Mr. David Wilson reports

KELT REPORTS FINANCIAL AND OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023

Kelt Exploration Ltd. has released its financial and operating results to shareholders for the three and six months ended June 30, 2023.

The company's financial results are summarized as shown in the attached table.

Financial statements

Kelt's unaudited consolidated interim financial statements and related notes for the quarter ended June 30, 2023, will be available to the public on SEDAR and will also be posted on the company's website on Aug. 3, 2023.

Kelt's operating results for the second quarter ended June 30, 2023 are summarized in the attached table.

Message to shareholders

During the second quarter of 2023, Kelt continued to maintain its strong financial position with a net surplus of $18.6-million as at June 30, 2023. Adjusted funds from operations during the second quarter exceeded net capital expenditures by $13.8-million or 31 per cent. In addition, Kelt recorded positive earnings for the tenth consecutive quarter. Net income was $25.8-million (13 cents per share) for the three months ended June 30, 2023.

Kelt's average production for the three months ended June 30, 2023, was 29,705 BOE per day, up 7 per cent from average production of 27,713 BOE per day during the corresponding period in 2022 and down 7 per cent from average production of 31,833 BOE per day during the first quarter of 2023.

The decline in quarter-over-quarter production was attributed to shut-in production as a precaution to wildfires burning in close proximity to certain of the company's properties; shut-in production at the Pipestone gas plant where gas processing was curtailed due to heat issues; and also due to shut-in production at the Progress gas plant where Kelt owns approximately 20 per cent of the facility and processes approximately 28.0 MMcf (million cubic feet) per day of raw gas plus associated liquids. The Progress gas plant was shuttered for approximately a month during the second quarter as the operator conducted an expansion to the facility. With the expansion complete, Kelt's ownership in gas processing capacity at the plant has increased by 14 per cent to approximately 32 MMcf per day of raw gas. The aforementioned production shut-ins affected average daily production for the second quarter of 2023 by approximately 3,000 to 3,200 BOE (barrels of oil equivalent) per day.

Production for the three months ended June 30, 2023, was weighted 40 per cent oil and NGLs (natural gas liquids) and 60 per cent gas compared with 35 per cent oil and NGLs and 65 per cent gas during the second quarter of 2022. Kelt's emphasis on drilling oilier wells in its Montney and Charlie Lake plays have contributed to the higher liquids weighting. During the second quarter of 2023, oil production increased by 67 per cent to 8,158 barrels per day compared with 4,871 barrels per day in the second quarter of 2022.

Kelt's realized average oil price during the second quarter of 2023 was $92.98 per barrel, down 31 per cent from $135.36 per barrel in the second quarter of 2022. The realized average NGLs price during the second quarter of 2023 was $40.67 per barrel, down 49 per cent from $79.24 per barrel in the same quarter of 2022. Kelt's realized average gas price for the second quarter of 2023 was $2.57 per Mcf (thousand cubic feet), a significant decline of 68 per cent from $8.14 per Mcf in the corresponding quarter of the previous year.

Oil prices declined as fears of lower global crude oil demand have been triggered in anticipation of a global economic recession during a period of high inflation. Since the start of 2022, after averaging a monthly high price of $114.84 (U.S.) per barrel in June, 2022, WTI (West Texas Intermediate) crude oil prices averaged a monthly low price of $70.25 (U.S.) per barrel in June, 2023, a drop of 39 per cent from the monthly average high price during the 18-month period. After a relatively mild winter in both North America and Europe, combined with the protracted shut-in of a major U.S. Gulf Coast LNG (liquified natural gas) export facility, natural gas inventories have filled up significantly higher than historical averages resulting in the precipitous decline in natural gas prices.

For the three months ended June 30, 2023, petroleum and natural gas sales were $110.1-million and adjusted funds from operations was $58.8-million (30 cents per share, diluted), compared with $178.9-million and $94.8-million (48 cents per share, diluted) respectively, in the second quarter of 2022. At June 30, 2023, the company had a net surplus of $18.6-million compared with net debt of $23.1-million at June 30, 2022.

Net capital expenditures incurred during the three months ended June 30, 2023, were $45.0-million. During the second quarter of 2023, the company spent $32.7-million on drill and complete operations and $10.7-million on facilities, pipelines and equipment.

Capital program -- second half of 2023

In anticipation of an active industry pipeline maintenance season in British Columbia, Kelt has shifted its Station 2 gas sales exposure this summer to the ACE Chicago gas hub. In addition, in its Oak/Flatrock division, Kelt has deferred the completion of five Montney wells from the second quarter to the third quarter of 2023. This allows the company to start up the new wells after pipeline maintenance operations in British Columbia are complete and when there is not expected to be undue pressure on Station 2 gas pricing resulting from bottlenecks that typically occur during system-wide pipeline maintenance.

Four of these wells are off existing pads in the northwestern part of the company's 190,000-acre (300-section) contiguous land block and the fifth well is located in the southern part of its land block. The company is very pleased with the production profile from its existing wells at Oak and is encouraged with the superior production profile from its two most recent wells that were completed with larger fracs using the plug and perf completion method with sand intensity in excess of two tonnes per metre.

At its Pouce Coupe/Progress/Spirit River division, Kelt has had an active drilling program in the Charlie Lake play. Initial production rates from its Charlie Lake wells have exceeded type curve expectations. At Pouce Coupe North, Kelt has accumulated lands with Charlie Lake rights after recompleting nine vertical wells and drilling its first horizontal well. The horizontal well, located at 100/02-01 (sfc 100/13-33), after producing for four months at restricted rates, has subsequently averaged approximately 876 BOE per day over the last 60 continuous producing days. Kelt has drilled two additional Charlie Lake horizontal wells in July, 2023, and expects to complete them in the second half of 2023. The company also expects to drill and complete two gross (one net) Charlie Lake wells at Progress in the second half of 2023.

In the Wembley/Pipestone division, Kelt expects to complete nine Montney wells as the company prepares to add significant production volumes when new third-party gas processing capacity becomes available. Five of these wells will be off its existing 12-3 pad, two of the wells will be off an existing pad located at 14-2 and the remaining two wells will be from a new pad at 5-21, located on the southeastern part of the Kelt's contiguous land base that in its entirety comprises approximately 109,000 net acres (170 sections). In addition, Kelt will commence construction of its fourth major 100-per-cent-owned facility (located at 14-2) in the Wembley/Pipestone area comprising of gas compression, an oil battery and water handling facilities.

Kelt's access to incremental gas processing capacity at Wembley/Pipestone is expected to increase as the company has entered into gas processing arrangements with certain mid-stream companies that are building a new gas processing plant and expanding an existing gas processing plant in the area. In addition to the company's plant ownership interests and firm service gas processing contracts currently in place at three different gas plants in the area, Kelt expects to add an incremental 75.0 MMcf per day of raw gas processing capacity in the next 18 months. One-third is expected in the first quarter of 2024 and the remaining two-thirds by late in 2024 or early in 2025. Having access to five different gas processing plants in the Wembley/Pipestone area will provide the company with operating flexibility and provides Kelt with the ability to significantly grow its production base in the future.

Kelt expects to spend $285.0-million in its capital expenditure program for 2023. Approximately $186.0-million is expected to be spent on drilling and completing wells and $84.0-million is expected to be incurred building facilities, constructing pipelines, and purchasing and installing equipment. The remainder of the capital budget will be directed toward land acquisitions and geological and geophysical operations. The company expects to drill 26 net wells and complete 24 net wells during the year. For the six-month period ended June 30, 2023, Kelt has drilled 19 net wells and completed seven net wells.

Production in 2023 is forecasted to average between 31,000 and 33,000 BOE per day, an increase of between 14 per cent and 21 per cent from average production of 27,236 BOE per day in 2022. Average production guidance for 2023 has been reduced by 1,000 BOE per day, compared with the company's previous guidance, to reflect the shut-ins during the second quarter and also to reflect the expected delay in the start-up of the new Oak Montney wells from the third quarter to the fourth quarter of 2023.

Adjusted funds from operations for 2023 is forecasted to be $276.0-million. Kelt will continue to maintain its strong financial position and at Dec. 31, 2023, the company expects to have net debt of $19.0-million or less than 0.1 times estimated 2023 adjusted funds from operations.

The attached table summarizes the changes to 2023 guidance since March, 2023.

Management looks forward to updating shareholders with 2023 third quarter results on or about Nov. 9, 2023.

We seek Safe Harbor.