Kelt Exploration Ltd. has reported its Q2 2019 results.

Operations Update

Inga/Fireweed Core Area

At Inga, Kelt completed six wells (wells #7 to #12) on its 24-well pad Montney cube development program. Four of the six wells have been put on production and the remaining two wells are expected to be put on production this week. Initial production rates from these wells have exceeded the Company’s expectations. The average drill and complete cost per well was $4.8 million, a 4% reduction from the average drill and complete cost of $5.0 million per well for the first six wells and 11% lower than the original budgeted average drill and complete cost of $5.4 million per well. The Company is pleased with the higher capital efficiencies on the second batch of six wells considering that the total amount of proppant pumped into the wells averaged 3,528 tonnes per well, a 15% increase from an average 3,074 tonnes per well of proppant pumped into the first six wells drilled from the pad. Kelt has been able to improve costs through drilling efficiencies resulting in lower drill times and completion efficiencies resulting from the use of the Company’s newly installed water handling facilities. Additional savings are being realized by using bi-fuel (natural gas capable) frac pumpers and on-site fuel gas further reducing costs and at the same time, improving the Company’s carbon footprint. A summary of the drill and complete operations for these wells is shown in the table below:

The next six wells (wells #13 to #18) on the 24-well pad were also drilled in the second quarter and are expected to be completed during the third quarter of 2019. Included in these six wells is one well targeting the Lower Middle Montney horizon. This will be the Company’s first Lower Middle Montney test on its Inga/Fireweed land acreage. The first six wells (wells #1 to #6) were put on production during the second quarter and were temporarily shut-in for a short period while the Company was completing the second batch of six wells. Production volumes from each of these first six wells for the respective initial 30 days (approximately 720 operating hours) in aggregate were 6,569 BOE per day (77% oil and NGLs), exceeding the Company’s expected range of 5,800 to 6,200 BOE per day (60% to 65% oil and NGLs).

At Fireweed, the Company was ahead of schedule putting five Upper and Middle Montney single pad wells on production during the second quarter. These wells that were previously drilled in 2018 and which were expected to be put on production in the third quarter of 2019, were tied-in ahead of schedule with production commencing in the second quarter of 2019. Production volumes from each of these five wells for the respective initial 30 days (approximately 720 operating hours) in aggregate were 5,281 BOE per day (72% oil and NGLs), within the Company’s expected range of 5,200 to 5,500 BOE per day (60% to 65% oil and NGLs).

Kelt has entered into an agreement with AltaGas Ltd. (“AltaGas”) whereby the Company will construct a 16- inch gas pipeline from its Inga 2-10 facility to the AltaGas Townsend Deep-Cut Gas Plant. The total cost to build the pipeline is estimated to be approximately $39.0 million and ownership of the pipeline will be two- thirds Kelt and one-third AltaGas. The pipeline will have a capacity to transport up to approximately 300 MMcf per day of natural gas. AltaGas will reimburse Kelt the full amount of $39.0 million ($13 million during construction and $26 million after construction) and in return Kelt has agreed to make annual payments over 10 years as repayment for its share of the cost of the pipeline (approximately $26.0 million). The annual payments to AltaGas over ten years are representative of payments that would have been required if Kelt did not take an ownership interest in the pipeline but instead entered into a take-or-pay arrangement to deliver gas through the pipeline as a third party. Under such an arrangement, Kelt would not have an ownership interest in the pipeline after 10 years and would have to re-negotiate transportation terms thereafter. Under the current agreement, Kelt retains its two-thirds ownership in the pipeline after the ten year term is complete, with no further financial obligation to AltaGas.

The Government of British Columbia offers an Infrastructure Royalty Credit Program that encourages new capital investment in oil and natural gas infrastructure. The program is designed to create and sustain good paying jobs for British Columbians and stimulate new royalty revenue for the Province. Through the Infrastructure Royalty Credit Program, oil and gas companies such as Kelt can apply for a reduction to the royalties they would otherwise pay to the Province under a competitive Request for Applications process. This reduction can be applied to future royalties that would otherwise be payable and is determined based on an approved percentage of the costs to build roads, pipelines and gas facilities that are approved under the program.

In 2017, Kelt made an application to the Infrastructure Royalty Credit Program and was approved for its planned infrastructure build in certain parts of its Inga/Fireweed property relating to expenditures totaling approximately $38.6 million. This infrastructure build includes the following:

• construction of a pipeline route comprised of a sour gas line, a sweet gas line, a sour emulsion line, a disposal water line, a frac water line and a fuel gas line;

• building and upgrading of roads and installation of a bridge; and

• installation of centralized dehydration and compression facilities.

The Government of British Columbia approved a recovery of approximately 39% of Kelt’s infrastructure expenditures or $15.0 million through the program. The amount is expected to be recovered from reduced future royalties payable relating to 20 horizontal Montney wells associated with this project. To date, Kelt has incurred over 80% of the infrastructure capital committed to under the program and has drilled 10 of the 20 horizontal Montney wells. The Company has commenced sales from these wells and expects to apply for royalty credits imminently, however, the future benefit of credits from the program are not currently reflected in the Company’s 2019 financial guidance.

Wembley/Pipestone Core Area

At Wembley/Pipestone, the Company has now drilled and completed three Upper Middle Montney (D3/D4) wells from the 1-14 pad offsetting the original discovery well located at 00/04-01-072-08W6 which had an IP30 production rate of 1,337 BOE per day (83% oil and NGLs). The average drill & complete cost per well was $5.4 million per well, 8% lower than the budgeted average cost of $5.9 million per well. Kelt has also drilled three additional Upper Middle Montney (D3/D4) wells from the 12-3 pad offsetting the 2018 well drilled from the same pad located at 00/12-05-073-08W6 which when tested, over the last three days of the test, produced average sales volumes of approximately 1,497 BOE per day (74% oil and NGLs). In August 2019, the Company expects to commence completion operations on these three wells that were drilled from the 12- 3 pad. During the second quarter, the Company also drilled a single well on its main Wembley/Pipestone land block located at (03/16-08) 02/16-10-72-7W6.

At Wembley/Pipestone, Kelt is currently building a battery that will be capable of processing all of the gas, oil and water associated with the Company’s firm service commitment at the Pipestone Sour Deep-Cut Gas Processing Plant which is also currently under construction by Tidewater Midstream and Infrastructure Ltd. (“Tidewater”). The Kelt battery, consisting of dehydration, separation, treating, storage and water injection facilities, is expected to be commissioned in September coinciding with the expected start-up of the Tidewater facility. Kelt’s water injection well, which was completed earlier this year, has already been tested and used for water disposal.

Outlook

As the Company prepares to ramp up production in the second half of 2019 with significant production additions from its Inga/Fireweed and Wembley/Pipestone core areas, Kelt has not changed its 2019 average production estimate that was forecasted to be in a range of 33,500 to 34,500 BOE per day. However, in light of recent third party gas plant interruptions, the Company expects its 2019 average production to be at the low end of its forecasted range. Subsequent to the end of the second quarter, the Enbridge McMahon Gas Plant, which accounts for approximately one-third of Kelt’s B.C. production, was shut down on July 30, 2019 and has indicated that it will resume operations on August 13, 2019. At La Glace, where the Company produces approximately 2,800 BOE per day through the Encana Sexsmith Gas Plant, Kelt has been experiencing interruptions in its production resulting from restrictions to the plant due to heat caused by high ambient temperatures and increased NGTL pipeline pressures.

With the recent volatility in oil and gas prices, Kelt is reducing its forecasted commodity price assumptions for 2019.

Kelt’s 2019 capital expenditure program, excluding the Company’s share of costs relating to the proposed 16-inch gas pipeline from its Inga 2-10 facility to the Townsend Deep-Cut Gas Plant, remains unchanged at $270.0 million. The cost of the pipeline of approximately $26.0 million will be incurred by Kelt during the year, however, Kelt will be reimbursed by AltaGas and in return Kelt will re-pay AltaGas based on a pre- determined fee basis over 10 years.

In addition, Kelt’s 2019 capital expenditures includes approximately $18.0 million of drilling expenditures for wells (DUCs) that are not expected to be completed until 2020:

• 6 wells at Inga/Fireweed – wells #19 to #24 from the Inga 24-well pad; and

• 2 wells at Wembley/Pipestone – 02/16-10 (sfc 03/16-08) and 00/04-24 (sfc 16-26).

Production from these eight wells (DUCs) plus an additional two wells at Oak (to be drilled and completed in 2019) is not included in the Company’s 2019 production forecast and will provide the Company with momentum for continued production growth in early 2020.

Message to Shareholders

realizations compared to AECO as a result of its gas market diversification portfolio and high heat content gas. During the second quarter of 2019, the Company’s realized average gas price per Mcf was 167% higher than the average AECO 5A price of $1.03 per MMBtu.

For the three months ended June 30, 2019, revenue was $100.7 million and adjusted funds from operations was $45.5 million ($0.25 per share, diluted), compared to $98.7 million and $47.1 million ($0.25 per share, diluted) respectively, in the second quarter of 2018.

Net capital expenditures incurred during the three months ended June 30, 2019 were $91.0 million. During the second quarter of 2019, the Company spent $57.1 million on drill and complete operations, $36.2 million on equipment, facilities and pipelines and $1.4 million on land and seismic. Property dispositions, net of property acquisitions were $3.7 million during the quarter.

During the second quarter of 2019, Kelt’s production was negatively impacted by firm gas transportation service restrictions on TC Energy’s NGTL system, temporary shut-ins from producing Inga wells during completion operations on the Inga 24-well pad and intermittent downtime at the Encana Sexsmith Gas Plant where the Company processes gas from its La Glace field. In order to mitigate the impact of production disruptions resulting from these events, Kelt elected to advance its 2019 capital expenditure program. In doing so, the Company was also able to take advantage of significant cost savings on its continuing drilling and completion operations. Approximately $30.0 million in capital expenditures relating to capital projects that were originally budgeted for the third quarter of 2019 were completed during the second quarter of 2019, including the following:

• completion operations for six wells from the Inga 24-well pad (wells #7 to #12);

• drilling operations for six wells from the Inga 24-well pad (wells #13 to #18); and

• drilling operations for one well at Oak.

At June 30, 2019, bank debt, net of working capital was $308.6 million. During the second half of 2019, Kelt is forecasting higher funds from operations compared to estimated capital expenditures, resulting in bank debt, net of working capital of approximately $258.0 million at December 31, 2019.