Kelt Exploration Ltd. (KEL) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the Kelt Exploration Ltd. Annual Meeting of Shareholders. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to David Wilson, the President. Please go ahead.

Good afternoon, ladies and gentlemen. Welcome to the meeting of the shareholders of Kelt Exploration Ltd. My name is David Wilson, and I am the President, Chief Executive Officer and a Director of Kelt Exploration Ltd., and I will assume the position of Chairman for this meeting. In order to ensure that the meeting covers the required business in an efficient manner, we have prearranged with designated shareholders or proxy holders to move and to second the motions of business. Before I get going here, I'll just -- I just want to introduce the directors of Kelt and the management team. So we've got Robert Dales as a director; William Guinan, who's also the Chairman; Neil Sinclair; Geri Greenall; Michael Shea; and then myself. As far as on the management, we've got Alan Franks, Vice President of Production; Douglas MacArthur, Vice President, Operations; Sadiq Lalani, Vice President and Chief Financial Officer; Bruce Gigg, Vice President, Engineering; Patrick Miles, Vice President, Exploration; Carol Van Brunschot, Vice President, Marketing; David Gillis, Vice President, Finance; and Douglas Errico, Senior Vice President, Land and Corporate Development. The meeting will now come to order. And if there are no objections, I shall ask Louise Lee to act as recording secretary of the meeting; and Gail Hibbs of Odyssey Trust Company to act as scrutineer of the meeting. The Secretary has provided me with proof of mailing of the Notice of Meeting, instrument of proxy, management information circular and accompanying documents to the registered shareholders of the corporation. I direct a copy of the proof of mailing together with copies of the documents mailed to shareholders to be kept by the Secretary with the records of this meeting. The bylaws of the corporation provide that 2 persons present and holding or representing by proxy at least 5% of the shares entitled to vote at the meeting shall constitute a quorum for purposes of meeting of shareholders. The scrutineer has provided me with their preliminary report regarding shareholder attendance at the meeting. Accordingly, I now declare that the meeting is regularly called and properly constituted for the transaction of business. As this meeting is being held virtually via live webcast due to COVID-19, we think it's necessary to set out a few rules for orderly conduct. [Operator Instructions] Questions will be addressed during the question period at the end of the meeting provided the questions regarding procedural matters or directly related to the motions before the meeting may be addressed during the meeting. For the purposes of the meeting today, voting on all matters will be conducted by electronic ballot. Registered shareholders and duly appointed proxy holders will be asked to vote on each business item after the presentation of all business items. Once discussion on all items of business has concluded, I will give you a minute to enter your votes if you haven't already voted by proxy and then declare voting closed on all resolutions. When you're asked to vote, the motions to be voted on will automatically appear. You will only have a certain amount of time to do so when polls are open. If you have already voted in advance, do not vote again online during the meeting unless you want to change your vote. If you vote again using the online ballot, your online ballot during the meeting will revoke your previously submitted proxy. The first item of business is the presentation of the auditor's report and the financial statements of the corporation for the year ended December 31, 2020. Copies of the foregoing were mailed to each registered shareholder and are available on the corporation's website and on SEDAR. It is not proposed to read the financial statements to the meeting. Receipt and presentation of the financial statements for the year ended December 31, 2020, are hereby acknowledged. I direct that the financial statements and the auditor's report be annexed to the minutes of the meeting. The next item of business is to fix number of directors to be elected at the meeting at 6.

I move that the Board of Directors of the corporation shall be fixed at 6 members.

I second the motion.

You've heard the resolution. Is there any discussion? As there is no further discussion, I will proceed with the next item of business. The next item of business is the election of the Board of Directors.

I nominate Robert J. Dales; Geraldine L. Greenall; William C. Guinan, Michael R. Shea; Neil G. Sinclair; and David J. Wilson for election as directors of the corporation to hold office for the ensuing year.

Are there any further nominations? I now declare the nominations closed. Could we have a motion regarding the election of directors?

I move that each of the following nominees: Robert J. Dales; Geraldine L. Greenall; William C. Guinan, Michael R. Shea; Neil G. Sinclair; and David J. Wilson be hereby elected as a Director of the corporation to hold office until the next Annual Meeting of Shareholders or until their successor is duly elected or appointed.

I second the motion.

You have heard the resolution. Is there any discussion? As there is no further discussion, I will proceed with the next item of business. The next item of business is the appointment of auditors. Could we have a motion with regard to the appointment of auditors until the next annual meeting?

I move that PricewaterhouseCoopers LLP be and are hereby appointed as auditors of the corporation until the next annual meeting or until a successor is appointed and that their remuneration be fixed by the Board of Directors.

I second the motion.

You've heard the resolution. Is there any discussion? As there is no further discussion, we will proceed with voting. As we mentioned, voting today will be conducted by electronic ballot. As a reminder, if you have already voted in advance do not vote again unless you want to change your vote. If you vote again using the online ballot, your online vote will revoke your previously submitted proxy. I will now take a moment to ask that the balloting be opened to registered shareholders and duly appointed proxy holders. The polls are now open and at this point, all registered shareholders and duly appointed proxy holders who have properly logged in with their control numbers or user names and wish to vote will be able to see on the screen all motions being brought forth at this meeting. Please register your votes by accessing the voting page and by selecting the for or against buttons next to the resolution fixing the number of directors and by selecting the for or withhold button next to the name of each proposed director and next to the resolution with respect to the appointment of Pricewaterhouse Coopers, LLP as the corporation's auditors. We will provide registered shareholders and duly appointed proxy holders approximately 1 minute to complete the electronic ballots. Once the electronic ballot -- balloting closes, the voting page will disappear and your votes will be automatically submitted. [Voting]

I now declare the polls closed. I think all of the voting had taken place prior to the meeting. I have been advised by the scrutineer that a sufficient number of votes were received to pass all of the resolutions before us today. Accordingly, I am pleased to announce that the number of directors to be elected at the meeting has been fixed at 6. Each of the 6 nominees have been elected as directors of the corporation to serve until the next Annual Meeting of Shareholders or until their successors are elected or appointed. The appointment of PricewaterhouseCoopers LLP as the auditors of the corporation has been approved, and the Board of Directors of the corporation has been authorized to fix their remuneration. That concludes the formal business brought before the meeting. As there is no further business, I declare the formal part of the meeting to be concluded. We will now proceed to the management presentation. [Operator Instructions]

Okay. Thanks, David. This is Sadiq Lalani, CFO of Kelt Exploration, and I'll kick off the corporate presentation and then turn it over back to David Wilson for an operations update. So you should be able to see the screen on your slide -- on your computers. Kelt focuses on value creation for the long term. The company has followed a similar business plan as some of its predecessor companies like Celtic Exploration and Genesis exploration. In our previous venture at Celtic Exploration, we sold the company in February 2013 to ExxonMobil for $3.2 billion. As part of that transaction, we spun out about $140 million worth of assets into a spinco, which became Kelt Exploration, and that's how Kelt got founded. Since we've been running Kelt, we've adopted the same strategy of accumulating land at a reasonable price, usually during downturns when land prices become affordable. And when things get good, and after we've delineated and proved up the assets, we tend to monetize the assets to create some value for our shareholders. At Kelt, back in January of 2017, we did sell our Karr Montney assets for $100 million. And last summer in August of 2020, we sold our Inga-Fireweed Montney assets in B.C. for $510 million of cash plus an assumption of some debt. So that's kind of our strategy, and we'll continue to follow that strategy. We aim to target a 2x or better recycle ratio on a 2P basis. And you'll notice from some future slides, we're going to show you that management and the Board are aligned with Kelt shareholders through their significant equity ownership in the company. Environment, social and governance, ESG for short, has become a big part of our business. We're happy to mention that in January of 2021, we released our inaugural ESG report. This report is available on the Kelt website and it addresses the 4 main components of the ESG strategy that Kelt adopts: Environment where we focus on emissions, climate change, spill prevention, abandonment and reclamation liabilities, water use and hydraulic fracturing. The other part is community engagement and the social impact and the involvement of First Nations. The third aspect is health and safety, which has been obviously a paramount feature over the last 15 months with the COVID pandemic. And then, of course, the governance, the leadership and governance with respect to business ethics and profitable growth. If you look at the next slide here, the capital structure of the company is pretty simple. We -- after the sale of our Inga assets, we no longer have any debt. We currently have a market cap of just under $500 million. Our stock has traded in the $0.93 to $3.19 range. And management and directors and officers of the company own 19% of the stock. We have a pretty good institutional following, I would say, to the best of our knowledge. Probably about 40% to 45% of our stock is in the hands of large institutional funds, and then the remainder would be retail trading. Insiders have consistently bought shares in the company. And you can see from this slide, over the last 7 or 8 years since we started the company, we've put about $135 million of our own money into the company. This is over and above our investment in Celtic, which would have rolled into Kelt shares. And we've participated in just about every equity offering that we've issued, and we've also been pretty active in the open market. You can see from this slide, we've purchased in excess of 12 million shares for more than $32 million in the open market. As far as our capital expenditure program goes, we came out with an original budget in November of last year of $90 million for CapEx spending in '21. In March of this year, we increased that budget from $90 million to $120 million. And you can see from this slide, the majority of the budget is being spent on drilling and completing wells. So $78.5 million of that $120 million will go to drilling and completing wells. The facility component is a lot smaller this year than previous years. You can see in 2019 and 2020, the facility component of our program was large. A lot of it had to do with some spending in our property that we sold at Inga, but we were also busy at Wembley/Pipestone, building infrastructure, including oil batteries, gas compression and pipeline. And we are today, now connected to 3 different gas plants in the Wembley/Pipestone area. So a lot of that is now behind us. The $38 million you see in this year's budget will go towards building -- not all of it, but the majority of it will go towards building infrastructure in the Oak Montney property in B.C. And then after that, we expect the facility component to remain a smaller part of our total capital expenditures. The next slide shows you kind of what we have for wells already drilled. You'll notice there we have 5 wells that have already been drilled, completed and tested, are waiting tie-in. Three of these are at Wembley. Two of them are at Oak. And then we have another 2 Wembley wells that have been drilled, waiting on completion. We have 8 wells at Oak that are also drilled, waiting on completion. We have a Middle Montney well at Flatrock, which is just east of our Oak property, that is drilled awaiting completion; and we've just finished the drilling operations on 2 Spirit River wells in the Charlie Lake formation, which are now standing as DUCs. So pretty large inventory of wells, which means lots of production to come on later in 2021 and a good head start for production adds in 2022. For the rest of this year from May to December '21, we've got plans to drill and complete 3 Montney wells at Pouce Coupe. These will be kind of in the oilier part of the Pouce Coupe play. You would have seen in our March press release, we announced the commencement of production at -- from 2 gas wells at Pouce Coupe. Those wells are now on production. Both wells are producing in excess of 10 million cubic feet of gas per day per well. And these 3 new wells will be more in the oilier section. Then we have plans to drill and complete another well at Wembley, and we also have plans to drill 3 more wells at Wembley, which will remain uncompleted until 2022. As far as production goes, we are forecasting an average of 19,000 BOEs a day for this year. We will be relatively flat for the first 9 months of this year, sort of in that 17,500 to 18,500 range and then a pretty good little ramp-up in production in Q4 when the bulk of our new wells come on onstream. As far as commodity prices go, we're basically -- when we came out with our budget, we're basically using strip pricing. And for WTI, we're assuming about $59.95 average for the year. And for AECO gas, we're assuming USD 2.28 or CAD 2.89 as an average for the year. If you look at current prices, we're a little ahead on the oil price. Current spot prices in oil are in excess of $60 a barrel. And we're a little bit behind on gas prices. Current gas prices are around $2.60 NYMEX versus our forecast of $2.80. However, keep in mind, we had some pretty high gas prices in the first quarter related to the colder polar vortex type weather we had, so the average still looks quite achievable. As far as gas marketing goes, we have set up our portfolio so that the majority of our gas is now going to the Western Canadian markets. We're assuming about 55% to AECO, 10% to Station 2. We do have a longer-term contract at Dawn, where we're selling about 21 million a day of gas at -- in the Dawn market in Eastern Canada. And about 6% of our gas is forecasted to go to the Chicago market in 2021. As far as hedging goes, we're pretty much open for exposure after the third quarter of this year. We do have about 1/3 of our oil locked in until September of this year. And for the third quarter, it's an average price of CAD 70 per barrel. And we've also locked in the MSW-WTI differential, giving us a true hedge for our light oil. For gas, we are only hedged about 20% of our production, and it goes till October 2021. 2/3 of that contract is at NYMEX at CAD 4, and the remaining 1/3 is at AECO at $2.84 MMBtu. The sensitivities on our pricing, you'll notice that even though about 60% of our production is gas, a 10% move in the realized price of gas actually impacts cash flow less than a 10% move in liquids pricing. So if there was a 10% move in liquids pricing, cash flow would be affected by about $8.6 million for the year or 8% of cash flow. And if there was a 10% change in the price of gas, it would affect cash flow by $6.6 million or 6% of cash flow. As far as netbacks go, you'll see that netbacks in 2021 are forecasted to improve quite significantly from where we were in 2020, almost back to the same levels we were at in 2019. We are forecasting about $16.80 a BOE operating netback. The important thing to note about this slide is the 3 main cost components: royalties, transportation expense and production expense are expected to come down further from what we forecasted in '21 as we move into 2022. And part of the reason for that is on royalties, our new wells that are coming on at Oak forecasted to come on in October of this year. Initially, we'll come on at about 6% royalty under our royalty incentive program, and we've also applied for an infrastructure credit where we will get back 37% of about $49 million of infrastructure spending. And this credit -- and the infrastructure credits will reduce our royalties in future years, so we'll see a reduction in that 8.5% rate as we move forward. On the transportation side, the $3.20 a BOE assumes the gas marketing mix that I showed you earlier. As we add new production, a lot of the new gas production will go into the AECO and Station 2 markets, where transportation costs are about $0.27 an Mcf versus Dawn and Chicago, where they're probably closer to $1.25. And then the third cost component is operating expenses or production expense. We're forecasting this year at $9.60 a BOE. When the production comes on at Oak in the fourth quarter and when we add on the new Wembley well, we expect the per BOE numbers to come down and probably closer to $9 a BOE as we go forward and maybe better as well. So the next slide is just a snapshot of where we stand financially. At the end of '21, we are forecasting debt to be 0, working capital to be positive $7 million. So with that $120 million of CapEx, we'll reduce our working capital surplus from $26 million to $7 million but still remain debt free. And cash flow or adjusted funds from operations, as it's correctly called, will be $107 million or $0.56 a share. And this is now older information as we press released a lot of our reserve information back in February, but I'll just go over it quickly here. At the end of 2020, we ended up with a 20% increase in PDP reserves from what was a pro forma number in the previous year. And just to quickly explain the pro forma number, we basically took the 2019 numbers and adjusted it for the Inga assets that were sold during the -- during 2020. And we're comparing the reserves to the pro forma reserves that excludes Inga. So PDP was up 20%. Proved reserves were up 13%, and 2P reserves were up 12%. The mix remains around 42% liquids and 58% gas. The reserve report was run by a third-party independent engineering firm called Sproule & Associates (sic) [ Sproule Associates Limited ]. And Sproule, in their forecasted commodity prices, assume that WTI over the next 3 years would average USD 46, USD 48 and USD 53, so quite a bit lower than what we're actually seeing in the market right now. However, they also assumed a NYMEX price of $3 flat for the next 3 years, and NYMEX is trading probably around $2.60, $2.65 right now. As far as future development capital goes, being a big resource player and having these large Montney land positions, there is the ability to book 2P reserves based on future development capital. Kelt tends to be fairly conservative on its future development capital, and we like to book only about 5 years of future capital under the rules of the COGE Handbook, which governs how you run your reserve report. You could book much more future capital than we have, and you could book as much as 10 years' worth of capital. But regardless, with our 2P reserve case, we totally -- we currently have a total of 132 Montney locations booked as future capital, and we have 42 other type formations booked as locations as well. So in order to drill all of those wells, we would have to spend $927 million in the future over the next 5 years. FD&A, this is a bit of a confusing slide given the big disposition last year. We ended up spending $150 million of capital. However, we took back $504 million through dispositions, the majority of which was the -- well, all of it was the Inga disposition. And then we also reduced our future development capital by $1.5 billion as a result of the sale. So we had a negative capital cost number of $1.9 billion and we had negative reserves of 273,000 barrels, giving us an FDA&D cost of $6.89 a BOE, which would have equated to a 1.2x recycle ratio on the 2020 -- low 2020 netbacks. But looking forward to the '21 netbacks would have been about a 2.4x recycle ratio. So just to simplify what exactly happened with the sale of Inga, we've got this slide here, which excludes the Inga property. And looking at the PDP case, proved developed producing reserves, with the $150 million of CapEx spending, $81.7 million of that was actually spent at Inga. So if we adjust for that, only $68.3 million was spent on our remaining assets, and we added 10.7 million BOEs of reserves, giving us an FD&A cost, excluding Inga, of $6.40 a BOE. And using this year's forecasted operating netback of $16.83, that's a 2.6x recycle ratio. So that recycle ratio on PDP reserves would probably be top decile for comparative purposes to all the other companies that have reported publicly. I'll now turn it over to Dave, and he'll walk you through the rest of the presentation.

Yes. So after selling Inga last year, Kelt still remains one of the bigger Montney players in the basin. Right now, we've -- instead of having 4 main Montney plays, we've got 3: Oak/Flatrock, Pouce Coupe, Progress and Wembley/Pipestone. We've also got a drier gas producing property down at Grande Cache. So this slide gives you a pretty good idea, even though we've -- we're split between B.C. and Alberta, it's quite close. So the -- we've got 3 main Montney plays here. The B.C. Oak play, we've got 322 sections of Montney land. Alberta between Wembley and the Pouce Coupe, Progress, we've got 257 sections of Montney land. And we've also got 117 Charlie Lake sections between the Spirit River area and the Wembley area. So we've got a lot of inventory here, and even though we've sold Inga, we still have way more inventory than we have capital. So this slide, just more than anything, just demonstrates the amount of zones that you actually can develop in any one of these plays. For the most part, you're looking at 3 to 4 different layers here that you can develop. So it makes these lands, just increases the inventory as a result. Over in Wembley, there, we've actually drilled predominantly 2 of the zones. I think we've drilled 1 well in the third zone, and we'll actually drill a fourth zone there in the Lower Montney, which some of our -- the working -- or some of the industry parties around us have actually had very good luck in that Lower Montney. So we'll drill some wells in that probably next year or the year after. So starting over in Oak. This is a fairly new area for us. We bought most of the land in 2015, 2016, and we've drilled 2 wells on this property that have been on production for almost 3 years. The one down at 6-2 at the south end of the block and then 13-13 up in the northern end of the block amongst that cluster wells there, those 2 wells have been on for about 3 years. So we've got a real good understanding of production characteristics, liquid yields from those 2 wells. And then more recently, we drilled a well over on the west side, 16-6 and completed that and tested it and had quite similar production profile to what we're seeing at 13-13, specifically with liquid yields. So if you draw a line between those 3 points, you could see this development program that we've put in place and drilled is kind of within that triangle and it's biased to the north where we know it's oilier. So even though it's a very new area for us and for anybody, like there hasn't been a lot of Montney drilling out here, we have a fairly good confidence level just due to the 3 wells that I mentioned there. We're going -- we're building a facility at 6-35 starting here in early June and hope to have that up and going in September, along with the tie-in of these 10 wells. And we're budgeting to bring those wells on October 1. Lots of room here. We're going to McMahon with this production. And there's a big 16-inch line that we'll be delivering into. That should be good for in excess of 200 million a day and the plant -- I believe the plant is about a 600 million a day plant that's just slightly over half full there. So lots of room here to develop this play and bring on a bunch of more wells. These wells at today's commodity price, you're looking at pretty close to a 1-year payout on these, so very economic. Moving on to Alberta. At Pouce Coupe -- in the Pouce Coupe area, we've been drilling Montney and in the Progress area. And then over in Spirit River, we've started developing our Charlie Lake play. And then down at the bottom there is the Wembley play. And all of these, much like the Oak play, everything has economics right around a 1-year payout. So just about everything that we're drilling here, you're looking at very robust economics that pay out in less than a year. So jumping into Wembley/Pipestone. We've got -- we are the biggest player here from a land perspective. We've got 175 sections, and the well curves that we're seeing here are similar to Oak but oilier. So we're seeing some great economics on these wells. We've been able to bring our op cost down here as we bring more and more wells on. And we've got a huge inventory of wells on this block, and this inventory that we've got on this page, 885, doesn't include the Lower Montney or the D2 as well. So we've got -- as we develop this, this inventory is just going to continue to go up. And we feel we've delineated this play pretty well. The 9-4 well over in the eastern side of the block is a real key well. It shows that you've got good productivity over there. We'll be tying this well in along with the rest of the wells on that eastern part of the block in the first quarter of next year. And we'll also be drilling another 3 wells on this block this year that will get tied in at the same time. So that's going to be a key factor here not just from a production standpoint but from a delineation standpoint to get that data on these eastern wells that really helped to prove up that big block there. So the -- this is the D2 and D4, so that last slide was just the D3. And we started -- we were drilling these back early in Kelt and we had the 14-29 battery built up at the top of the page there. But since then, we've built the 11-31 battery and the 1-14 battery. And so we've got the 3 main batteries here now, and we think that will suffice for the foreseeable future but lots of capacity. And we've also pipelined all these batteries into 3 different plants and have a lot of interconnectivity so that we can go from plant to plant if one plant goes down. So it gives us a lot of flexibility in the future as we bring more production on here. So the good news here is most of the infrastructure money has been spent with the exception of that -- of 15 miles of pipe that will be ran in Q1 of next year to tie that Eastern block in. So this will turn into a development project, where we just started pad drilling probably just after we do that tie-in to the east there. So the other play that I'd mention was the Charlie Lake play. This is just a fantastic play. It's a little unlike the Montney in that it's a little more -- the pools are not continuous. So you'll find the pools in one township and you might have to skip a township and you hit another pool. So it's not as layer cake as the Montney but extremely good economics nonetheless. The Charlie Lake play that we're focusing on right now is up in Spirit River, and we drilled 2 wells in 3-1, both in the upper and the lower from the same pad, back almost 3 years ago. Those wells have been on, and since that time, the Lower Montney has actually paid out about 4x, so real robust economics here. We've just finished drilling 2 wells, 8-25 and 1-25. They've been rig released and the rig moved off. We'll probably complete those in the next month. And that will kind of book in this -- that middle pool that we know is very oily, and it'll pretty much kind of prove up all the land in between because we do have some vertical wells there that are also producing out of that play. So it'll really do a lot to kind of prove up that middle block. Over to the West, that's what we call Progress. And we drilled some Montney wells on there, but we have not drilled any Charlie Lake, but obviously, when you drill your Montney wells, you go through the Charlie Lake formation. So we're -- we realize that we have what looks to be a pretty good play over on those lands as well that we'll pursue maybe starting as early as next year. So I think from what we went through, you could see that we've got a huge inventory of land, both in the Montney and the Charlie Lake. The one thing that I'd say we could do is continue to increase capital here because with the payouts that we're seeing here now at today's oil and gas prices, makes real good sense to deploy as much capital as we possibly can and ramp production up. As far as the derisking goes, we've been able to derisk Wembley to a real good extent, we think. Oak is kind of the next one on the books that we'd like to get delineated and derisked. And then at that point, it just comes down to a development phase on all 3 areas. As Sadiq mentioned, our game plan is to divest of assets once we can realize their value. So to realize the value, what we need to do is have good delineation done of each property; and to do that, the more delineation wells we can drill and the more development wells we can drill just adds to the value there. So at some point, we do plan to sell these properties when the time is right. I think that wraps up the presentation. I don't think there's any questions. So we'll just leave it at that, and thanks for participating.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.