Mr. David Wilson reports
KELT REDUCES 2020 CAPITAL EXPENDITURE PROGRAM BY 36%
Kelt Exploration Ltd.'s board of directors has approved a reduction in capital expenditures for 2020. The company has reduced its capital expenditure budget by $80.0-million or 36 per cent to $145.0-million (previously $225.0-million).
The energy industry continues to experience high volatility with lower crude oil prices driven by fears of a retraction in global economic growth and increases in crude oil supply as oil-producing countries such as Saudi Arabia and Russia ramp up oil production during a period of heightened uncertainty caused by the COVID-19 pandemic. In addition, natural gas prices at most major U.S. gas hubs are trading at low levels coming out of a warmer-than-average winter in North America.
Kelt has taken measures to mitigate near-term commodity price volatility by entering into fixed price swap contracts for the first half of 2020 on crude oil and for the summer of 2020 on natural gas.
The reduction in Kelt's capital spending plans for the remainder of 2020 includes the deferral of the following projects:
- Drilling of an exploratory well at Oak/Flatrock;
- Completions of seven development wells at Oak/Flatrock;
- Construction of pipeline tie-ins, gas compression and an oil battery at Oak/Flatrock;
- Drilling of a well at Wembley/Pipestone;
- Completion of a well at Wembley/Pipestone;
- Construction of pipeline tie-ins at Wembley/Pipestone;
- Drilling and completions of a five well pad at Fireweed.
The revised capital expenditure program will begin immediately with minimal activity in the second quarter of 2020.
Kelt has reduced its production forecast for 2020 by approximately 12 per cent to reflect the delayed start-up of new wells resulting from the deferral of capital expenditures. The company expects 2020 production to average between 34,000 and 36,000 barrels of oil equivalent (boe) per day (previous forecast was 38,500 to 41,000 boe per day). The revised 2020 production forecast would represent an increase of between 13 per cent and 20 per cent from average production of 29,961 boe per day in 2019.
Given the significant recent decline in commodity prices, Kelt has reduced its 2020 commodity price assumptions as follows:
- West Texas Intermediate (WTI) crude oil (in U.S. dollars per barrel) -- $39.50, down 24 per cent from $52:
- Note: WTI averaged $54.09 (U.S.) for the first two months of 2020. The annual forecast assumes WTI will average $36.60 (U.S.) from March 1, 2020, to Dec. 31, 2020. Kelt has fixed the WTI price on 6,000 barrels per day of crude oil at $75.63 per barrel for March, 2020, and on 4,000 barrels per day of crude oil at $77.55 per barrel from April 1, 2020, to June 30, 2020.
- Mixed Sweet Blend (MSW) crude oil (in Canadian dollars per barrel) -- $46.60, down 24 per cent from $61.50:
- Note: Kelt has fixed the differential between WTI and MSW on 1,000 barrels per day of crude oil at $4.60 (U.S.) per barrel and on 3,000 barrels per day of crude oil at $6.40 per barrel for the period from April 1, 2020, to June 30, 2020.
- NYMEX natural gas (in U.S. dollars per million British thermal units (MMBtu)) -- $2.10, down 7 per cent from $2.25:
- Note: Kelt has fixed the NYMEX Henry Hub natural gas price on 45,000 MMBtu per day at $2.83 per MMBtu from April 1, 2020, to Nov. 30, 2020. In addition, Kelt has fixed the CONWAY price on 500 barrels per day of propane at $23.35 per barrel for two years from April 1, 2020, to March 31, 2022. Starting in April, 2020, the majority of the company's unhedged propane volumes will be sold in Asia, receiving Far East Index pricing, when the company commences processing gas at the Altagas Townsend deep-cut gas plant in British Columbia.
- Exchange rate (U.S. to Canadian dollars) -- 73.9 cents, down 3 per cent from 75.8 cents:
- Note: Kelt has entered into a collar on $3.0-million (U.S.) per month with a floor of 74.1 U.S. cents and a ceiling of 70.4 U.S. cents from April, 2020, to December, 2020, with an option to enter into an extendible fixed rate swap at 70.4 U.S. cents on $3.0-million (U.S.) per month for calendar 2021 only if the settlement exchange rate on Dec. 31, 2020, is less than 70.4 U.S. cents.
After giving effect to the revised production and commodity price forecasts, Kelt has reduced its forecast for 2020 adjusted funds from operations by 40 per cent to $135.0-million. Bank debt, net of working capital (net bank debt), at Dec. 31, 2020, is forecast to be $310.0-million, or 2.3 times adjusted funds from operations for the year.
The company will continue to closely monitor market conditions during this period of global uncertainty and may make additional changes to the 2020 capital expenditure program if warranted.
We seek Safe Harbor.
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