CALGARY, AB–(Marketwired – August 10, 2016) – Kelt Exploration Ltd. (“Kelt” or the “Company”) (TSX: KEL) has released its financial and operating results for the three and six months ended June 30, 2016. The Company’s financial results are summarized as follows:
FINANCIAL HIGHLIGHTS | Three months ended June 30 | Six months ended June 30 | |||||||||||
(CA$ thousands, except as otherwise indicated) | 2016 | 2015(2) | % | 2016 | 2015(2) | % | |||||||
Revenue, before royalties and financial instruments | 40,718 | 52,131 | -22 | 81,116 | 91,514 | -11 | |||||||
Funds from operations(1) | 11,671 | 14,701 | -21 | 17,622 | 28,681 | -39 | |||||||
Basic ($/ common share)(1) | 0.07 | 0.10 | -30 | 0.10 | 0.20 | -50 | |||||||
Diluted ($/ common share)(1) | 0.07 | 0.09 | -22 | 0.10 | 0.20 | -50 | |||||||
Loss and comprehensive loss | (20,413) | (9,971) | 105 | (46,331) | (26,495) | 75 | |||||||
Basic ($/ common share) | (0.12) | (0.06) | 100 | (0.27) | (0.19) | 42 | |||||||
Diluted ($/ common share) | (0.12) | (0.06) | 100 | (0.27) | (0.19) | 42 | |||||||
Total capital expenditures, net of dispositions | 25,908 | 343,105 | -92 | 49,313 | 420,805 | -88 | |||||||
Total assets | 1,260,245 | 1,364,810 | -8 | 1,260,245 | 1,364,810 | -8 | |||||||
Bank debt, net of work capital(1) | 139,080 | 251,887 | -45 | 138,080 | 251,887 | -45 | |||||||
Convertible debentures | 69,320 | – | – | 69,320 | – | – | |||||||
Shareholders’ equity | 835,241 | 870,083 | -4 | 835,241 | 870,083 | -4 | |||||||
Weighted average shares outstanding (000s) | |||||||||||||
Basic | 173,818 | 153,990 | 13 | 171,321 | 141,163 | 21 | |||||||
Diluted | 173,972 | 155,300 | 12 | 171,444 | 142,212 | 21 | |||||||
(1) | Refer to advisory regarding non-GAAP measures. | |
(2) | Comparative financial information for the three and six month periods ended June 30, 2015 has been revised to reflect all purchase price adjustments related to the acquisition of Artek Exploration Ltd. as of the acquisition date of April 16, 2015. | |
Financial Statements
Kelt’s unaudited condensed consolidated interim financial statements and related notes for the quarter ended June 30, 2016 will be available to the public on SEDAR at www.sedar.com and will also be posted on the Company’s website at www.keltexploration.com on August 10, 2016.
Kelt’s operating results for the three and six months ended June 30, 2016 are summarized as follows:
OPERATIONAL HIGHLIGHTS | Three months ended June 30 | Six months ended June 30 | |||||||||||
(CA$ thousands, except as otherwise indicated) | 2016 | 2015 | % | 2016 | 2015 | % | |||||||
Average daily production | |||||||||||||
Oil (bbls/d) | 5,066 | 5,419 | -7 | 5,469 | 5,189 | 5 | |||||||
NGLs (bbls/d) | 2,632 | 1,494 | 76 | 2,686 | 1,437 | 87 | |||||||
Gas (mcf/d) | 75,060 | 75,362 | 0 | 81,577 | 66,737 | 22 | |||||||
Combined (BOE/d) | 20,208 | 19,473 | 4 | 21,751 | 17,749 | 23 | |||||||
Production per million common shares (BOE/d)(1) | 116 | 126 | -8 | 127 | 126 | 1 | |||||||
Average realized prices, before financial instruments | |||||||||||||
Oil ($/bbl) | 49.76 | 59.02 | -16 | 41.30 | 52.58 | -21 | |||||||
NGLs ($/bbl) | 18.21 | 25.43 | -28 | 16.19 | 25.57 | -37 | |||||||
Gas ($/mcf) | 1.97 | 2.85 | -31 | 2.16 | 2.94 | -27 | |||||||
Operating netbacks(1) ($/BOE) | |||||||||||||
Oil and gas revenue | 22.14 | 29.42 | -25 | 20.49 | 28.49 | -28 | |||||||
Realized gain (loss) on financial instruments | (0.01) | 0.15 | -107 | (0.01) | 0.65 | -102 | |||||||
Average realized price, after financial instruments | 22.13 | 29.57 | -25 | 20.48 | 29.14 | -30 | |||||||
Royalties | (1.65) | (2.91) | -43 | (1.49) | (3.07) | -51 | |||||||
Production expense | (8.87) | (13.95) | -36 | (9.61) | (13.05) | -26 | |||||||
Transportation expense | (2.89) | (2.48) | 17 | (2.79) | (2.54) | 10 | |||||||
Operating netback(1) | 8.72 | 10.23 | -15 | 6.59 | 10.48 | -37 | |||||||
Drilling activity | |||||||||||||
Total wells | – | – | – | 3 | 7 | -57 | |||||||
Working interest wells | – | – | – | 2.5 | 5.5 | -55 | |||||||
Success rate on working interest wells | – | – | – | 100% | 100% | 0 | |||||||
Undeveloped land | |||||||||||||
Gross acres | 665,010 | 661,304 | 1 | 665,010 | 661,304 | 1 | |||||||
Net acres | 543,530 | 532,538 | 2 | 543,530 | 532,538 | 2 | |||||||
(1) | Refer to advisory regarding non-GAAP measures. | |
Message to Shareholders
The Company has reported its financial and operating results to shareholders for the second quarter of 2016. Average production for the three months ended June 30, 2016 was 20,208 BOE per day, up 4% compared to average production of 19,473 BOE per day during the second quarter of 2015. Daily average production in the second quarter of 2016 was 13% lower than average production of 23,295 BOE per day in the first quarter of 2016, primarily due to a planned two week facility turnaround operation in Progress, Alberta. Production was also temporarily shut-in as a precautionary measure due to forest fires near gas processing facilities in the Stoddart area of British Columbia. Production downtime resulted in shut-ins of approximately 1,700 BOE per day average during the second quarter of 2016.
Kelt’s realized average oil price was $49.76 per barrel, up 46% from $34.01 per barrel in the first quarter of 2016 and down 16% from $59.02 per barrel in the second quarter of 2015. The realized average NGLs price during the second quarter of 2016 was $18.21 per barrel, up 28% from $14.24 per barrel in the first quarter of 2016 and down 28% from $25.43 per barrel in the corresponding period of 2015. The realized average gas price was $1.97 per MCF, down 15% from $2.33 per MCF in the first quarter of 2016 and down 31% from the realized average gas price of $2.85 per MCF in the second quarter of the previous year.
For the three months ended June 30, 2016, revenue was $40.7 million and funds from operations was $11.7 million ($0.07 per share, diluted), compared to revenue of $52.1 million and funds from operations of $14.7 million ($0.09 per share, diluted) in the second quarter of 2015. At June 30, 2016, bank debt, net of working capital was $139.1 million, down 45% from $251.9 million at June 30, 2015. Production expenses of $8.87 per BOE continue to improve and were 36% lower compared to $13.95 per BOE in the second quarter of 2015.
Net capital expenditures incurred during the three months ended June 30, 2016 were $25.9 million, of which $18.9 million was for a property acquisition in Kelt’s core operating area at Progress, Alberta. The balance of capital spending during the second quarter of 2016 was primarily for land acquisition and infrastructure construction.
During the second quarter of 2016, Kelt took measures to improve financial liquidity. On April 7, 2016, the Company closed a private placement of 4.7 million common shares on a “CDE flow-through” basis at a price of $4.70 per share, resulting in net proceeds of $22.0 million. On May 3, 2016, Kelt closed the issuance of $90.0 million principal amount of 5.0% convertible unsecured subordinated debentures, resulting in net proceeds of approximately $86.4 million.
Kelt has revised its 2016 outlook and guidance to reflect changes to forecasted commodity prices as follows:
- Average production of 21,500 BOE per day, unchanged from previous guidance;
- 2016 production mix is expected to be weighted 37% to oil & NGLs and 63% to gas;
- 2016 operating income is expected to be derived 82% from oil & NGLs and 18% from gas;
- Average WTI price of US$41.85 per barrel, down 3% from previous forecast;
- Average AECO gas price of $2.10 per GJ, up 11% from previous forecast;
- Capital expenditures, including acquisitions, of $87.0 million, up 5% from previous guidance;
- Funds from operations of $54.0 million ($0.31 per share, diluted), up 8% from previous guidance; and
- Bank debt, net of working capital of $137.0 million (2.5 x trailing funds from operations), unchanged from previous guidance.
In July 2016, the Government of Alberta released further details with respect to the Alberta Modernized Royalty Framework (“MRF”), now providing companies with the ability to apply for early adoption by drilling wells in 2016 and still qualifying for royalties under MRF. Kelt expects to take advantage of this early adoption on certain wells and has increased its capital spending plans in Alberta for 2016 and reallocated funds within the budget.
After delineating four of its Montney oil plays in Alberta, Kelt is now in a position to commence full development on two of these plays and at the same time, taking advantage of both the early adoption of MRF, as well as the current low cost service sector environment. As a result, Kelt expects to commence pad drilling at Pouce Coupe and Karr in the second half of 2016. The Company plans to drill two wells at Pouce Coupe and two wells at Karr, with further plans to drill additional wells from the same pads in both areas in early 2017. Completions of these wells are planned prior to spring break-up in 2017.
At Inga, British Columbia, Kelt put on production two wells that were recently drilled and completed on the eastern part of its contiguous Montney land block. Both these wells were completed in the Upper Montney. The well located at 07-12-088-23W6 flowed high volumes of field condensate with an IP30 rate (gross sales) of 648 BOE per day of which condensate and liquids was 379 barrels per day (58%). The well located at 05-07-088-22W6 had an IP30 rate (gross sales) of 1,130 BOE per day of which condensate and liquids was 592 barrels per day (52%). The Company is excited with these results as it extends the Montney resource play further to the east significantly adding to its future drilling inventory.
In the Inga/Fireweed/Stoddart area, Kelt will defer drilling and completing a previously planned Upper Montney well to 2017, leaving two wells to be drilled in the second half of 2016. The Company expects to drill and complete a Middle Montney well in the central part of its land block at Inga and to drill an Upper Montney well in the northeast part of its land block at Fireweed. Kelt expects to complete this well in early 2017 and to drill and complete the deferred Upper Montney well, also in early 2017. At this stage, the Company will have obtained sufficient information from delineation drilling and expects to commence full development in the Upper Montney in British Columbia by switching to pad drilling which should result in significant savings in per well capital expenditures, as well as lower per unit operating expenses when the wells are brought on production.
In light of the current energy business environment with much lower oil and gas prices year-to-date in 2016, compared to 2015, Kelt is optimistic that it can continue to take advantage of the current downturn with its strategy of low-cost land accumulation in its core operating areas, during the remainder of 2016. In July, Kelt completed an acquisition of 18 sections of land in British Columbia, which brings the Company’s Montney land holdings in the Inga/Fireweed/Stoddart area to 180 contiguous net sections. The Upper Montney well that was deferred from 2016 capital spending plans is now expected to be drilled on these newly acquired lands during the first quarter of 2017. Kelt believes that these lands will be prospective in both the Upper and Middle Montney formations.
Management looks forward to updating shareholders with 2016 third quarter results on or about November 10, 2016.
Outlook and Guidance
Oil and gas prices have bounced back from the lows experienced earlier in 2016, however, our industry continues to operate in a challenging commodity price environment. Due to market instability and volatile commodity prices that have trended lower over the past two years, many oil and gas companies have reduced their capital spending plans. Ultimately, lower capital investment in oil and gas drilling can be expected to balance the supply and demand ratio. Kelt continues to remain optimistic about the long-term outlook for oil and gas commodity prices.
Kelt believes that the current business environment creates opportunities to add value at a reasonable cost. The cost to acquire land at Crown sales in the Company’s core operating areas has dropped significantly and service related costs to drill and complete wells have also declined substantially. In order to capitalize on opportunities in the current energy business environment, Kelt expects to remain active at Crown land sales.
The Company is opportunity driven and is confident that it can continue to build on its current inventory of development projects by adding new exploration prospects. As a result, the Company’s Board of Directors, have increased Kelt’s 2016 capital expenditures budget to $87.0 million, up 5% from its previous budget of $83.0 million.
The table below outlines the Company’s forecasted financial and operating guidance for 2016, updated from guidance previously disclosed in the Company’s press release dated May 11, 2016.
(CA$ millions, except as otherwise indicated) | Revised Guidance | Previous Guidance | Change | ||||
Average Production | |||||||
Oil and NGLs (bbls/d) | 7,940 | 7,950 | 0% | ||||
Gas (mmcf/d) | 81,360 | 81,300 | 0% | ||||
Combined (BOE/d) | 21,500 | 21,500 | 0% | ||||
Production per million common shares (BOE/d) | 124 | 124 | 0% | ||||
Forecasted Average Commodity Prices | |||||||
WTI oil price (US$/bbl) | 41.85 | 43.25 | -3% | ||||
Canadian Light Sweet ($/bbl) | 50.73 | 51.05 | -1% | ||||
NYMEX natural gas price (US$/MMBTU) | 2.50 | 2.35 | 6% | ||||
AECO natural gas price ($/GJ) | 2.10 | 1.90 | 11% | ||||
Average Exchange Rate (US$/CA$) | 0.760 | 0.772 | -2% | ||||
Capital Expenditures | |||||||
Drilling & completions | 42.0 | 41.0 | 2% | ||||
Facilities, pipeline & well equipment | 20.3 | 15.0 | 35% | ||||
Land, seismic & property acquisitions (net of dispositions) | 24.7 | 27.0 | -9% | ||||
Total Capital Expenditures | 87.0 | 83.0 | 5% | ||||
Funds from operations | 54.0 | 50.0 | 8% | ||||
Per common share, diluted | 0.31 | 0.29 | 7% | ||||
Bank debt, net of working capital, at year-end (1) | 137.0 | 137.0 | 0% | ||||
Weighted average common shares outstanding (millions) | 172.8 | 172.8 | 0% | ||||
Common shares issued and outstanding (millions) | 174.2 | 174.2 | 0% | ||||
(1) | In addition to bank debt, the Company has $90 million principal amount of convertible debentures outstanding with a coupon of 5% maturing May 31, 2021. | |
Forecast average production of 21,500 BOE per day in 2016 represents a 16% increase from average production of 18,577 BOE per day in 2015 and is estimated to be weighted 37% to oil and NGLs and 63% to gas. However, based on the Company’s forecasted commodity prices for 2016, 82% of forecasted operating income in 2016 is expected to be generated from oil and NGLs versus 18% from gas.
During 2016, the Company is forecasting oil and gas prices to average WTI US$41.85 per barrel and AECO $2.10 per GJ, respectively. Sensitivities to changes in these prices are as follows: a 10% increase in the average WTI oil price forecast would increase funds from operations by $7.0 million or 13%; a 10% decrease in the average WTI oil price forecast would decrease funds from operations by $7.6 million or 14%; a 10% increase in the average AECO gas price forecast would increase funds from operations by $7.5 million or 14%; and a 10% decrease in the average AECO gas price forecast would decrease funds from operations by $7.8 million or 14%. The Company reviews its commodity price forecasts periodically and retains the flexibility to adjust its capital expenditure plans accordingly.
Royalties are expected to average 8.4% of oil and gas sales in 2016 (previously, 9.3%). During 2016, production and transportation expense (combined) is estimated to be $12.62 per BOE (previously, $12.74 per BOE), G&A expense is estimated to be $0.89 per BOE (unchanged from previous guidance) and interest expense is forecasted at $1.31 per BOE (unchanged from previous guidance).
After giving effect to the aforementioned production estimates, commodity price assumptions and estimated expenses: funds from operations for 2016 is forecasted to be approximately $54.0 million or $0.31 per common share, diluted. Kelt estimates that the Company’s bank debt, net of working capital, will be approximately $137.0 million as at December 31, 2016.
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.
The information set out herein is “financial outlook” within the meaning of applicable securities laws. The purpose of this financial outlook is to provide readers with disclosure regarding Kelt’s reasonable expectations as to the anticipated results of its proposed business activities for 2016. Readers are cautioned that this financial outlook may not be appropriate for other purposes.