Kiwetinohk provides fourth quarter 2022 results and year-end reserves report

Financial and operating highlights

“Kiwetinohk delivered financial and operational results that move us significantly along the path of realizing our built-for-purpose energy transition company,” said CEO Pat Carlson, “Kiwetinohk grew reserves in all categories, doubled upstream production and more than tripled adjusted funds flow in the fourth quarter year-over-year while achieving Alberta Utilities Commission (AUC) regulatory approval on two power plants and advancing all seven power projects along the regulatory process.”

The upstream business posted strong growth in reserves, production and cash flow while managing capital spending and debt levels, preserving balance sheet strength and financial resilience.

Kiwetinohk achieved regulatory approval on the first two power plants, projects Homestead Solar and Opal Firm renewable, and progressed each of its seven power projects along the regulatory process. Progress continues towards a final investment decision on the first two projects, Homestead Solar and Opal Firm Renewable, with the earliest target date remaining the fourth quarter of 2023.

2022 results include production above the upper end of guidance with capital spending below the low end of guidance resulting in stronger Adjusted Funds Flow (AFF) and lower exit net debt than in May 2022’s original guidance (May 18, 2022, Kiwetinohk accelerates 2022 upstream development program, increases 2022 guidance and provides 2023 outlook). The MD&A provides a full comparison of 2022 results compared with prior 2022 guidance.

Production from new Duvernay wells resulted in the Simonette gas processing facilities reaching capacity during the fourth quarter, driving operating costs lower per unit and accelerating plant expansion plans (as previously communicated). The resulting 2022 capital efficiency of ~$13,500/boe/d¹ demonstrates Kiwetinohk’s ability to sustain and grow production efficiently. The company expects to be in a free cash flow position after its production is capable of filling the Simonette gas plants, which are currently being expanded to support corporate production rates of approximately 40,000 boe/d.

Fourth quarter and 2022 financial & upstream highlights:

• Fourth quarter AFF¹ of $101.5 million, or $2.30/share (basic), a 106% increase from third quarter.
• 2022 annual AFF¹ was $264.1 million, or $6.00/share (basic).
• Record quarterly production of 24,745 boe/d (45% liquids), a 50% increase quarter-over-quarter and a 99% increase over fourth quarter 2021 production.
• Operating costs of $7.20/boe, a 35% reduction quarter-over-quarter, driven by the benefit of filling company-owned gas processing facilities at Simonette.
• Operating netback¹ of $51.85/boe, up 2% quarter-over-quarter and 26% over fourth quarter 2021 driven by higher realized prices and lower costs per boe.
• Adjusted operating netback¹ of $46.07/boe, an increase of $10.17/boe quarter-over-quarter due to lower risk management related losses.
• Full year capital expenditures of $269.7 million (before acquisitions/dispositions), was below the guidance range of $280–$310 million set in May 2022.
• Year end net debt to AFF¹ was 0.46x with remaining credit capacity of $229.5 million.

2022 year-end reserves highlights:

• Proven developed producing (PDP)/Total proven (TP)/Total proven and probable (TPP) reserves increased 27%/18%/19% from year-end 2021.
• PDP Net Present Value 10% Before Tax (NPV₁₀ (BT) increased 55% to $16.63/share (basic).
• TP NPV₁₀ (BT) increased 23% to $35.82/share (basic).
• TPP NPV₁₀ (BT) increased 29% to $57.47/share (basic).
• PDP finding & development (F&D) costs¹ of $21.89/boe (excluding future development costs (FDC)) drove a one-year PDP recycle ratio of 2.5x.
• Two-year PDP finding, development & acquisition (FD&A) costs¹ of $14.59/boe (including FDC) for a 2-year recycle ratio of 3.2x.

Fourth quarter and 2022 Green Energy highlights:

• In 2022, Kiwetinohk expanded its power development portfolio by 345 MW to ~2,150 MW.
• The Homestead Solar project obtained AUC power plant approval and the Opal Firm Renewable project obtained AUC power plant approval and Environmental Protection and Endangered Area (EPEA) industrial approval.
• Four power plant development projects are in Alberta Energy System Operator (AESO) stage 3 and three in stage 2, along the path to securing grid capacity.
• Discussions with potential financing partners continue to advance.

Fourth quarter sustainability highlights:

• Advanced carbon capture hubs, entering into two Carbon Sequestration Evaluation Agreements with the Government of Alberta and starting detailed evaluations.
• On track to eliminate all inactive asset retirement obligations in five to seven years, spending more than 10x the Alberta Energy Regulator’s mandatory spend in 2022.
• Published first annual ESG report in alignment with Sustainability Accounting Standards Board (SASB) and Taskforce for Climate-Related Financial Disclosure (TCFD) frameworks.
• Invested $100,000 in Indian Business Corporation’s microloan fund to support the success of Indigenous entrepreneurs.
• Welcomed first cohort of Indigenous operator trainees to upstream operations team.
• Furthered engagement and consultation with landowners and community stakeholders around Kiwetinohk’s gas-fired and solar renewable projects.

Financial results

Kiwetinohk achieved record AFF¹ during the fourth quarter of $101.5 million, or $2.30/share (basic). Strong AFF¹ was driven by record production levels combined with reduced per unit operating costs, royalties and transportation costs. The drop in realized commodity prices of $10.82/boe in the fourth quarter relative to the third quarter was more than offset by $12.08/boe in costs savings over the same time period with lower royalties, operating and transportation costs.

Kiwetinohk exited the year with $119.7 million of debt drawn against its $375 million bank syndicated revolving credit facility. The next redetermination of the bank credit facility is expected in May 2023. At year end, the company maintained $229.5 million of credit capacity. At the end of 2022, net debt to AFF¹ was 0.46x, at the lower end of the guidance range of 0.4-0.6x.

Kiwetinohk remains committed to its established hedging program, which is a risk management tool to protect the company’s capital spending program. The company’s hedging summary can be found in the accompanying MD&A.

As at year-end 2022, Kiwetinohk had $777 million of tax pools and does not expect to be cash taxable in 2023.

The company initiated a normal course issuer bid (NCIB) on Dec. 22, 2022 and purchased 6,471 shares of its stock prior to year end at an average price of $14.69/share for a total cost of approximately $95,000.

Kiwetinohk is reiterating previously stated 2023 guidance, which can be found in the MD&A available on the company website or on SEDAR.

Upstream operational results

Strong 2022 upstream operating performance was evidenced by results including reserve additions across all categories, production hitting the top end of guidance, capital spending near the low end of guidance and improved per unit operating costs. Base PDP production continues to perform well with a low decline rate combined with robust performance from new wells.

Three additional Simonette Duvernay wells on the 04-34 pad were completed and brought on stream in late February and initial production rates are in-line with expectations. Rates will be reported with first quarter results on May 3, 2023. Kiwetinohk is currently drilling four Montney wells at Placid, which are expected to come onstream before the end of the second quarter. Four additional Duvernay wells are also being drilled at Simonette and are targeted to come onstream early in the third quarter with additional Simonette drilling expected to spud before year end.

Execution of both Simonette gas plant expansions continue with new capacity tie-in scheduled to commence in the third quarter of 2023, resulting in approximately two weeks of scheduled facility down time. One of the Simonette gas plants is also being electrified as part of this expansion to lower its GHG emissions footprint.

There are no changes to previously disclosed guidance, which can be referenced in the fourth quarter MD&A and the Dec. 14, 2022 news release. The company’s focus remains on growing production to an average of 24.5-28.5 thousand boe/d for calendar 2023 at a competitive capital efficiency, reducing unit operating costs and rapidly growing production.

Kiwetinohk achieved strong capital efficiency of ~$13,500/boe/d¹ during 2022, which benefited from fourth quarter production additions from the 04-34 pad at Simonette. The company expects to achieve corporate upstream capital efficiencies of $15,000–$18,000/boe² going forward. This capital efficiency range supports Kiwetinohk’s stated estimate that ~$160 million of capital investment should maintain targeted 2023 production rates of ~26.5 thousand boe/d (mid-point of guidance) flat going forward.

Reserves update

McDaniel & Associates conducted an independent reserves evaluation and prepared the company’s reserve report according to National Instrument 51-101 standards as outlined by the Society of Petroleum Evaluation Engineers (SPEE) and the Canadian Oil and Gas Evaluation Handbook (COGEH). Additional details of Kiwetinohk’s 2022 year end reserves can be found in the company’s AIF available on the company website and on sedar.com.

Kiwetinohk grew reserves 18%-27% after production and grew NPV₁₀/share by 23%-55% (including changes to FDC, based on the reserve evaluator’s price deck and year-end basic shares outstanding) across all categories (PDP, TP and TPP). NPV represents attractive valuation upside relative to share price.

The following reserve summary table details the company’s 2022 volumetric and valuation reserve performance; detailing strong growth across all categories.

In 2021, the company acquired the Simonette assets which continue to represent approximately 68% of the company’s TPP reserves (75% of the company’s 2022 year-end TPP NPV₁₀). Considering the 2021 acquisition and the 2022 drill bit performance, Kiwetinohk has a 2-year PDP FD&A cost (including FDC) of $14.59/boe, resulting in a 3.2x corporate PDP recycle ratio⁴. This low-cost asset base, combined with strong drill bit performance, sets the stage for robust targeted economic returns for Kiwetinohk shareholders going forward. The 2-year PDP FD&A cost (excluding FDC) was $12.96/boe driving a recycle ratio of 3.6x.

In 2022, Kiwetinohk posted 180%-433% reserve replacement across all reserve categories with the drill bit while also achieving peer group leading corporate production growth. Kiwetinohk has a strong proven reserve RLI of ~14 years.

In 2022 the company posted a one-year PDP F&D cost of $28.74/boe, including changes to FDC, for a recycle ratio of 1.9x. Changes to the PDP FDC was $80 million (undiscounted), representing annual maintenance capital of $8 million over the next 10 years. Burdening 2022 reserve performance with the increased costs for the next 10 years of operations (undiscounted) onto 2022 results is not representative of 2022 economics. Kiwetinohk believes looking at PDP F&D costs of $21.89/boe before changes to FDC more accurately represents 2022 performance, resulting in a 2.5x 2022 PDP recycle ratio.

Like the broader economy, the energy industry experienced inflationary pressures during 2022. Kiwetinohk posted strong economics on its reserve additions in 2022, notwithstanding changes to FDC. However, burdening 2022 FD&A costs with the full effect of inflation on the 131 future locations booked on TPP reserves, 10 years of undiscounted increased maintenance costs and increased development costs associated with new facilities to support higher production rates for the long-term may not be an accurate representation of actual 2022 economic performance of the company’s capital investment program.

The Canadian Oil and Gas Evaluation Handbook (COGEH) notes the need to match the impact of cost changes to changes in reserves volumes. This can be achieved by looking at total FDC over all booked undeveloped reserves, providing an indication of future reserve economics. In the case of Kiwetinohk, total TPP FDC of $2.137 billion over 164.7 MMboe of booked undeveloped reserves (ie. Proven + Proven Undeveloped) indicates attractive future development economics of $12.97/boe for the full future development of the company’s booked undeveloped reserves.

Green Energy update

In 2022, Kiwetinohk obtained key regulatory approvals, continued to advance its power projects in the AESO queue, expanded its power development portfolio by ~345 MW (170 MW at Phoenix, 124 MW at Firm Renewable 2 and 50 MW at Granum) to approximately 2,150 MW, and completed engineering and cost reviews across its power portfolio.

The Homestead Solar project and the Opal Firm Renewable project obtained AUC power plant approvals in the third quarter and Opal Firm Renewable received Environmental Protection and Enhancement Act (EPEA) industrial approval in the fourth quarter. AUC transmission line approval for is the key regulatory approval remaining for both these projects and is expected to be received  in the fourth quarter of 2023. Kiwetinohk also submitted the AUC power plant application for the Granum Solar project in December 2022.

All power projects continue to advance along the path to securing grid capacity. Homestead Solar, Opal Firm Renewable, Phoenix Solar and NGCC 1 have all reached AESO Stage 3. Granum Solar and Natural Gas Combined Cycle (NGCC) 2 achieved AESO Stage 2 in 2022 and Firm Renewable 2 in January 2023.

Kiwetinohk acquired the early-stage 170 MW Phoenix Solar project with 130 MW expansion capacity in the second quarter, accelerated development of a second natural gas-fired firm renewable (124 MW) project and expanded capacity by 50 MW on the Granum Solar project in the fourth quarter.

Kiwetinohk advanced pre-front end engineering and design (FEED) studies, FEED reviews and engineering, procurement and construction (EPC) evaluations on its power projects. The Company advanced EPC bid evaluation for Homestead Solar, and EPC review and detailed engineering for Opal in the fourth quarter of 2022. Kiwetinohk evaluated carbon capture technologies for Opal and conducted pre-FEED reviews for carbon capture technologies on Opal and the NGCC power plants.

During the fourth quarter of 2022, Kiwetinohk invested $8.1 million in Green Energy capital across all power projects including consultation, regulatory reviews, environmental studies, AESO review and engineering analysis, EPC bid evaluation for Homestead and pre-FEED reviews for NGCCs. The majority of the Green Energy capital spend ($4.9 million) was to advance detailed engineering on Opal to confirm its EPC pricing by the second quarter of 2023.

Sustainability update

Kiwetinohk released its first annual ESG report in the fourth quarter, in alignment with leading global frameworks, TCFD and SASB, and including a limited assurance review of Kiwetinohk’s 2021 greenhouse gas emissions reporting.

Kiwetinohk continues to advance its ESG strategy and plans, achieving early milestones on its two carbon capture hubs, kicking off Indigenous and stakeholder engagement and detailed geological evaluation, which will continue through 2023. In 2022, Kiwetinohk advanced its asset retirement program, achieving key milestones toward elimination of all inactive asset retirement obligations in five to seven years and spending appropriately 10x the Alberta Energy Regulator’s mandatory requirement.

The company continues direct engagement with Indigenous nations in whose traditional territory it operates, working to reduce impacts and benefits in line with community needs, economic and cultural goals.

Kiwetinohk invested $100,000 in Indian Business Corporation’s microloan fund to support the success of Indigenous entrepreneurs and welcomed the first cohort of Indigenous Operator Trainees to its Upstream operations team.

Conference call, annual general meeting and first quarter 2023 report date

Management of Kiwetinohk will host a conference call on March 8, 2023, at 8 AM MT (10 AM ET) to discuss results and answer questions. Participants will be able to listen to the conference call by dialing 1-888-394-8218 (North America toll free) or 647-794-4605 (Toronto and area). A replay of the call will be available until March 15, 2023, at 1-888-203-1112 (North America toll free) or 647-436-0148 (Toronto and area) by using the code 9236228.

Kiwetinohk plans to release its first quarter 2023 results prior to TSX opening on May 3, 2023 and hold its annual general meeting later that same day.

About Kiwetinohk

We, at Kiwetinohk, are passionate about addressing climate change and the future of energy. Kiwetinohk’s mission is to build a profitable energy transition business providing clean, reliable, dispatchable, affordable energy. Kiwetinohk develops and produces natural gas and related products and is in the process of developing renewable power, natural gas-fired power, carbon capture and hydrogen clean energy projects. We view climate change with a sense of urgency, and we want to make a difference. Kiwetinohk’s common shares trade on the Toronto Stock Exchange under the symbol KEC. Additional details are available within the year-end documents available on Kiwetinohk’s website at www.kiwetinohk.com and SEDAR at www.sedar.com.

Oil and Gas Advisories

For the purpose of calculating unit costs, natural gas is converted to a barrel of oil equivalent using six thousand cubic feet of natural gas equal to one barrel of oil unless otherwise stated. The term barrel of oil equivalent (boe) may be misleading, particularly if used in isolation. A boe conversion ratio for gas of 6 Mcf:1 boe is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

This news release includes references to sales volumes of “Oils and condensate”, “NGLs” and “Natural gas” and revenues therefrom. National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities, includes condensate within the NGLs product type. The Company has disclosed condensate as combined with crude oil and separately from other NGLs since the price of condensate as compared to other NGLs is currently significantly higher, and the Company believes that this crude oil and condensate presentation provides a more accurate description of its operations and results therefrom. Oil and condensate therefore refers to light oil, medium oil, tight oil, and condensate. NGLs refers to ethane, propane, butane, and pentane combined. Natural gas refers to conventional natural gas and shale gas combined.

This news release contains metrics commonly used in the oil and natural gas industry. Each of these metrics is determined by the Company as set out below or elsewhere in this news release. The metrics are F&D cost, FD&A cost, recycle ratio, reserves replacement ratio (excl A&D), reserve life index, and capital efficiency. These metrics do not have standardized meanings and may not be comparable to similar measures presented by other companies. As such, they should not be used to make comparisons. Management uses these oil and gas metrics for its own performance measurements and to provide shareholders with measures to compare the Company’s performance over time; however, such measures are not reliable indicators of the Company’s future performance and future performance may not compare to the performance in previous periods and therefore should not be unduly relied upon. Refer to the “Non-GAAP Financial Ratios” section of this news release for a description of the calculation and use of F&D cost, FD&A cost, recycle ratio, and capital efficiency.

F&D reserve replacement (excl A&D) is calculated by dividing: (i) the net changes to reserves in such reserves category from the prior period from extensions & improved recovery, technical revisions, economic factors, acquisitions, and dispositions, expressed in boe; by (ii) the actual annual production for the year. Reserves replacement ratio is a measure commonly used by management and investors to assess the rate at which reserves depleted by production are being replaced.

Reserve life index is calculated by dividing: (i) the reserves by category, expressed in boe; by (ii) the annualized Q4 average production rate, expressed in boe/d.

Reserves Data

Reserves data set forth in this news release is based upon an evaluation of the Company’s reserves prepared by McDaniel & Associates Consultants Ltd. (“McDaniel”) dated March 7, 2023 and effective December 31, 2022 (the “McDaniel Report”). The reserves referenced in this news release are gross reserves. The price forecast used in the McDaniel Report is the three consultant average forecast prices of McDaniel & Associates Consultants Ltd., GLJ Ltd. and Sproule Associates Limited as of January 1, 2023 (“Jan 2023 Consultant Avg.”) price forecast. The estimates of reserves contained in the McDaniel Report and referenced in this news release are estimates only and there is no guarantee that the estimated reserves will be recovered. Actual reserves may be greater than or less than the estimates contained in the McDaniel Report and referenced in this news release. There is no assurance that the forecast prices and costs assumptions used in the McDaniel Report will be attained, and variances could be material. Estimated future net revenue does not represent fair market value. Readers should refer to the Company’s annual information form for the year ended December 31, 2022, available on Kiwetinohk’s website at www.kiwetinohk.com and SEDAR at www.sedar.com, for a complete description of the McDaniel Report (including reserves by the specific product types of shale gas, conventional natural gas, NGLs, tight oil and light and medium crude oil) and the material assumptions, limitations and risk factors pertaining thereto.