Mr. David Wilson reports
KELT REPORTS SIGNIFICANT INCREASES IN OIL & GAS RESERVES AND NET ASSET VALUE PER SHARE AS AT DECEMBER 31, 2019
Kelt Exploration Ltd. has released its oil and gas reserves and production for the year ended Dec. 31, 2019.
The audit of Kelt's 2019 annual consolidated financial statements has not been completed and accordingly all financial amounts relating to 2019 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
Dec. 31, 2019 Dec. 31, 2018
$ millions unless otherwise stated % weight Amount % weight Amount
Proved plus probable reserves
Oil and NGLs (Mbbl) 47% 216,324 43% 128,847
Gas (MMcf) 53% 1,467,941 57% 1,042,987
Combined (Mboe) 100% 460,981 100% 302,678
Oil and NGLs mix (P+P reserves, Mbbl)
Light oil, condensate and pentane 62% 133,150 64% 83,040
Butane 11% 24,282 11% 14,389
Propane 22% 46,746 20% 26,322
Ethane 5% 12,146 5% 5,096
Total oil and NGLs 100% 216,324 100% 128,847
Net present value of reserves (10% BT)
Proved developed producing 514,261 481,113
Proved 1,899,665 1,499,241
Proved plus probable 3,988,482 3,128,636
Annual average production
Oil and NGLs (bbl/d) 46% 13,851 43% 11,589
Gas (Mcf/d) 54% 96,658 57% 92,502
Combined (boe/d) 100% 29,961 100% 27,006
Net asset value 4,040,164 3,209,319
Net asset value per share -- diluted ($) 18.78 15.51
Operations update
Kelt achieved a record-high calendar year average production in 2019. Average production for 2019 was 29,961 barrels of oil equivalent per day, up 11 per cent from average production of 27,006 boe per day in 2018. Production for 2019 was weighted 46 per cent oil and natural gas liquids and 54 per cent gas. Average production for 2019 was 2 per cent to 5 per cent below the company's guidance of 30,500 to 31,500 boe per day range, primarily due to infrastructure-related delays in the Wembley/Pipestone area.
During the fourth quarter of 2019, Kelt took advantage of service accessibility (bi-fuel frac equipment and access to water) and completed three wells at Inga on its 24-well Montney cube pad that were previously planned for the first quarter of 2020. In addition, Kelt had originally planned to install gas compression at Wembley/Pipestone in 2020; however, due to higher-than-anticipated pipeline pressures relating to infrastructure connecting Kelt's wells to the Pipestone sour deep-cut gas processing plant, the company installed compression during the fourth quarter of 2019. Net capital expenditures for 2019 were $315.6-million (unaudited), approximately 7 per cent above budgeted capital expenditures of $296-million. In connection with moving forward to 2019 certain capital expenditures planned for 2020, Kelt completed a flow-through equity financing during the fourth quarter of 2019. The company issued 3.45 million common shares on a flow-through basis in respect of Canadian development expenses at a price of $5.05 per share for gross proceeds of $17.4-million.
During the 24 months ending March 31, 2020, Kelt will have incurred significant infrastructure capital expenditures that will benefit future production additions from new development wells in its main operating divisions. The company will have installed approximately 287,000 metres of pipelines ranging from six-inch to 16-inch pipe that will transport oil, emulsion, water, sweet gas and sour gas from Kelt wells to processing facilities.
In 2017, Kelt made an application to the British Columbia Infrastructure Royalty Credit Program and was approved for its planned infrastructure build in certain parts of its Inga/Fireweed property relating to expenditures totalling approximately $38.6-million. The government of B.C. approved a recovery of approximately 39 per cent of Kelt's infrastructure expenditures or $15-million through reduced future royalties payable relating to 20 horizontal Montney wells associated with the infrastructure. The company has drilled and completed 10 of the Montney wells at Inga and has commenced drilling operations on the remaining 10 Montney wells at Fireweed. To date, the company has recovered approximately $1.3-million under this program.
In 2019, Kelt made an application to the B.C. Clean Growth Infrastructure Royalty Credit Program and was approved for its planned infrastructure build in certain parts of its Oak/Flatrock property relating to expenditures totalling approximately $49.5-million. The government of B.C. has approved a recovery of approximately 37 per cent of Kelt's infrastructure expenditures or $18.5-million through reduced future royalties payable relating to 22 horizontal Montney wells associated with the infrastructure. The company drilled and completed two of these wells in 2019 and is currently drilling another nine Montney well program at Oak during the first half of 2020.
Kelt's commodity price forecast for 2020 differs from those used by Sproule Associates Ltd. Kelt's forecasted West Texas Intermediate crude oil price for 2020 is $52 (U.S.) per barrel (unchanged from its previous forecast). The company has taken measures to secure a portion of its adjusted funds from operations in 2020 by entering into the following oil related swaps:
- Fixed the WTI price on 6,000 barrels per day for the first quarter of 2020 at $75.63 per barrel (equivalent to $57.30 (U.S.) per barrel at Kelt's 2020 forecasted Canadian dollar/United States dollar exchange rate of 1.32);
- Fixed the WTI price on 3,000 barrels per day for the second quarter of 2020 at $79.40 per barrel (equivalent to $60.15 (U.S.) per barrel at Kelt's 2020 forecasted Canadian dollar/U.S. dollar exchange rate of 1.32);
- Fixed the WTI to mixed sweet blend basis differential on 3,000 barrels per day for the second quarter of 2020 at $6.40 per barrel (equivalent to $4.85 (U.S.) per barrel at Kelt's 2020 forecasted Canadian dollar/U.S. dollar exchange rate of 1.32).
The company has reduced its New York Mercantile Exchange Henry Hub natural gas forecast for 2020 to $2.25 (U.S.) per million British thermal units, down 18 per cent from its previous forecast. Kelt estimates that the Canadian dollar/U.S. dollar exchange rate will average 1.32 (75.8 U.S. cents), up 1 per cent from its previous forecast of 1.307 (76.5 U.S. cents).
After taking into consideration these revised commodity price forecasts for 2020 and including the hedging contracts, Kelt is forecasting 2020 adjusted funds from operations of $225-million, down 4 per cent from its previous forecast. In addition, Kelt has reduced its 2020 capital expenditure forecast from $235-million to $225-million, in part to reflect the planned 2020 expenditures that were brought forward and incurred in 2019.
Reserves
Kelt retained Sproule Associates, an independent qualified reserve evaluator, to prepare a report on its oil and gas reserves. The report is effective as of Dec. 31, 2019. 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, 2019, and at Dec. 31, 2018, 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, 2020.
The company's net present value of proved plus probable reserves at Dec. 31, 2019, discounted at 10 per cent before tax, was $4-billion, an increase of 27 per cent from $3.1-billion at Dec. 31, 2018, despite lower forecasted oil and gas prices for the future years in the Dec. 31, 2019, evaluation. Sproule's forecasted commodity prices for 2020 used to determine the net present value of the company's reserves at Dec. 31, 2019, are $61 (U.S.) per barrel for WTI oil and $2.80 (U.S.) per million British thermal units for NYMEX Henry Hub natural gas.
Proved developed producing reserves at Dec. 31, 2019, were 48.9 million boe, an increase of 20 per cent from 40.7 million boe at Dec. 31, 2018. Total proved reserves at Dec. 31, 2019, were 224.6 million boe, up 42 per cent from 158.4 million boe at Dec. 31, 2018. Proved plus probable reserves increased by 52 per cent from 302.7 million boe at Dec. 31, 2018, to 461 million boe at Dec. 31, 2019.
SUMMARY OF RESERVES
Oil and NGLs Gas Combined NPV 10% BT NPV 10% BT
(Mbbl) (MMcf) (Mboe) ($M) ($/boe)
Proved developed producing 21,522 163,994 48,854 514,261 10.53
Total proved 103,292 727,740 224,582 1,899,665 8.46
Total proved plus probable 216,324 1,467,941 460,981 3,988,482 8.65
CHANGE IN RESERVES
(Mboe) Dec. 31, 2019 Dec. 31, 2018
Proved developed producing 48,854 40,702
Total proved 224,582 158,443
Total proved plus probable 460,981 302,678
Future development capital expenditures
Future development capital (FDC) expenditures of $1,379-million are included in the evaluation for total proved reserves and are expected to be incurred over five years as follows: $149-million in 2020, $328-million in 2021, $337-million in 2022, $384-million in 2023 and $181-million in 2024. FDC expenditures of $2,454-million are included in the evaluation of proved plus probable reserves and are expected to be incurred over seven years as follows: $163-million in 2020, $381-million in 2021, $400-million in 2022, $454-million in 2023, $451-million in 2024, $345-million in 2025 and $260-million in 2026.
FUTURE DEVELOPMENT CAPITAL EXPENDITURES -- PROVED PLUS PROBABLE RESERVES
Dec. 31, 2019 Dec. 31, 2018
FDC ($M) Net wells FDC ($M) Net wells
Alberta Montney wells 581,614 101.3 331,835 59.3
British Columbia Montney wells 1,463,797 270.0 743,803 140.0
Total Montney wells 2,045,411 371.3 1,075,638 199.3
Other formations (including Doig/Charlie Lake) 355,148 85.4 355,088 76.6
Other expenditures 53,888 - 43,372 -
Total FDC expenditures 2,454,447 456.8 1,474,098 275.9
Operating divisions
Kelt has five operating divisions. The Inga/Fireweed division is primarily a light oil/condensate-rich gas Montney play with condensate-rich gas Doig development potential. The Pouce Coupe/Progress division has light oil and liquids-rich gas development potential in the Montney, Doig, Charlie Lake and Halfway formations. The Wembley/Pipestone division is primarily a light oil/condensate-rich gas Montney play.
The Oak/Flatrock division is the least developed in the company's portfolio. Kelt has three producing Montney wells in this division and expects to drill nine Upper Montney wells and one Middle Montney well at Oak/Flatrock in 2020. The Grande Cache division is primarily a Cretaceous gas development area.
OPERATING DIVISIONS
Proved Proved + probable Proved + probable
Proved reserves NPV 10% reserves NPV 10% Montney acres
(Mboe) BT ($M) (Mboe) BT ($M) (sections)
Inga/Fireweed 139,345 1,331,209 301,361 2,877,302 139,963 (219)
Pouce Coupe/Progress 47,179 352,056 75,539 583,639 36,239 (57)
Wembley/Pipestone 30,157 212,561 62,716 472,156 107,155 (167)
Other properties 7,901 3,839 21,365 55,385 233,851 (365)
Total company 224,582 1,899,665 460,981 3,988,482 517,208 (808)
Commodity price forecast
The WTI oil price during 2019 averaged $56.98 (U.S.) per barrel, 10 per cent lower than Sproule's 2019 forecast provided in the Dec. 31, 2018, evaluation. Sproule is forecasting an average WTI oil price of $61 (U.S.) per barrel in 2020, a 9-per-cent decline from its previous forecast. The NYMEX gas price during 2019 averaged $2.62 (U.S.) per million British thermal units, 13 per cent lower than Sproule's 2019 forecast provided in the Dec. 31, 2018, evaluation. Sproule is forecasting an average NYMEX gas price of $2.80 (U.S.) per million British thermal units in 2020, a 14-per-cent decline from its previous forecast.
COMMODITY PRICES
Dec. 31, 2019, evaluation Dec. 31, 2018, evaluation
WTI Cushing NYMEX USD/CAD WTI Cushing NYMEX USD/CAD
crude oil Henry Hub exchange crude oil Henry Hub exchange
(USD/bbl) (USD/MMBtu) (USD) (USD/bbl) (USD/MMBtu) (USD)
2015 (historical) 48.80 2.63 0.783 48.80 2.63 0.783
2016 (historical) 43.32 2.55 0.755 43.32 2.55 0.755
2017 (historical) 50.88 3.07 0.770 50.88 3.07 0.770
2018 (historical) 64.94 3.04 0.771 64.94 3.04 0.771
2019 (historical/future) 56.98 -10% 2.62 -13% 0.754 -2% 63.00 3.00 0.770
2020 (future) 61.00 -9% 2.80 -14% 0.760 -5% 67.00 3.25 0.800
2021 (future) 65.00 -7% 3.00 -14% 0.770 -4% 70.00 3.50 0.800
2022 (future) 67.00 -6% 3.25 -9% 0.800 0% 71.40 3.57 0.800
2023 (future) 68.34 -6% 3.32 -9% 0.800 0% 72.83 3.64 0.800
Finding, development and acquisition costs
During 2019, the company's capital expenditures, net of dispositions, resulted in proved plus probable reserve additions of 169.2 million boe, resulting in 2P finding, development and acquisition (FD&A) costs of $7.66 per boe, including FDC expenditures. Proved reserve additions in 2019 were 77.1 million boe, resulting in 1P FD&A costs of $10.68 per boe, including FDC expenditures.
Estimated capital expenditures, after minor dispositions, in 2019 were $315.6-million (unaudited). The company considers the calculated FD&A costs in 2019 to be a very good result considering it incurred significant infrastructure expenditures during 2019. Kelt was able to show a 2P recycle ratio of 2.5 times for the year.
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 boe with the same period's reserve FD&A cost per boe. With the construction of facilities and infrastructure in 2018 and 2019, 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 upcoming years, as it continues to proceed with development and pad drilling.
FD&A COSTS
Year ended Year ended
Dec. 31, 2019 Dec. 31, 2018
Proved reserves
Capital expenditures ($000s) (2019) 315,624 285,498
Change in FDC costs required to develop reserves ($000s) 507,348 95,548
Total capital costs ($000s) 822,972 381,046
Reserve additions, net (Mboe) 77,053 35,298
FD&A cost, including FDC ($/boe) 10.68 10.80
Operating netback ($/boe) (2019) 18.89 20.56
Recycle ratio -- proved 1.8x 1.9x
Proved plus probable reserves
Capital expenditures ($000s) (2019) 315,624 285,498
Change in FDC costs required to develop reserves ($000s) 980,349 310,506
Total capital costs ($000s) 1,295,973 596,004
Reserve additions, net (Mboe) 169,217 76,905
FD&A cost, including FDC ($/boe) 7.66 7.75
Operating netback ($/boe) (2019) 18.89 20.56
Recycle ratio -- proved plus probable 2.5x 2.7x
Reserves reconciliation
Kelt's 2019 capital investment program resulted in net proved plus probable reserve additions that replaced 2019 production by a factor of 15.5 times.
PROVED PLUS PROBABLE RESERVES
Oil and NGLs (Mbbl) Gas (MMcf) Combined (Mboe)
Balance, Dec. 31, 2018 128,847 1,042,987 302,678
Extensions and infill drilling 86,910 437,634 159,849
Technical revisions and economic factors 5,574 21,953 9,233
Acquisitions 49 515 135
Dispositions -- -- --
Additions, after dispositions 92,533 460,102 169,217
Less: 2019 production (5,056) (35,148) (10,914)
Balance, Dec. 31, 2019 216,324 1,467,941 460,981
Continued outperformance of existing producing wells compared with the previous year's forecasts resulted in significant positive technical revisions to both producing wells and offsetting future development locations. Notably, in Inga/Fireweed, the Upper Montney-type curve was adjusted upward and the results from the 2019 drilling program increased the overall play maturity resulting in additional proved plus probable reserve bookings.
Net asset value
Kelt's net asset value at Dec. 31, 2019, was $18.78 per share, up 21 per cent from the previous year.
NET ASSET VALUE PER SHARE
($M unless otherwise stated)
Dec. 31, 2019 Dec. 31, 2018
P&NG proved plus probable reserves, NPV 10% BT 3,988,482 3,119,592
Undeveloped land 350,617 279,739
Net bank debt (328,080) (196,416)
Proceeds from exercise of stock options 29,145 6,404
Net asset value 4,040,164 3,209,319
Diluted common shares outstanding (000s) 215,187 206,978
Net asset value per share ($/share) 18.78 15.51
Changes in forecasted commodity prices and variances in production estimates can have a significant impact on estimated reserves values, adjusted funds from operations and profit.
We seek Safe Harbor.
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