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Kelt Exploration Ltd
Symbol KEL
Shares Issued 184,003,327
Close 2019-02-21 C$ 5.12
Market Cap C$ 942,097,034
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Kelt Exploration's 2018 P+P reserves at 302,678 mmboe

2019-02-21 10:08 ET - News Release

Mr. David Wilson reports

KELT REPORTS SIGNIFICANT INCREASES IN OIL & GAS RESERVES AND NET ASSET VALUE PER SHARE AS AT DECEMBER 31, 2018

Kelt Exploration Ltd. has released its oil and gas reserves and production for the year ended Dec. 31, 2018.

Note: Kelt's audit of its 2018 annual consolidated financial statements has not been completed, and, accordingly, all financial amounts relating to 2018 referred to in this press release are unaudited and represent management's estimates. Readers are advised that these financial estimates are subject to audit and may be subject to change.

                                HIGHLIGHTS
             (in millions of dollars, unless otherwise stated)

                                      Dec. 31, 2018          Dec. 31, 2017

                                 % weight      Amount   % weight      Amount
Proved plus probable reserves
Oil and NGLs (mbbl)                   43%     128,847        43%     101,788
Gas (mmcf)                            57%   1,042,987        57%     802,875
Combined (mboe)                      100%     302,678       100%     235,601
Net present value of 
reserves (10% BT)
Proved developed producing                 $  481,113             $  422,932
Proved                                      1,499,241              1,093,236
Proved plus probable                        3,128,636              2,111,574
Properties (P+P reserves, 
NPV 10% BT)
Inga/Fireweed                         61%   1,906,732        55%   1,156,731
Pouce Coupe/Progress                  19%     605,787        27%     578,737
La Glace/Wembley/Pipestone            12%     368,250         7%     154,592
Oak/Flatrock                           2%      62,218         1%      21,721
Other properties                       6%     185,649        10%     199,793
Total company                        100%   3,128,636       100%   2,111,574
Annual average production
Oil and NGLs (bbl/d)                  43%      11,589        42%       9,242
Gas (mcf/d)                           57%      92,502        58%      77,330
Combined (boe/d)                     100%      27,006       100%      22,130
Net asset value (1)                         3,209,319              2,261,509
Net asset value per 
share -- diluted ($)                            15.51                  11.06

(1) Net present value of proved plus probable reserves used in the 
calculation of net asset value is based on a 10-per-cent discount rate, 
before tax. More detailed information is available in the net asset 
value per share table provided in this press release. 

Production

Kelt achieved a record-high calendar year average production in 2018. Average production for 2018 was 27,006 barrels of oil equivalent per day, up 22 per cent from average production of 22,130 barrels of oil equivalent per day in 2017. Production for 2018 was weighted 43 per cent oil and NGLs (natural gas liquids) and 57 per cent gas.

Reserves

Kelt retained Sproule Associates Ltd., an independent qualified reserve evaluator to prepare a report on its oil and gas reserves. The report is effective as of Dec. 31, 2018. The company has a reserves committee which oversees the selection, qualifications and reporting procedures of the independent qualified reserves evaluator. Reserves as at Dec. 31, 2018, and at Dec. 31, 2017, were determined using the guidelines and definitions set out under National Instrument 51-101. Additional reserves disclosure as required under NI 51-101 will be included in Kelt's annual information form, which will be filed on SEDAR on or before March 31, 2019.

The company's net present value of proved plus probable reserves at Dec. 31, 2018, discounted at 10 per cent before tax, was $3.1-billion, an increase of 48 per cent from $2.1-billion at Dec. 31, 2017, despite lower forecasted oil and gas prices for the future years in the Dec. 31, 2018, evaluation (see commodity prices table included herein). Sproule's forecasted commodity prices for 2019 used to determine the net present value of the company's reserves at Dec. 31, 2018, are $63 (U.S.) per barrel for WTI (West Texas Intermediate) oil and $3 (U.S.) per million British thermal units for NYMEX Henry Hub natural gas. As a result of the company's gas market diversification strategy, Kelt is forecasting that less than 20 per cent of its 2019 gas production will be sold into the Western Canadian gas markets. The remaining forecasted gas production for 2019 is expected to be sold into the higher-netback Dawn, Malin, Sumas and Chicago markets under existing contracts.

Proved developed producing reserves at Dec. 31, 2018, were 40.7 million barrels of oil equivalent, an increase of 8 per cent from 37.9 million barrels of oil equivalent at Dec. 31, 2017. Total proved reserves at Dec. 31, 2018, were 158.4 million barrels of oil equivalent, up 19 per cent from 133.0 million barrels of oil equivalent at Dec. 31, 2017. Proved plus probable reserves increased by 28 per cent from 235.6 million barrels of oil equivalent at Dec. 31, 2017, to 302.7 million barrels of oil equivalent at Dec. 31, 2018.

The attached table outlines a summary of the company's reserves by category at Dec. 31, 2018.

                                           SUMMARY OF RESERVES

                                Oil and NGLs          Gas     Combined    NPV 10% BT    NPV 10% BT
                                       (mbbl)       (mmcf)       (mboe)  ($ millions)       ($/boe) 
                       
Proved developed producing            15,386      151,889       40,701    $  481,113        $11.82
Proved developed non-producing         3,985       20,191        7,350        94,995         12.92
Proved undeveloped                    44,356      396,218      110,392       923,133          8.36
Total proved                          63,727      568,298      158,443     1,499,241          9.46
Probable additional                   65,120      474,689      144,235     1,629,395          11.3
Total proved plus probable           128,847    1,042,987      302,678     3,128,636         10.34

The attached table shows the change in reserves year-over-year by reserve category.

                      CHANGE IN RESERVES
                             (mboe)   
                   
                                Dec. 31, 2018     Dec. 31, 2017 

Proved developed producing             40,701            37,858          
Proved developed non-producing          7,350             2,833        
Proved undeveloped                    110,392            92,282         
Total proved                          158,443           132,973        
Probable additional                   144,235           102,628         
Total proved plus probable            302,678           235,601        

Future development capital (FDC) expenditures of $872-million are included in the evaluation for total proved reserves and are expected to be spent as follows: $82-million in 2019, $200-million in 2020, $206-million in 2021, $125-million in 2022, $110-million in 2023 and $149-million thereafter.

FDC expenditures of $1,474-million are included in the evaluation of proved plus probable reserves and are expected to be spent as follows: $145-million in 2019, $310-million in 2020, $306-million in 2021, $246-million in 2022, $205-million in 2023 and $262-million thereafter.

The attached table outlines FDC expenditures and future wells to be drilled by province, included in the Dec. 31, 2018, and Dec. 31, 2017, proved plus probable reserve evaluations.

        FUTURE DEVELOPMENT CAPITAL EXPENDITURES -- PROVED PLUS PROBABLE RESERVES
   
                                            Dec. 31, 2018                Dec. 31, 2017 

                                            FDC    Net wells             FDC     Net wells
                                    ($ millions)                 ($ millions) 

Alberta Montney HZ wells               $331,835         59.3        $175,728          37.3     
British Columbia Montney HZ wells       743,803        140.0         638,203         102.5    
Total Montney HZ wells                1,075,638        199.3         813,931         139.8    
Other formations -- HZ wells            355,088         76.6         342,441          74.5     
Other expenditures                       43,372            -           7,220             -        
Total FDC expenditures                1,474,098        275.9       1,163,592         214.3    

The WTI oil price during 2018 averaged $65.04 (U.S.) per barrel, 18 per cent higher than Sproule's 2018 forecast provided in the Dec. 31, 2017, evaluation. Sproule is forecasting an average WTI oil price of $63 (U.S.) per barrel in 2019, a 3-per-cent decline from 2018. The NYMEX gas price during 2018 averaged $3.11 (U.S.) per million British thermal units, 4 per cent lower than Sproule's 2018 forecast provided in the Dec. 31, 2017, evaluation. Sproule is forecasting an average NYMEX gas price of $3 (U.S.) per million British thermal units in 2019, a 4-per-cent decline from 2018.

During 2018, the company's capital expenditures, net of dispositions, resulted in proved plus probable reserve additions of 76.9 million barrels of oil equivalent, resulting in 2P finding, development and acquisition (FD&A) costs of $7.75 per barrel of oil equivalent, including FDC expenditures. Proved reserve additions in 2018 were 35.3 million barrels of oil equivalent, resulting in 1P FD&A costs of $10.80 per barrel of oil equivalent, including FDC expenditures.

Estimated capital expenditures, after minor dispositions, in 2018 were $285-million (unaudited). The company considers the calculated FD&A costs in 2018 to be a very good result considering it incurred expenditures drilling several exploration wells in its new Montney core areas at Oak in British Columbia and at Wembley/Pipestone in Alberta, in addition to incurring significant infrastructure expenditures constructing the Inga 2-10 facility during 2018. Despite significant facility expenditures in 2018, Kelt was able to show a 2P recycle ratio of 2.7 times.

The recycle ratio is a measure for evaluating the effectiveness of a company's reinvestment program. The ratio measures the efficiency of capital investment. It accomplishes this by comparing the operating netback per barrel of oil equivalent to the same period's reserve FD&A cost per barrel of oil equivalent. With the purchase and construction of facilities and infrastructure in 2017 and 2018, along with land acquisitions during both years, Kelt has positioned itself to achieve further efficiencies in production additions and finding and development costs over the coming years as it continues to transition to development/pad drilling.

The attached table provides detailed calculations relating to FD&A costs for 2018 and 2017.

                                 
Proved reserves                                       Year ended         Year ended
                                                   Dec. 31, 2018      Dec. 31, 2017
Capital expenditures ($000s)
(2018 unaudited)                                        $285,498           $127,977
Change in FDC costs required to
develop reserves ($000s)                                  95,548            187,459
Total capital costs ($000s)                              381,046            315,436
Reserve additions, net (mboe)                             35,298             32,837
FD&A cost, including FDC ($/boe)                            10.8               9.61
Operating netback ($/boe) (2018 unaudited)                 20.56              15.92
Recycle ratio -- proved                                     1.9x               1.7x

Proved plus probable reserves                         Year ended         Year ended
                                                   Dec. 31, 2018      Dec. 31, 2017
Capital expenditures ($000s)
(2018 unaudited)                                         285,498            127,977
Change in FDC costs required to
develop reserves ($000s)                                 310,506            215,976
Total capital costs ($000s)                              596,004            343,953
Reserve additions, net (mboe)                             76,905             49,592
FD&A cost, including FDC ($/BOE)                            7.75               6.94
Operating netback ($/boe) (2018 unaudited)                 20.56              15.92
Recycle ratio -- proved plus probable                       2.7x               2.3x

Reserves reconciliation

Kelt's 2018 capital investment program resulted in net reserve additions that replaced 2017 production by a factor of 7.8 times on a proved plus probable basis.

A reconciliation of Kelt's proved plus probable reserves is provided in the attached table.

                          PROVED PLUS PROBABLE RESERVES

                                             Oil and NGLs          Gas     Combined
                                                    (mbbl)       (mmcf)       (mboe)                             
                                  

Balance, Dec. 31, 2017                            101,788       802,875     235,600
Extensions and infill drilling                     41,733       217,403      77,967
Technical revisions (excluding   
reclassifications) and economic factors             1,020        45,084       8,534
Technical revisions -- reclassifications (1)      (10,605)       13,171      (8,410)
Acquisitions                                           56           212          91
Dispositions                                         (915)       (2,169)     (1,276)
Additions, after dispositions 
(net additions)                                    31,289       273,701      76,906
Less: 2018 production (2)                          (4,230)      (33,589)     (9,828)
Balance, Dec. 31, 2018 (3)                        128,847     1,042,987     302,678

Notes: 
(1) Under Kelt's new long-term processing arrangements in British Columbia, 
the company expects to reject C2 recoveries. As a result, the higher gas 
recoveries are expected to provide better economics based on current 
commodity prices.
(2) Sulphur production of 17,371 long tonnes (174 million cubic feet equivalent
or 29,000 barrels of oil equivalent) has been excluded in the table.
(3) Sulphur reserves of 26,800 long tonnes (268 million cubic feet equivalent
or 45,000 barrels of oil equivalent) have been excluded in the table.

In the Dec. 31, 2018, Sproule evaluation, 10.6 million barrels of ethane were reclassified to an equivalent 13.2 billion cubic feet of gas to reflect the future long-term gas processing arrangement at Inga/Fireweed whereby recoveries of ethane will be rejected and instead Kelt will sell its gas at a higher heat content. Previously, ethane recoveries were sold at an equivalent Station 2 gas price. Under the new arrangement, Kelt expects to sell the higher-heat-content gas under its existing gas marketing contracts at Chicago and Sumas, which is expected to result in higher netbacks when compared with the prior arrangement.

Net asset value

Kelt's net asset value at Dec. 31, 2018, was $15.51 per share, up 40 per cent from the previous year. Details of the calculation are shown in the attached table.

                     NET ASSET VALUE PER SHARE
         (in millions of dollars, unless otherwise stated)  
      
                                                 Dec. 31,        Dec. 31,
                                                    2018            2017   
   
P&NG reserves, NPV 10% BT                     $3,128,636       2,111,574
Decommissioning obligations, 
NPV 10% BT (unaudited) (1)                        (9,044)        (12,815)
Undeveloped land                                 279,739         239,118
Bank debt, net of working capital 
(unaudited)                                     (196,416)       (136,729)
Proceeds from exercise of stock options (2)        6,404          60,361
Net asset value                                3,209,319       2,261,509
Diluted common shares 
outstanding (000s) (2) (3)                       206,978         204,410
Net asset value per share ($/share)                15.51           11.06

Notes: 
(1) The net present value of decommissioning obligations included in 
the table is incremental to the amount included in the present value 
of P&NG reserves as evaluated by Sproule.
(2) The calculation of proceeds from exercise of stock options and 
the diluted number of common shares outstanding only include stock 
options that are in the money based on the closing price of Kelt of 
$4.64 and $7.19 per common share respectively, as at Dec. 31, 2018, 
and Dec. 31, 2017. All outstanding RSUs (restricted share units) are 
included in diluted common shares outstanding.
(3) The 5-per-cent convertible debentures that mature on May 31, 2021,
are convertible to common shares at $5.50 per share. At the Dec. 31, 
2018, closing price of $4.64 per share, the convertible debentures are 
out of the money and 20.4 million shares issuable at a 5-per-cent
discount are included in diluted common shares outstanding. At the 
Dec. 31, 2017, closing price of $7.19, the convertible debentures are 
in the money and 16.3 million shares issuable upon conversion are 
included in diluted common shares outstanding.

Changes in forecasted commodity prices and variances in production estimates can have a significant impact on estimated reserves values, funds from operations and profit.

We seek Safe Harbor.

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