Quarterly / Earnings Reports | Third Quarter (3Q) Update | Capital Markets | Capital Expenditure - 2020

Kelt Exploration Talks Q3 2019 Results; IDs 2020 Budget

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   |    Friday,November 08,2019

Kelt Exploration Ltd. reported its financial and operating results for the three and nine months ended September 30, 2019.

2020 Budget

The Company’s Board of Directors has approved an initial capital expenditure budget of $235.0 million for 2020.

Kelt expects to drill 25 gross (25.0 net) wells in 2020 and expects to complete 31 gross (31.0 net) wells in 2020. The Company expects to have 11 gross (11.0 net) wells drilled but un-completed (“DUC”) in 2019 and 5 gross (5.0 net) DUC wells by the end of 2020. The 2020 capital expenditures are expected to be allocated as follows: $155.0 million for drilling and completing wells, $70.0 million for facilities, pipeline and equipment and $10.0 million for land and seismic.

Q3 Results

Kelt’s operating results for the third quarter ended September 30, 2019 are summarized as follows:

(1) Refer to advisories regarding non-GAAP financial measures and other key performance indicators.

Average production for the three months ended September 30, 2019 was 31,150 BOE per day, an increase of 19% compared to average production of 26,204 BOE per day during the third quarter of 2018. Quarter-over-quarter, daily average production in the third quarter of 2019 was up 3% compared to average production of 30,314 BOE per day in the second quarter of 2019. The Company experienced significant downtime at La Glace where the operator of the Sexsmith Gas Plant has restricted gas processing access to Kelt production volumes due to an increase in throughput volumes from other owners of the plant. Prior to the interruptions at Valhalla/La Glace, the Company’s production in the area was approximately 2,500 BOE per day.

Kelt’s realized average oil price during the third quarter of 2019 was $65.41 per barrel, down 19% from $80.62 per barrel in the third quarter of 2018. The realized average NGLs price during the third quarter of 2019 was $16.64 per barrel, down 60% from $41.20 per barrel in the same quarter of 2018. Kelt’s realized average gas price for the third quarter of 2019 was $2.32 per Mcf, down 17% from $2.81 per Mcf in the corresponding quarter of the previous year. Lower commodity prices during the quarter negatively impacted revenue and adjusted funds from operations during the three months ended September 30, 2019.

For the three months ended September 30, 2019, revenue was $93.3 million and adjusted funds from operations was $39.2 million ($0.21 per share, diluted), compared to $100.2 million and $46.9 million ($0.25 per share, diluted) respectively, in the third quarter of 2018. Net capital expenditures incurred during the three months ended September 30, 2019 were $52.7 million. During the third quarter of 2019, the Company spent $25.2 million on drill and complete operations, $26.3 million on facilities, pipelines and equipment and $1.2 million on land and seismic.

To date in 2019, Kelt has incurred capital expenditures of $6.5 million relating to its share of costs for the 16-inch gas pipeline being constructed from the Company’s Inga 2-10 facility to the AltaGas Townsend Deep-Cut Gas Plant in British Columbia. The Company expects to be reimbursed for these expenditures and additional future expenditures relating to this project by AltaGas under a separate financing arrangement after the construction project has been completed.

Kelt’s syndicate of lenders has agreed to increase the Company’s credit facility to $350.0 million, up 11% from $315.0 million, after completing their interim borrowing base review in early November 2019. At September 30, 2019, bank debt, net of working capital was $320.5 million (includes $6.5 million of borrowings related to the AltaGas pipeline project mentioned above which is expected to be reimbursed to Kelt by AltaGas when the construction of the pipeline is completed).

2019 Forecast

Kelt has experienced delays commencing production from its wells at Wembley as the Tidewater Pipestone Sour Deep-Cut Gas Processing Plant works through its start-up issues. As a result of the delays in starting up its Wembley production (approximately 10,000 BOE per day) and curtailments at the Encana Sexsmith Gas Plant restricting the Company from producing at its La Glace field (approximately 2,500 BOE per day), Kelt has reduced its annual 2019 average production estimate to be within a range of 30,500 to 31,500 BOE per day (previously 33,500 to 34,500 BOE per day). The revised expected range for average production in 2019 would represent an increase of between 13% and 17% from average production of 27,006 BOE per day in 2018. Estimated production for 2019 is expected to be weighted approximately 48% oil and NGLs and 52% gas.

Kelt has also lowered its forecasted commodity price assumptions for 2019. WTI oil prices are expected to average US$56.00 per barrel (previous estimate was US$58.00 per barrel) and NYMEX natural gas prices are expected to average US$2.70 per MMBtu (previous estimate was US$2.80 per MMBtu).

As a result of changes to its production and commodity price estimates, Kelt now expects adjusted funds from operations in 2019 to be $190.0 million or $1.03 per diluted share (previous forecast was $220.0 million or $1.19 per diluted share). Net bank debt at December 31, 2019 is estimated to be $288.0 million or 1.5 times 2019 adjusted funds from operations (previously, estimated to be $258.0 million or 1.2 times 2019 adjusted funds from operations).

Ops Update

Wembley/Pipestone Core Area

Kelt is excited to commence development operations on its 162 section (103,955 acres) Montney land block at Wembley/Pipestone. Approximately eight miles of pipeline infrastructure was installed during the third quarter and construction of a battery with a capacity to handle approximately 8,000 barrels per day of oil/condensate and 8,000 barrels per day of water was also completed during the quarter. Kelt had planned to install gas compression later in 2020; however, due to higher than anticipated pipeline pressures, the Company now expects to have compression installed prior to year-end in order to be in a position to produce its Wembley wells at their full capability. Wembley wells are expected to produce at reduced rates until compression is installed.

Despite processing its initial gas volumes in late September, the Tidewater Pipestone Sour Deep-Cut Gas Processing Plant has not operated with consistent run times as it works through start-up issues which are typical with new sour deep-cut gas plants. Run times continue to improve.

During the third quarter, Kelt was required to shut-in the majority of its production from the Company’s La Glace field. The Company processes its gas from La Glace at the Encana Sexsmith Gas Plant, which has filled up by other owner volumes resulting from increased drilling activity in the surrounding Pipestone play. During the first quarter of 2020, Kelt plans to build a pipeline connecting its La Glace field to the Wembley/Pipestone infrastructure so that gas volumes can be processed at the new Tidewater Pipestone Sour Deep-Cut Processing Plant taking advantage of the higher liquids yields expected from the deep-cut plant.

Inga/Fireweed Core Area

At Inga, Kelt commenced production from the second group of six wells (wells #7 to #12) on its 24-well pad Montney cube development program. Two wells were drilled in the Upper Montney formation, two wells were drilled in the Upper-Middle (IBZ) formation and two wells were drilled in the Middle Montney formation. Initial production rates from these wells have exceeded the Company’s expectations. Aggregate combined sales volumes from the second group of six wells for initial production of 30 days or 720 operating hours (“IP30”) was 7,732 BOE per day (79% oil and NGLs), 18% higher than the IP30 of 6,569 BOE per day (77% oil and NGLs) from the first group of six wells.

The two Upper-Middle (IBZ) Montney wells from the second group of six wells had an average aggregate IP30 rate of 2,284 BOE per day (76% oil and NGLs). These are the first IBZ wells that were fully completed successfully and Kelt is pleased to see IP30 rates far exceeding current IBZ type curves.

The third group of six wells (wells #13 to #18) on the 24-well pad were drilled in the second quarter and three of the wells (two Upper Montney wells and one Lower Middle Montney well) have now been completed and put on production. The remaining three wells (two Middle Montney wells and one Montney IBZ well) are expected to be put on production during the first quarter of 2020. The Lower Middle Montney well was the Company’s first test in that zone on its Inga/Fireweed land acreage. Initial results are encouraging with an IP30 of 420 BOE per day (72% oil and NGLs). Testing the Lower Middle Montney formation was most efficient from a capital expenditure outlay on the 24-well pad; however, based on geology, the Company believes this zone will be more prospective on the eastern portion of its land block at Inga/Fireweed. A future test on the eastern part of Kelt’s land block will likely be undertaken in the future.

Drilling operations for the fourth group of six wells (wells #19 to #24) on the 24-well pad are expected to be complete by the end of November 2019. This group of wells includes two in the Upper Montney, two in the Upper-Middle (IBZ) Montney and two in the Middle Montney formation. These six wells are expected to be completed in the first quarter of 2020.

The Company expects to drill and complete 10 wells at Fireweed in 2020, all of which are targeting the Upper Montney formation. These wells are part of the Company’s previously announced Infrastructure Royalty Credit Program whereby future royalties payable on these wells will be reduced by royalty credits as the Company continues to recover $15.0 million of infrastructure expenditures incurred at Inga/Fireweed, under the program.

Oak/Flatrock Core Area

At Oak, Kelt completed two wells during the third quarter. One well was completed in the Upper Montney and the second well in the Middle Montney formation. The Upper Montney well has been tested and showed encouraging liquids rates of 158 barrels per MMcf of gas during the test. The Middle Montney well has been shut-in for build-up and will be tested in December.

The Company has plans to drill seven development Upper Montney wells at Oak during the first quarter of 2020. With success, Kelt has allocated funds in its 2020 capital expenditure budget to build an oil battery, gas compression and a pipeline gathering system connecting its Oak field to a nearby third party gas plant. In addition, the Company also has plans to drill three exploration wells at Oak/Flatrock during 2020.

The Company is well positioned financially to execute its capital program during the remainder of the year and into 2020. Kelt expects to exit 2019 with a net bank debt/adjusted funds from operations ratio of 1.5 times, reducing to 1.2 times by the end of 2020.