CALGARY, AB –(Marketwired – January 18, 2017) – Kelt Exploration Ltd. (TSX: KEL) (“Kelt” or the “Company”) has completed its previously announced disposition of oil and gas assets in the Karr area of Alberta. The effective adjustment date of the disposition was January 1, 2017. Kelt received gross proceeds, prior to adjustments at closing, in the amount of $100.0 million, including $6.2 million which is being held in escrow subject to certain preferential rights. Funds in the amount of $6.2 million will be paid to Kelt after satisfaction of the preferential rights. The Company’s syndicate of lenders has confirmed that the authorized borrowing amount available under its credit facility remains unchanged at $185.0 million. Bank debt, net of working capital, is estimated to be $52.0 million as at December 31, 2017 or 0.4 times forecasted 2017 funds from operations of $128.0 million.
MONTNEY LAND EXPANSION
In the second half of 2014, global crude oil prices began a precipitous decline that resulted in massive cutbacks in capital spending on energy projects worldwide. After averaging US$93.00 per barrel in 2014, WTI oil prices averaged US$48.80 per barrel in 2015 and bottomed with a low average price of US$33.45 per barrel during the first quarter of 2016. In November 2016, OPEC and certain non-OPEC countries agreed to cut oil production supplies, resulting in a recovery of oil prices, currently above US$50.00 per barrel.
During this oil commodity price downturn, many oil and gas producers were adversely affected by declining funds from operations and limited access to equity and debt sources of capital. Kelt maintained a strong financial position during the period prior to the downturn, with a debt to funds flow ratio below 1.0 times at December 31, 2014. During the energy industry downturn throughout 2015 and 2016, Kelt took advantage of its strong financial position by making the following strategic investment and financing decisions:
- Kelt completed the corporate acquisition of Artek Exploration Ltd., consolidating its Inga/Fireweed Montney asset ownership to 100% and assuming operational control of the large asset base;
- Kelt completed various common share equity offerings resulting in aggregate gross proceeds of $155.0 million;
- Kelt completed a convertible debenture financing that resulted in aggregate gross proceeds of $90.0 million;
- Kelt has drilled and successfully completed seven upper Montney wells and two middle Montney wells on its 186 section contiguous land block at Inga/Fireweed, BC, de-risking and delineating a large portion of the lands;
- Kelt has accumulated and currently holds 132,610 net acres (207 sections) of land with Montney rights in a new core exploration area at Oak/Flatrock, BC, adjacent to its Inga/Fireweed assets (see Figure 1); and
- Kelt has accumulated and currently holds 50,080 net acres (78 sections) of land with Montney rights in a new core exploration area at Pipestone/Wembley, Alberta, adjacent to its Valhalla/La Glace assets (see Figure 2).
BRITISH COLUMBIA MONTNEY
Kelt expects to drill its first exploration Montney horizontal well located at Oak 02/06-02-086-18W6 (bottom hole) in the first quarter of 2017. The well will be drilled adjacent to two vertical wells that are approximately two miles apart, both of which tested gas and condensate during short well test periods. Gas composition from an existing analysis at Oak appears to be similar to the Company’s gas analysis at Inga/Fireweed. Offsetting reservoir pressures at Oak indicate a gradient of approximately 9.8 kPa per metre. Kelt expects to drill a second exploration horizontal Montney well on the eastern part of its land block during the second half of 2017.
Kelt established its original Montney core position at Valhalla/La Glace and Pipestone/Wembley through certain acquisitions completed in 2013 and 2014. Prior to the commodity price downturn, the Company held 38,513 net acres (60 sections) of lands with Montney rights. Through an active land acquisition strategy during 2015 and 2016, primarily through Crown land sales, Kelt has expanded its Montney land holdings in the area to 78,241 net acres (122 sections), an increase of 103%. Competitor drilling adjacent to newly acquired Kelt acreage has resulted in prolific well results from the Montney formation.
The Company expects to move a rig to Valhalla/La Glace during the third week of January where Kelt will drill two wells in the middle Montney. Upon rig release of the two Valhalla/La Glace wells, the Company expects to drill its first exploration well at Pipestone/Wembley in the first half of 2017.
2017 CAPITAL EXPENDITURE PROGRAM
The Company plans to spend $144.6 million on capital projects in 2017, of which approximately 72% will be incurred on drilling and completing wells. Approximately $58.0 million (40% of total budget) is expected to be incurred in the first quarter of 2017. Kelt is forecasting funds from operations for 2017 to be approximately $128.0 million (based on an average WTI oil price of US$52.00 per barrel and an average AECO natural gas price of $2.95/GJ). Bank debt, net of working capital, is estimated to be $52.0 million as at December 31, 2017 or 0.4 times forecasted 2017 funds from operations.
In BC, Kelt has completed the recently drilled upper Montney well at Fireweed located at C-31-I/94-A-12 in the previously un-tested northeast part of its large contiguous Montney land block. This well was completed using slick-water comprising 46 frac stages with average proppant of 70 tonnes per stage and average fluid pump rates of 10.3 cubic metres per minute. The well is currently being tested and the initial results appear very favourable. Kelt is currently drilling an upper Montney well in the previously un-tested southeast part of its BC Montney land block at Inga, located at 8-17-87-22W6. The Company expects to rig release this well by the end of January and commence completion operations in February. Upon completion of this well, Kelt expects to initiate a development drilling program in the upper Montney at Inga by switching to multi-well pad drilling, currently planned for the second half of 2017.
At Pouce Coupe, Alberta, completion operations are underway on the five-well pad where two wells were drilled in the lower-middle Montney (“D1”) and three wells were drilled in the upper-middle Montney (“D2”). Four wells have been completed and will commence flow back during the next week. The fifth well, along with another well that is currently drilling on the western land block at Pouce Coupe, are expected to be completed later in the first quarter using recycled water obtained from flow back of the first four wells.
At Progress, Alberta, Kelt has commenced drilling the first well of a two well program. These wells are expected to be completed in March 2017. To date, results from the Progress Montney play are demonstrating similar characteristics to the Pouce Coupe/Gordondale Montney B pool, which Kelt used as an analogy prior to acquiring its Progress acreage position. During the commodity price downturn, Kelt acquired 43 gross (29 net) sections of land with Montney rights at Progress.
At spring break-up, the Company will re-evaluate its spending plans for the remainder of 2017. With continued improvement in oil and gas prices, Kelt will consider increasing its capital program for the balance of 2017 at that time.
Changes in forecasted commodity prices and variances in production estimates can have a significant impact on estimated funds from operations and profit. Please refer to the advisories regarding forward-looking statements and to the cautionary statement below.