Kelt Exploration Ltd. (TSX: KEL) ("Kelt" or the "Company") has released its financial and operating results for the three months ended March 31, 2017. The Company's financial results are summarized as follows:
Message to Shareholders
Average production for the three months ended March 31, 2017 was 20,204 BOE per day, up 2% compared to average production of 19,762 BOE per day during the fourth quarter of 2016. Daily average production in the first quarter of 2017 was 13% lower than average production of 23,295 BOE per day in the first quarter of 2016. Production during the first quarter of 2017 reflects the disposition of the majority of its oil and gas assets at Karr which included approximately 1,300 BOE per day of production. The Karr property disposition was completed on January 18, 2017. During the second half of 2016, Kelt only added 2.3 net wells of new production from its 2016 drilling program. However, the Company drilled five wells from an existing pad at Pouce Coupe in the fourth quarter of 2016, targeting the Montney D1 and D2 formations.
Kelt has recently moved to pad drilling as part of its future development plan for its vast corporate Montney acreage. The Company's first significant pad drilling program was carried out at Pouce Coupe, Alberta (pad located at 15-06-78-11W6
Kelt expects to realize significant improved capital efficiencies from pad drilling and expects to commence with a multi-well pad on its large Inga/Fireweed (British Columbia) Montney land acreage during the second half of 2017.
The Company is expecting production in the second quarter of 2017 to average approximately 22,700 to 23,000 BOE per day. Included in this forecast are the following planned outages that will negatively affect production during the second quarter of 2017:
1) TCPL has published expected outages on the NGTL pipeline system upstream of the James River receipt area in June for approximately two weeks. Kelt has budgeted 85% of firm service capability during this period;
2) Enbridge (Spectra) has published expected outages in BC at the McMahon Gas Plant which is expected to be down for plant turnaround operations for three weeks from June 5th to 26th. As a result of compression downtime on the Westcoast Energy pipeline system during the McMahon plant outage, Kelt expects partial outages at the West Stoddart Gas Plant where the majority of the Company's gas is processed; and
3) Wet weather conditions experienced in April during spring break-up at Pouce Coupe and Progress has limited the Company from producing at its full capability during the month.
Commodity prices continued to improve from 2016 levels and have shown significant gains in the first quarter of 2017 compared to the first quarter of 2016. Kelt's realized average oil price during the first quarter of 2017 was $60.21 per barrel, up 77% from $34.01 per barrel in the first quarter of 2016. The realized average NGLs price during the first quarter of 2017 was $27.79 per barrel, up 95% from $14.24 per barrel in the corresponding quarter of 2016. Kelt's realized average gas price for the first quarter of 2017 was $3.52 per MCF, up 51% from $2.33 per MCF in the first quarter of the previous year.
For the three months ended March 31, 2017, revenue was $60.2 million and adjusted funds from operations was $26.8 million ($0.15 per share, diluted), compared to $40.4 million and $6.0 million ($0.04 per share, diluted) respectively, in the first quarter of 2016. At March 31, 2017, bank debt, net of working capital was $75.8 million, down 67% from $230.3 million at March 31, 2016.
Capital expenditures incurred during the three months ended March 31, 2017, prior to dispositions, were $67.6 million. The Company spent $49.5 million (73%) on drilling and completion operations, $15.6 million (23%) on facilities, pipelines and equipment and $2.5 million (4%) on land and seismic. In addition, during the first quarter of 2017, Kelt completed the disposition of the majority of its oil and gas assets at Karr for cash proceeds of $103.0 million, improving the Company's financial flexibility significantly.
Kelt continues to focus on long-term value creation by accumulating significant undeveloped land acreage on resource style plays, with a primary focus on Triassic Montney oil and liquids-rich gas plays. As at March 31, 2017, Kelt's net working interest land holdings were 847,275 acres (1,324 sections) of which 417,386 net acres (652 sections) include Montney rights. This ranks Kelt in the top five for Montney land ownership amongst publicly traded oil and gas companies.
At Oak/Flatrock, British Columbia, where the Company owns 132,610 acres (207 sections) of lands with Montney rights, the Company has drilled and completed its first exploratory horizontal well located at 02/06-02-086-18W6. The well was completed using the ball drop completion method for hydraulic fracturing. The horizontal lateral of the well was approximately 2,500 metres and the well was completed using slick-water comprising 46 fracture stages. After flowing the frac-water back on a seven day clean-up, the Oak well tested gas and free condensate, with a final rate of 3.4 MMCF per day and approximately 74 barrels per day of 42˚ API field condensate. The well was shut-in after recovering approximately 19% of load frac water. The gas rate and casing pressure continued to build through the flow-back, with final flowing casing pressure recorded at 7,476 kPa. The gas composition at Oak is similar to the Company's gas at Inga where plant liquid recoveries are approximately 55 barrels per MMCF of raw gas. The Oak well currently remains shut-in due to wet spring break-up weather conditions. The Company plans to tie the well into nearby third-party infrastructure and expects to bring the well on production in late Q2 or early Q3 2017. The well will be produced at restricted rates limited by the third-party compression currently available. Kelt expects to follow-up with a second well at Oak to be drilled after spring break-up in 2017.
The Company also has 50,080 acres (78 sections) of lands with Montney rights at Pipestone/Wembley, Alberta where Kelt expects to drill its first horizontal exploratory well during the second quarter of 2017.
The Company's Board of Directors has agreed to increase the 2017 capital expenditure budget by $28.0 million. Kelt has changed its previously reported production and financial guidance for 2017 to reflect the increased capital spending, as set-out under the heading of Outlook and Guidance below. The Company is well positioned financially to execute its capital program during the remainder of 2017 and expects to enter 2018 with strong operational momentum.
Outlook and Guidance
Kelt continues to be optimistic about the long-term outlook for oil and gas commodity prices. The cost to acquire land at Crown sales in the Company's core operating areas dropped significantly and service related costs to drill and complete wells also declined substantially. In order to capitalize on opportunities in the current energy business environment, Kelt was active at Crown land sales and has transitioned to development pad drilling in order to take advantage of lower oilfield related service costs.
Kelt's Board of Directors has approved the Company's increased 2017 capital expenditure budget of $173.0 million (previously $144.6 million), of which approximately 75% is expected to be incurred on drilling and completing wells. Approximately 40% of the total budget was incurred in the first quarter of 2017. A portion of the capital budget will be used for facilities, whereby Kelt expects to increase both compression and pipeline gathering capacity in its core producing areas to accommodate production additions. After giving effect to the proceeds of the Karr property disposition of $103.0 million, net capital spending in 2017 is expected to be approximately $70.0 million (previously $42.0 million).
Kelt expects to drill 31 gross (23.1 net) wells in 2017, however, the Company expects to complete 37 gross (29.1 net) wells in 2017, as there are 6 gross (6.0 net) drilled but un-completed wells from 2016.
The Company is forecasting WTI crude oil prices to average US$51.00 per barrel in 2017, up 18% from the average price of US$43.32 per barrel in 2016. AECO natural gas prices are forecasted to average $2.70 per GJ in 2017, up 32% from the average price of $2.05 per GJ in 2016.
Forecast average production of 23,500 BOE per day in 2017 represents a 12% increase from 2016 average production of 20,947 BOE per day and is estimated to be weighted 42% to oil and NGLs and 58% to gas (previous guidance of 23,000 BOE per day was expected to be weighted 40% to oil and NGLs and 60% to gas). However, based on the Company's revised forecasted commodity prices for 2017, 76% of forecasted operating income in 2017 is expected to be generated from oil and NGLs versus 24% from gas (previously 69% oil/NGLs and 31% gas). Kelt exited 2016 with approximately 20,000 BOE per day of production. Pad drilling production additions in 2017 from Inga/Fireweed in BC are anticipated to occur in the later part of 2017 and therefore are not fully reflected in the average production forecast for 2017. However, the Company expects 2017 exit production to be approximately 26,000 BOE per day, 30% higher than 2016 exit production.
After giving effect to the aforementioned revised capital expenditure budget, production estimates, commodity price assumptions, and estimated expenses: adjusted funds from operations for 2017 is forecasted to be approximately $130.0 million or $0.73 per share, diluted (previously $128.0 million and $0.73 per share, diluted); Kelt estimates that the Company's bank debt, net of working capital, will be approximately $78.0 million as at December 31, 2017 (previously $52.0 million); royalties are expected to average 12.1% of revenue in 2017 (previously 11.2%); during 2017, combined production and transportation expense is estimated to be $11.94 per BOE (previously $11.59 per BOE); G&A expense is estimated to be $0.93 per BOE (previously $0.91 per BOE); and interest expense is forecasted at $0.81 per BOE (previously $0.83 per BOE).
Kelt Exploration Ltd. is an oil and gas company based in Calgary, Alberta, Canada. The company focuses on exploration, development and production of crude oil and natural gas resources, primarily in west central Alberta and northeastern British Columbia.
SOURCE: Kelt Exploration Ltd.
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