)	3.7	3.7
Risk-free interest rate	0.3% - 1.4%	1.4% - 1.7%

Performance Awards and Director Share Awards

The Company has a performance award incentive plan which authorizes the Board of Directors to grant performance awards to officers, employees, consultants or other service providers. Each performance award entitles the holder to an award value equal to the number of shares designated in the performance award grant, multiplied by a payout multiplier ranging from 0 to 1.5x which is dependent on the performance of the Company relative to predefined corporate performance measures for a particular period. The Company also has a director share award plan where each director share award entitles an eligible director to receive an award value equal to the number of shares designated in the director award grant. Performance awards and director share awards vest one-half on the second anniversary of the grant date and the remaining one-half on the third anniversary of the grant date. The fair value of performance awards and director share awards is determined at the grant date based on the volume weighted average price of the shares on the TSX for the five trading days immediately preceding the date of grant.

Details of the performance awards and director share awards outstanding at December 31, 2020 and 2019 are as follows:

	Number of PerformanceAwards (000s)	Number of DirectorShare Awards (000s)
Outstanding at December 31, 2019 and December 31, 2018	-	-
Granted during the year	624	82
Outstanding at December 31, 2020	624	82

Share-Based Compensation Expense

Share-based compensation expense of $1.8 million was charged to the consolidated statement of income (loss) during the year ended December 31, 2020 (2019 - $2.5 million) with an equivalent offset to contributed surplus.

14. NET INCOME (LOSS) PER SHARE

Basic and diluted net income (loss) per share were calculated as follows:

	Year Ended	Year Ended
	December 31, 2020	December 31, 2019
Net income (loss) for the year	$(214)	$11,313
Weighted average number of common shares outstanding – basic
Common shares outstanding at beginning of year	121,557	121,557
Effect of shares issued	6	-
Weighted average number of common shares outstanding – basic	121,563	121,557
Dilutive effect of outstanding share-based awards(1)	-	-
Weighted average number of common shares outstanding - diluted	121,563	121,557
Net income (loss) per share
Basic and diluted	$(0.00)	$0.09

(1) For the year ended December 31, 2020, the Company incurred a net loss and therefore there was no dilutive effect of stock options. For the year ended December 31, 2019, 9.2 million weighted average common shares related to stock options were anti-dilutive.

15. FINANCIAL INSTRUMENTS

The Company's financial instruments include accounts receivable, prepaids and deposits, accounts payable and accrued liabilities, bank indebtedness and risk management contracts.

Storm classifies the fair value of financial instruments according to the following hierarchy based on the amount of observable inputs used to value the instrument.

• Level 1 Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions occur in sufficient frequency and volume to provide continual and verifiable pricing information.
• Level 2 Pricing inputs are other than quoted prices in active markets included in Level 1. Prices in Level 2 are either directly or indirectly observable as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities and interest rates, time value and volatility factors, which can be substantially observed or corroborated in the marketplace.
• Level 3 Valuations in this level are those with inputs for the asset or liability that are not based on observable market data.

The carrying value of bank indebtedness approximates its fair value as it bears interest at market rates. The fair value of the Company's risk management contracts described below is based on forward prices of commodities and interest rates available in the marketplace and they are therefore classified as Level 2 financial instruments. The Company does not have any financial instruments classified as Level 3 and there were no transfers between levels within the fair value hierarchy for the years ended December 31, 2020 and December 31, 2019.

The Company's risk management contracts are subject to master netting agreements that create a legally enforceable right to offset by counterparty the related financial assets and financial liabilities on the Company's consolidated statements of financial position. The following is a summary of the Company's financial assets and financial liabilities that are subject to offset as at December 31, 2020:

	Gross AmountsRecognized as FinancialAssets (Liabilities)		Gross Amountsof Financial Assets(Liabilities) Offset		Recognized as Financial	Net AmountsAssets (Liabilities)
Risk management contracts
Current asset	$	3,518	$	(3,518)	$	-
Long-term asset		1,511		(1,278)		233
Current liability		(12,001)		3,518		(8,483)
Long-term liability		(1,379)		1,278		(101)
Net position	$	(8,351)	$	-	$	(8,351)

The following is a summary of the Company's financial assets and financial liabilities that are subject to offset as at December 31, 2019:

	Recognized as Financial	Gross AmountsAssets (Liabilities)	of Financial Assets	Gross Amounts(Liabilities) Offset	Recognized as Financial	Net AmountsAssets (Liabilities)
Risk management contracts
Current asset	$	1,805	$	(692)	$	1,113
Long-term asset		-		-		-
Current liability		(2,734)		692		(2,042)
Long-term liability		(904)		-		(904)
Net position	$	(1,833)	$	-	$	(1,833)

Financial Risk Management

The Company's activities expose it to a variety of financial risks that arise as a result of its exploration, development, production, marketing and financing activities such as:

• credit risk;
• market risk; and
• liquidity risk.

Management has primary responsibility for monitoring and managing financial risks under direction from the Board of Directors, which has overall responsibility for establishing the Company's risk management framework.

Credit Risk

Credit risk is the risk of financial loss to the Company if a customer, joint operations partner or counterparty to a financial instrument fails to meet its contractual obligations.

Cash

When the Company has a cash surplus, it limits its exposure to credit risk by only investing in liquid securities and only with counterparties that have an acceptable credit rating or are supported by provincial government guarantees.

Accounts Receivable

The Company's accounts receivable tend to be concentrated with a limited number of marketers of the Company's production as well as joint operation partners and are subject to normal industry credit risk. Receivables from crude oil and natural gas marketers are typically collected on or about the 25th of the following month. The Company's production is sold to organizations whose credit worthiness is in part assessable from publicly available information. As at December 31, 2020, the Company's three major energy customers with investment grade credit ratings accounted for $16.9 million of total receivables (December 31, 2019 - $17.0 million from two major customers) and 92% of total revenues (December 31, 2019 - 81%). Where operations involve partners in a joint operation, the Company attempts to mitigate the risk from joint operation receivables by obtaining pre-approval from its partners in advance of significant capital expenditures. Receivables from joint operations are typically collected within one to three months of the joint operator bill being issued. As at December 31, 2020 and 2019, there were no receivables outstanding for more than 60 days. No material default on outstanding receivables is anticipated as none of the Company's outstanding receivables are considered past due at December 31, 2020.

The maximum exposure to credit risk at December 31, 2020 was the carrying amount of accounts receivable of $19.3 million and risk management contract assets of $0.2 million. No receivables were impaired at December 31, 2020.

Risk Management Contracts

The Company enters into derivative risk management contracts with counterparties with an acceptable credit rating and with a demonstrated capability to execute such contracts. The contracts, individually and in aggregate, are subject to controls established by the Board of Directors and limitations set out in the Company's banking agreement.

Market Risk

Market risk is the risk that changes in market prices will affect the Company's income or the value of its financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return.

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

• commodity prices;
• interest rates; and
• foreign currency exchange rates.

Commodity Price Risk

Commodity price risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for crude oil, natural gas, condensate and natural gas liquids are affected by many known and unknown factors such as demand and supply imbalances, market access, the relationship between the Canadian and United States dollar as well as national and international economic and geopolitical events.

The Company is exposed to the risk of declining prices for production resulting in a corresponding reduction in projected funds flow. Reduced funds flow may result in lower levels of capital being available for field activity, thus compromising the Company's capacity to grow total production while at the same time replacing continuous production declines from existing properties. Bank financing available to the Company is in the form of a reserves based loan, which is reviewed semi-annually, and is based on future funds flows and commodity price expectations. Changes to commodity prices will have an effect on credit available to the Company under its banking agreement.

The Company uses risk management contracts to manage its exposure to fluctuations in commodity prices, by fixing prices of future deliveries of crude oil and natural gas and thus providing stability of funds flow. Although the Company had no crude oil production at December 31, 2020, part of its condensate and NGL stream is sold at a price based on crude oil. Accordingly, a financial investment based on crude oil is used as a proxy for the Company's condensate and NGL stream.

Fair values for risk management contracts are based on quotes received from financial institution counterparties and are calculated using current market rates and prices and option pricing models using forward pricing curves and implied volatility.

As at March 2, 2021		2021	2022
Natural Gas
NYMEX swap	Mmbtu/d	3,000	-
	US$/Mmbtu	$2.51	-
NYMEX swap	Mmbtu/d	6,814	-
	Cdn$/Mmbtu	$3.36	-
NYMEX collar	Mmbtu/d	1,575	2,589
	US$/Mmbtu	$2.57 - $3.04	$2.78 - $3.51
NYMEX collar	Mmbtu/d	5,159	2,219
	Cdn$/Mmbtu	$3.48 - $4.02	$3.53 - $4.14
Chicago swap	Mmbtu/d	752	8,448
	US$/Mmbtu	$3.11	$2.56
Chicago swap	Mmbtu/d	18,026	1,110
	Cdn$/Mmbtu	$3.20	$3.65
AECO swap	GJ/d	9,107	986
	Cdn$/GJ	$2.25	$2.91
AECO collar	GJ/d	4,279	1,981
	Cdn$/GJ	$2.03 - $2.58	$2.32 - $3.14
BC Station 2 swap	GJ/d	23,778	9,297
	Cdn$/GJ	$2.04	$2.36

At the date of this report, the Company had entered into the following outstanding financial risk management contracts in place to manage commodity price risk:

As at March 2, 2021		2021	2022
Natural Gas Differential Swaps
NYMEX:Chicago	Mmbtu/d	13,697	2,589
	US$/Mmbtu	($0.23)	$0.04
NYMEX:Chicago	Mmbtu/d	2,729	2,219
	Cdn$/Mmbtu	$0.05	$0.05
AECO:BC Station 2	GJ/d	1,726	1,488
	Cdn$/GJ	($0.10)	($0.01)
Crude Oil
WTI swap	Bbls/d	-	149
	US$/Bbl	-	$51.43
WTI swap	Bbls/d	800	-
	Cdn$/Bbl	$53.41	-
WTI collar	Bbls/d	976	298
	Cdn$/Bbl	$52.09 - $61.91	$58.00 - $68.33
WTI collar	Bbls/d	100	100
	US$/Bbl	$44.00 - $54.23	$46.00 - $55.25
Crude Oil Differential Swaps
WTI:C5	Bbls/d	1,100	-
	Cdn$/Bbl	($3.83)	-
Propane
Conway swap	Bbls/d	50	-
	Cdn$/Bbl	$27.30	-
Argus Far East Index swap	Bbld/d	88	-
	Cdn$/Bbl	$46.31	-
Argus Far East Index swap	Bbls/d	88	-
	US$/Bbl	$37.91	-

Physical Delivery Sales Contracts

The Company also enters into physical delivery sales contracts from time to time to manage commodity price risk. These contracts are considered normal executory contracts and are not recognized in the consolidated statement of income (loss) and comprehensive income (loss) until volumes are delivered.

	Daily Volume	Contract Price
Natural Gas
Jan 2021 – Oct 2021	5,000 GJ at Station 2	AECO 7A less Cdn$0.125/GJ
Jan 2021 – Mar 2021	6,000 GJ at ATP	AECO 5A plus Cdn$0.09/GJ
Apr 2021 – Oct 2021	6,000 GJ at ATP	AECO 7A plus Cdn$0.00/GJ
Nov 2021 – Oct 2022	6,000 GJ at ATP	AECO 7A plus Cdn$0.115/GJ

Interest Rate Risk

Interest on the Company's revolving bank facility varies with changes in market interest rates and is most commonly based on bankers acceptances issued by the Company's banks, plus a stamping fee. The stamping fee may change based on the Company's debt-to-funds-flow ratio for the previous quarter. The Company is thus exposed to increased borrowing costs during periods of increasing interest rates, with a corresponding reduction in both funds flows and project economics. In addition, a higher debt-to-cash-flow ratio will mean an increase in stamping fees, and correspondingly, interest rates.

The Company is exposed to interest rate risk in relation to interest expense on its revolving credit facility. If interest rates applicable to floating rate debt were to have increased by 100 basis points (1%) it is estimated that the Company's net income for the year ended December 31, 2020 would have decreased by $0.9 million. A decrease in interest rates by 1% would result in an increase in net income by an equivalent amount.

The Company may enter into interest rate swap contracts to manage the uncertainty of variable interest rates by fixing the variable component of a portion of the interest paid on the Company's revolving bank facility. Interest rate swaps are classified as derivative financial assets and liabilities at fair value through profit and loss and measured at fair value, with gains and losses on re-measurement included as a component of unrealized risk management contracts in the period in which they arise. This interest rate swap is included on the balance sheet as either a risk management contract asset or liability and is classified as current or non-current based on the contractual terms specific to the instrument. As at December 31, 2020, the Company had the following outstanding financial risk management contracts in place to manage interest rate risk:

		Notional		Fixed
Index	Effective Date	Principal	Remaining Term	Contract Rate
One-month bankers' acceptance - CDOR(1)	May 2019	$25 million	Jan 2021 – May 2022	1.949%
One-month bankers' acceptance - CDOR(1)	Jan 2020	$10 million	Jan 2021 – Jan 2023	1.943%
One-month bankers' acceptance - CDOR(1)	Jan 2020	$15 million	Jan 2021 – Jan 2021	1.985%

(1) Canadian Dollar Offered Rate.

Subsequent to December 31, 2020, the Company entered into the following interest rate swap contract to manage interest rate risk:

		Notional		Fixed
Index	Effective Date	Principal	Remaining Term	Contract Rate
One-month bankers' acceptance - CDOR(1)	Jan 2021	$15 million	Feb 2021 – Jan 2024	0.66%

(1) Canadian Dollar Offered Rate.

Foreign Currency Exchange Rate Risk

Prices for crude oil are determined in global markets and generally denominated in US dollars. Natural gas prices are largely influenced by both US and Canadian supply and demand structures. Changes in the Canadian dollar relative to the US dollar affect the Company's natural gas revenue, some of which is sold at a US$ price; therefore, variation in the Canadian-US dollar exchange rate will affect Canadian dollar prices for the Company's production. In addition, costs of imported materials used in the Company's operations will be affected by the Canadian-US dollar exchange rate.

Risk Management

Risk management contracts may be used by the Company to manage exposure to market risks related to commodity prices, exchange rates and interest rates. The use of financial risk management contracts is governed by Storm's Board of Directors and follows guidelines and limits approved by the Board. Storm does not use derivative contracts for speculative purposes. All derivative contracts are classified at fair value through profit and loss and measured at fair value, with gains and losses on re-measurement included as a component of unrealized risk management contracts in the period in which they arise.

The fair market value of these risk management contracts at December 31, 2020 was a net liability position of $8.4 million (December 31, 2019 - net liability position of $1.8 million) and is included in current and non-current assets or current and non-current liabilities based on the contractual terms specific to the instruments. For the year ended December 31, 2020, this resulted in an unrealized mark-to-market loss of $6.5 million (December 31, 2019 - an unrealized mark-to-market gain of $1.5 million) when measured against the fair market value at the end of the preceding reporting period. These amounts are recognized in the consolidated statement of income (loss) and comprehensive income (loss).

The Company realized a gain from risk management contracts in place in the amount of $7.5 million for the year ended December 31, 2020 (December 31, 2019 - realized loss of $8.8 million).

Sensitivities

The following table summarizes the effects of movement in commodity prices and interest rates on net income (loss) due to changes in the fair value of risk management contracts in place at December 31, 2020. Changes in the fair value generally cannot be extrapolated because the relationship of a change in an assumption to the change in fair value may not be linear.

	Year Ended December 31, 2020
Factor		Gain/(Loss)
Increase of US$5.00/Bbl in the price of WTI(1)	$	(2,570)
Decrease of US$5.00/Bbl in the price of WTI(1)	$	2,570
Increase of US$0.10/Mmbtu in the price of NYMEX natural gas	$	(3,763)
Decrease of US$0.10/Mmbtu in the price of NYMEX natural gas	$	3,763
Increase of 100 basis points (1%) in interest rates	$	575
Decrease of 100 basis points (1%) in interest rates	$	(575)

(1) A portion of the Company's condensate and NGL production is sold at a price based on WTI.

Liquidity Risk

Liquidity difficulties would emerge if the Company is unable to establish or maintain a profitable production base and thus generate sufficient funds flow to cover both operating and capital requirements. This may be the consequence of insufficient funds flows resulting from low product prices, production interruptions, operating or capital cost increases, unsuccessful investment programs, limitations in the Company's access to markets, or delays in bringing on stream new wells or facilities. These risks cannot be eliminated; however, the Company uses the following guidelines to address financial exposure:

• internal funds flow provides the initial source of funding on which the Company's capital expenditure program is based;
• debt, if available, may be utilized to expand capital programs, including acquisitions, when it is deemed appropriate and where debt retirement can be controlled;
• equity, if available on acceptable terms, may be raised to fund acquisitions and exploration expenditures;
• farm-outs of projects may be arranged if management concludes that a project requires too much capital or where the project affects the Company's investment risk profile.

The timing of cash flows related to financial liabilities as at December 31, 2020 is as follows:

	Less than 1 year	2-3 years	Total
Accounts payable and accrued liabilities	$17,721	$-	$17,721
Risk management contracts	8,483	101	8,584
Bank indebtedness(1)	-	134,391	134,391
Total financial liabilities	$26,204	$134,492	$160,696

(1) Bank indebtedness is based on a revolving credit facility, which is reviewed annually. At renewal, the Company has the option to extend the facility for an additional year. If the revolving facility is not extended, the facility converts to a non-revolving facility payable in one year.

16. CAPITAL MANAGEMENT

The Company's capital structure comprises shareholders' equity and bank indebtedness. The Company's objective when managing capital is to maintain financial flexibility to support capital programs that will replace production sold as well as production declines and provide a base for future growth in production. Capital management involves the preparation of an annual budget, which is implemented after approval by the Company's Board of Directors. As the Company's business evolves throughout the year, the budget will be amended; however, any changes are again subject to approval by the Board of Directors.

Funds flow, bank financing and potential proceeds from the issue of equity and the sale of assets will be invested in exploration and development operations with the intent of growing short and medium term operating funds flow. Growing funds flow enables the Company to increase bank or other debt financing, thus expanding capital available for investment. It may be that capital currently available to the Company is insufficient to adequately grow funds flow, thus requiring additional capital which may be available only on terms dilutive to existing shareholders, if available at all.

17. RELATED PARTY TRANSACTIONS

The remuneration of the key management personnel of the Company, which includes directors and officers, is set out below in aggregate:

	Year EndedDecember 31, 2020	December 31, 2019	Year Ended
Salaries and short-term benefits	$3,170	$	3,293
Share-based compensation	975		1,381
Total compensation	$4,145	$	4,674

18. SUPPLEMENTAL CASH FLOW INFORMATION

Changes in non-cash working capital

	Year Ended	Year Ended
	December 31, 2020	December 31, 2019
Accounts receivable	$2,584	$7,214
Prepaids and deposits	(360)	89
Accounts payable and accrued liabilities	(12,297)	(4,341)
Change in non-cash working capital	$(10,073)	$2,962
Relating to:
Operating activities	$(4,165)	$8,957
Investing activities	(5,908)	(5,995)
Change in non-cash working capital	$(10,073)	$2,962
Interest paid during the year	$6,974	$5,087
Income taxes paid during the year	$-	$-

19. COMMITMENTS

At December 31, 2020, the Company has the following long-term commitments over the next five years and thereafter:

	2021	2022	2023	2024	2025	Thereafter	Total
Transportation and processing
commitments	$ 64,289	$ 60,398	$ 28,212	$ 28,332	$ 28,037	$ 179,815	$ 389,083
Office lease(1)	356	356	356	356	356	30	1,810
Total	$ 64,645	$ 60,754	$ 28,568	$ 28,688	$ 28,393	$ 179,845	$ 390,893

(1) Office lease commitment includes the operating cost component of the office lease costs.

CORPORATE INFORMATION

Officers

Brian Lavergne President & Chief Executive Officer

Robert S. Tiberio Chief Operating Officer

Michael J. Hearn Chief Financial Officer & Corporate Secretary

Emily Wignes Vice President, Finance Jamie P. Conboy Vice President, Geology

H. Darren Evans Vice President, Exploitation

Bret A. Kimpton Vice President, Production

Directors

Matthew J. Brister (2)(3)

John A. Brussa

Mark A. Butler (1)(3)

Stuart G. Clark (1) Chairman

Brian Lavergne President & Chief Executive Officer Sheila A. Leggett (2) Gregory G. Turnbull (2) P. Grant Wierzba (2)(3) James K. Wilson (1)

(1) Member, Audit Committee (2) Member, Reserves, Environment, Health and Safety Committee (3) Member, Compensation, Governance and Nomination Committee

Stock Exchange Listing

Toronto Stock Exchange Trading Symbol "SRX"

Solicitors

Stikeman Elliott LLP Burnet Duckworth & Palmer LLP Calgary, Alberta

Auditors

Ernst & Young LLP Calgary, Alberta

Registrar & Transfer Agent

Alliance Trust Company Calgary, Alberta

Bankers

ATB Financial Canadian Imperial Bank of Commerce Royal Bank of Canada Canadian Western Bank Calgary, Alberta

Executive Offices

Suite 600, 215 – 2nd Street S.W. Calgary, Alberta, T2P 1M4 Canada Tel: (403) 817-6145 Fax: (403) 817-6146 www.stormresourcesltd.com

Abbreviations

ATP	Alliance Transfer Point	Mbbl	Thousands of barrels
Bbls	Barrels of oil or natural gas liquids	Mboe	Thousands of barrels of oil equivalent
Bbls/d	Barrels per day	Mcf	Thousands of cubic feet
Bcf	Billions of cubic feet	Mcf/d	Thousands of cubic feet per day
Boe	Barrels of oil equivalent	Mmbtu	Millions of British Thermal Units
Boe/d	Barrels of oil equivalent per day	Mmbtu/d	Millions of British Thermal Units per day
Bopd	Barrels of oil per day	Mmcf	Millions of cubic feet
Btu	British thermal unit	Mmcf/d	Millions of cubic feet per day
Cdn$	Canadian dollar	NGL	Natural gas liquids
CGU	Cash generating unit	NYMEX	New York Mercantile Exchange
DPIIP	Discovered Petroleum Initially in Place	OPEC	Organization of Petroleum Exporting Countries
GJ	Gigajoules	PDP	Proved developed producing (reserves)
GJ/d	Gigajoules per day	TSX	Toronto Stock Exchange
KPa	Kilopascal	US	United States
LNG	Liquefied natural gas	US$	United States dollar
		WTI	West Texas Intermediate

Storm Resources Ltd. Suite 600, 215 – 2nd Street S.W., Calgary, Alberta T2P 1M4 Phone: (403)817-6145 Fax: (403)817-6146

www.stormresourcesltd.com