Mr. David Wilson reports
KELT ENTERS INTO AN AGREEMENT TO SELL ITS INGA ASSETS
Kelt Exploration Ltd. has entered into an agreement to sell its Inga/Fireweed/Stoddart assets (the Inga assets) in British Columbia that are held by its wholly owned subsidiary, Kelt Exploration (LNG) Ltd., to ConocoPhillips. Kelt will receive cash proceeds of $510-million, prior to closing adjustments, and the purchaser will assume certain specific financial obligations related to the Inga assets in the amount of approximately $41-million.
All of the company's remaining B.C. assets, including the Montney lands at Oak/Flatrock, will remain with Kelt LNG.
The effective date for the transaction is July 1, 2020. Completion of the transaction is subject to customary closing conditions, including receipt of regulatory approvals, including under the Competition Act (Canada). Closing is expected to occur on or around Aug. 21, 2020.
Kelt has a large inventory of future drilling locations for which the net present value was not being reflected in the company's current valuation. As a result, the company's board of directors has determined that the sale of its Inga assets, representing a monetization of approximately 27 per cent of the company's Montney acreage, is an opportunity to bring forward the value of certain assets and at the same time put the company in a position of increased financial strength during an uncertain economic environment. Kelt's remaining Montney landholdings of 374,528 net acres (585 net sections) continues to place the company as one of the largest Montney players in the Western Canadian sedimentary basin.
Kelt, pro forma the completion of the sale of its Inga assets, will be in a strong financial position with no debt and a large Montney land acreage position to grow the company's production base as commodity prices improve. In addition to its three remaining Montney play areas, the company will also be in a position to develop its Charlie Lake play in Alberta.
A comparison of Kelt precompletion and postcompletion of the asset sale transaction is summarized in the included table.
Production Pro forma Kelt (1)
(for the five months ended May 31, 2020) Kelt pretransaction posttransaction
Oil and NGLs (bbl/d) 14,325 47% 6,542 40%
Gas (Mcf/d) 98,681 53% 59,769 60%
Combined (boe/d) 30,772 100% 16,503 100%
(as at May 31, 2020)
Montney acres (sections) 514,490 (804) 374,528 (585)
Alberta Charlie Lake acres (sections) 74,719 (117) 4,719 (117)
(as at March 31, 2020)
Bank debt (2) 310,000 Nil
Working capital deficit (surplus) 34,664 (73,543)
Convertible debentures (3) 83,957 Nil
Financing and lease liabilities 29,082 1,331
Total liabilities, net of working
capital, and before decommissioning
obligations and deferred income taxes 457,703 (72,212)
(1) Pro forma Kelt is for illustrative purposes only to demonstrate the impact
of the transaction and the anticipated following use of proceeds, assuming it
had occurred on the dates mentioned in the table.
(2) Pro forma Kelt assumes that all amounts outstanding under the company's
revolving committed term credit facility with a syndicate of financial
institutions will be repaid in full at the time of the completion of the
(3) Pro forma Kelt assumes that the company's 5-per-cent convertible debentures
due May 31, 2021, will be redeemed following the completion of the transaction.
Current economic environment and COVID-19 pandemic update
Kelt is providing a corporate update in response to the current market conditions resulting from the COVID-19 pandemic. Kelt's highest priority remains the health and safety of its employees, partners and the communities where it operates. The company continues to implement measures to protect the well-being of these stakeholders and is proud of the dedication of its work force to maintain safe operations and business continuity in a challenging environment.
The unprecedented impact to global oil demand destruction resulting from the COVID-19 pandemic resulted in a collapse in crude oil prices around the world. The WTI crude oil price averaged $16.55 (U.S.) per barrel during the month of April, 2020, the lowest monthly average price since March, 1999. In recent weeks, many regions around the world have started to phase in a return to opening up their economies and, as a result, crude oil prices have recovered from recent low levels as global oil demand slowly returns. WTI crude oil averaged $38.31 (U.S.) per barrel during the month of June, 2020, an increase of 131 per cent from the April, 2020, average price.
As producers shut in certain oil and gas wells during the pandemic, North American gas supply was reduced considerably. However, the pandemic resulted in global gas demand destruction, which in turn negatively impacted North American liquefied natural gas exports. As a result, natural gas prices have dropped significantly in most North American gas hubs as gas storage levels are running significantly ahead of historical levels for this time of the year. Kelt was pro-active with its hedging program and is currently in a position to offset lower priced physical gas sales with its financial gas swaps. The company has fixed the price on 45,000 MMBtu per day of NYMEX Henry Hub natural gas at a price of $2.83 per MMBtu for the period from April to November, 2020. In addition, Kelt has fixed the NYMEX-AECO differential on 25,000 MMBtu per day at 46.75 U.S. cents per MMBtu for the period from June to October, 2020.
In addition to its gas hedging program, Kelt has fixed the price on 3,000 barrels per day of mixed sweet blend light oil at a price of $31.36 per barrel for the period from July to December, 2020. This hedge position protects the company from the potential of decreasing West Texas Intermediate crude oil prices (in the event of further oil demand destruction from a potential second wave of economy lockdowns), widening WTI-MSW differentials (in the event of major oil export pipeline interruptions) and the potential of a strengthening Canadian dollar relative to the U.S. dollar.
Kelt will continue to monitor oil and gas prices and watch for improvements in the economic outlook, as the company expects to be in a strong financial position to recommence drilling and completion operations at Wembley/Pipestone (Alberta) where the company owns 107,155 net acres (167 sections) of Montney rights, at Oak/Flatrock (B.C.) where the company owns 203,661 net acres (318 sections) of Montney rights and in Alberta where the company owns 74,719 net acres (116 sections) of Charlie Lake rights.
Kelt will continue to reassess its ability to reasonably estimate and provide annual financial guidance, and plans to continue to provide corporate updates during this period of heightened commodity price volatility and economic uncertainty.
We seek Safe Harbor.
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