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

Hello, and welcome to the 2025 Annual and Special Meeting of Shareholders of Kelt Exploration Limited. Please note that this meeting is being recorded. It is my pleasure to introduce the President, Chief Executive Officer and a Director of Kelt Exploration, Mr. David Wilson. Mr. Wilson, the floor is yours.

Thank you. Good afternoon, ladies and gentlemen. Welcome to the meeting of the shareholders of Kelt Exploration Limited. My name is David Wilson, and I am the President, Chief Executive Officer and a Director of Kelt Exploration Limited, and I will assume the position of Chair for this meeting. I'm pleased to note that all of the Directors of the corporation have also joined us virtually today. In order to ensure that the meeting covers the required business in an efficient manner, we have prearranged with designated shareholders or proxyholders to move and to second the motions of business. 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 Nazim Nathoo 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 and the Directors of the company. I direct a copy of the proof of mailing, together with copies of documents mailed to shareholders be kept by the Secretary with the records of this meeting. With the consent of the meeting, the reading of the Notice of Meeting will be dispensed with. The bylaws of the corporation state that a quorum for the purposes of a meeting of shareholders is established based on 2 persons present and holding or representing by proxy at least 25% of the shares entitled to vote at the meeting. 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. During the formal portion of the meeting, only registered shareholders and duly appointed shareholders who have logged into the meeting using their control numbers provided by Odyssey Trust will be able to ask questions. During the Q&A portion of the meeting, these options will be made available to all attendees of the meeting. There are 2 ways for attendees to ask any questions that they may have using the chat function for written questions or verbally using the device that they have used to join this meeting. [Operator Instructions] You can refer to the virtual meeting guide posted on the documents page of this meeting platform. As this meeting is being held virtually via live webcast, we think it is necessary to set out a few rules for orderly contact or conduct. Questions will be addressed at the appropriate time during the meeting. Once discussion on all items of business has concluded, I will give you an additional minute to enter your votes. For the purposes of the meeting today, voting on all matters will be conducted by electronic ballot. Registered shareholders and duly appointed proxyholders who have properly logged in with their control numbers and wish to vote will be able to see on the screen all motions being brought forth at this meeting. 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 vote 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, 2024. 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, 2024, are hereby acknowledged. I direct that the financial statements and the auditor's report be annexed to the minutes of this meeting. Next item of business is to fix the 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. Are there any questions? I will now proceed with the next item of business. Next item of business is election of the Board of Directors.

I nominate Jennifer Haskey, William C. Guinan, Ray Kwan, Neil G. Sinclair, Janet E. Vellutini, 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: Jennifer Haskey, William C. Guinan, Ray Kwan, Neil G. Sinclair, Janet E. Vellutini and David J. Wilson be hereby elected as 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've heard the resolution. I will now proceed with the next item of business. The next item of business is the approval of an ordinary resolution authorizing amendments to the corporation's restricted share unit plan and the approval of all the unallocated entitlements thereunder, all as more particularly described in the corporation's management information circular prepared in connection with the meeting.

I move to approve an ordinary resolution authorizing amendments to the corporation's restricted share unit plan and the approval of all the unallocated entitlements thereunder, all as more particularly described in the corporation's management information circular prepared in connection with this meeting.

I second the motion.

You've heard the resolution. Are there any questions? I will now proceed with the next item of business. The next item of business is the approval of an ordinary resolution adopting the corporation's new performance share unit plan as more particularly described in the corporation's management information circular prepared in connection with the meeting.

I move to approve an ordinary resolution adopting the corporation's new performance share unit plan, all as more particularly described in the corporation's management information circular prepared in connection with this meeting.

I second the motion.

You've heard the resolution. Are there any questions? I will now proceed with the next item of business. The next item of business is the appointment of auditors.

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. Are there any questions? As there is no further discussion, we will proceed to provide registered shareholders and duly appointed proxyholders approximately 1 more minute to complete the electronic ballot. As a reminder, if you've 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. Once the electronic balloting closes, the voting page will disappear and your votes will be automatically submitted. I now declare the polls closed. I have been advised by the scrutineer that a sufficient number of votes were received to pass all of the resolutions before us today. 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 with the management presentation and Sadiq Lalani will start the presentation and do the first half.

Good afternoon, fellow shareholders, ladies and gentlemen. So for those of you that are not familiar with how Kelt got started back in 2013, we sold a company called Celtic Exploration for $3.2 billion to Exxon Corporation. Part of that transaction, we spun out about $140 million worth of assets into a SpinCo. That SpinCo became Kelt Exploration. The initial assets in the company were -- represented about 3,000 BOEs a day of production, about 85% of that was gas. And the 3 properties included in the initial formation of the company was a 40% interest in a Montney asset in BC called Inga, 16 sections of Montney lands in an area called Karr in Alberta and some dry gas in an area called Grande Cache. Fast forward to today, 2 of those assets have now been monetized. The Karr assets were sold in January 2017 for $100 million. And the Inga assets, which were consolidated to 100% in 2015 were ultimately sold in 2020 for just over $0.5 billion. Kelt's focus today is primarily on the Montney and Charlie Lake fairway. We have about 339,000 acres of Montney rights and approximately 87,000 acres of Charlie Lake rights. Our business plan in order to create value focuses on a 2x or better recycle ratio over a long period of time on a 2P and the Board are aligned with Kelt's shareholders through their significant equity ownership. The capital structure of the company is fairly simple. We have just under 199 million shares outstanding, just over $100 million, so fairly unleveraged on the balance sheet. For dilutive instruments, we do have another 9.6 million shares pursuant to stock options and RSUs, which represent only 4.8% of the outstanding stock, giving us a fully diluted number of just under 209 million shares. Directors and Officers of the company do own 18% of the stock outright and 20% diluted. And that stock ownership, in addition to shares that were owned at Celtic Exploration that got rolled over into Kelt, the Directors and Officers have been fairly active purchasing additional shares over the last 12 years. Just about every equity financing that the company issued, the insiders were a participant of. And in addition to that, we've spent close to $47 million buying stock in the open market. As we sit here today, the insiders do own 36.8 million shares or 19% of the shares outstanding. We came up with a CapEx budget here in January of 2025, looking to spend $328 million this year, slightly below the $333 million we spent last year. The focus this year is going to be on drilling and completing wells in 3 of our core properties, the Wembley/Pipestone division, the Pouce Coupe division and the Oak division in BC. We will spend another $97 million on equipment and facilities and pipeline and $22 million of other spending includes a $14 million 3D seismic shoot in BC in the Oak division. This program will see us drill 30.5 net wells and complete 33.5 wells. Most of this activity will happen in Alberta. As many people already know, LNG Canada, the big project on the West Coast should come online here midyear. And for the time being, Station 2 gas prices have been quite depressed. So we've got a pretty small program in BC this year. But we think when LNG Canada does come on, we'll see an improvement in Station 2 pricing, and we could ramp up our program in BC next year. As far as production goes, we are forecasting 44,000 to 48,000 BOEs a day as an average for the year. This would be a 40% increase if we use the midpoint number for that range from last year, where we averaged about 33,115 BOEs a day. During the first half of '25, production is expected to be in that 38,000 to 40,000 BOEs a day and then a big ramp-up in the second half of the year. And that ramp-up is basically production that we already have behind pipe. These are wells that have been drilled, completed and tied in, but are currently shut in, just waiting on a third-party gas plant. This gas plant is the CSV Albright gas plant in our Wembley/Pipestone division. And the owner-operator of the plant is expecting to bring this plant on in June of this year. After the plant comes on, we should be able to ramp up our production by about 8,000 to 10,000 BOEs a day just from gas that goes through that plant and associated liquids. This slide here just summarizes the content of our production. We're about 60 -- in 2024, we were about 63% gas, 37% oil and liquids. The oil and liquids are of a good quality netback. 26% of our production was light oil or condensate and 4% was condensate removed from the gas. Another 7% would be other liquids and 63% would have been dry gas. So with our 26% production being oil and actually 30% if you use the condensate from the gas that actually generated 97% of our cash flow last year. So moving on to commodity prices; we've seen a lot of volatility this year. During the first couple of months of the year, WTI oil averaged over $70 a barrel. And then with recent events globally in terms of expectations on tariffs from the U.S. and the impact it will have on oil demand and with OPEC+'s recent announcement to bring on shut-in production sooner than they had anticipated, we have seen WTI prices kind of move down to the low 60s. When we look at our sensitivities, a 10% move in the realized price of oil and liquids for Kelt would affect cash flow by about $35 million or 10%. On the other hand, gas prices have gone the other way. We've seen gas prices move a little bit higher than what we had forecasted here. And again, looking at the sensitivities on gas prices, a 10% move in the realized price of gas would affect our cash flow by $18.3 million or 5.3%. In order to provide some security on gas pricing, we have diversified our gas markets. If the operator could just move us to the next slide, please. There we go. So with gas market diversification, we've got -- we're anticipating to have about 61% of our production at the AECO hub, and then we have the rest of our gas in Dawn. We've transferred over some gas over to NYMEX Henry Hub, and we do have some gas at Chicago and Station 2 as well. So with the diversification of gas markets, we're able to realize a higher gas price than just being in one hub all the time. One of the big things that we've done over the last few years here is set ourselves up for pretty good growth here over the next few years. And in order to do that, other than having lots of inventory on the drilling front, we also need gas processing capacity. So a lot of our drilling brings on oil production, associated liquids. But in order to produce that oil, we do have to have a home for our gas. So looking at where our processing capacity was last year, about 167 million a day of processing in '23, which moved up to 187 million last year. During '25, with new gas plants coming on stream in both the Wembley/Pipestone division and the Pouce Coupe division, we will bring our processing capacity up to 297 million a day and looking to expand that to 322 million in '26 and up to 347 million a day in 2027. This gives us the ability to keep growing our production at significantly high rates. And the timing of these gas plants for 2025, I think I mentioned earlier, the CSV plant in Wembley/Pipestone is expected to come on in June. And we've got about 25 million a day of capacity at a new plant in Pouce Coupe called Gordondale West, which is expected to come on in May. So just to protect our capital program, we have entered into a few different hedging contracts. Some of the more significant ones include a NYMEX gas contract for 20 million a day for the remainder of the year at CAD 640. We have locked a piece of that with a basis differential deal to Dawn at CAD 0.63, which gives us a realized price of $5.70 at Dawn. And then we also have another 10 million a day on a collar for NYMEX gas at $5 by $10 MMBtu. On the oil side, we also have some good hedges in place. We've got about 1,000 barrels a day for the second quarter at CAD 106. And then for the remaining 9 months of the year, we also have 2,000 barrels a day at USD 69.66 combined with our currency hedge at CAD 137.95 that would give us CAD 96 for the WTI oil for the rest of the year. So moving on to our netbacks; we're looking at a netback of $21.75 BOE for '25, which would be an 11% improvement from last year. And G&A and interest expense still at a very low level compared to our peer group. So most of that netback goes right to the bottom line, giving us an adjusted funds from operations of $20.33 a BOE. As we move forward and expand our development drilling program, we think we'll see further improvements in our costs, currently forecasting about $9.90 a BOE for operating expenses, and those should come in a little bit lower and a very good competitive royalty rate of about 11% on our sales. So just to summarize, we are looking at sales in 2025 of about $671 million, a 43% improvement from last year and adjusted funds from operations based on the budgeted commodity prices of $345 million, 55% improvement from last year. We will review these commodity prices in May when we come out with our first quarter results. And if there is a need, we will make some adjustments to the guidance on adjusted funds from operations. But needless to say, we're running a fairly strong balance sheet of only $110 million of net debt by the end of '25, 0.3x debt to cash flow. So with that balance sheet in place, we feel the capital program, combined with the low leverage and our hedging contracts should be very doable at $328 million. As far as returns, over the last 3 years, we've averaged a 14.5% return on average capital employed. And as we kind of move on to a development style drilling program, we should see some more efficiencies and maintain these type of returns. We did come out with our reserves when we reported our year-end results in March. We had a 11% improvement in PDP reserves of 78.9 million BOEs and a 5% improvement in 2P reserves, moving us up to 435.2 million BOEs. The 2P reserves are split about 40% liquids and 60% gas. We replaced our production -- our 2024 production by 164% on a PDP basis and by 282% on a 2P basis. The independent evaluators also reflected the strong drilling inventory that we have. And in the future development capital, they have booked a total of 404 locations, future locations to be drilled. We would have to spend $2.8 billion to do that. Internally, we see even higher inventory. And over time, this higher inventory should work its way into the reserve report. So just to summarize the reserves, our FD&A costs for the last 3 years have averaged -- on a PDP basis have averaged about $13.67 a BOE, giving us a 1.9x recycle ratio on the last 3-year netbacks. And on a 2P basis, we've averaged $10.97 a BOE, giving us a 2.4x recycle ratio. As part of the reserve evaluation, there is a calculation on net asset value. And given the independent engineering report, which included a forecasted commodity prices for the average of 3 different consultants, the WTI price was forecasted to go from $71.58 this year to $79.22 by 2029, and NYMEX gas was forecasted to go from $3.31 in '25 to $4.01 in 2029. With these commodity prices, our proved reserves represented about $10.34 a share of net asset value before tax at 10% discount rate and the probable reserves adds another $6.32 per share. Adjusted for land and debt would give us a net asset value of about $16.85 a share. I will now turn over the floor to David Wilson for the operations part of the update.

Thanks, Sadiq. Yes, so Kelt is a pretty simple company. There's -- we operate in 3 divisions, Oak/Flatrock, PouceCoupe/Progress and Wembley/Pipestone. We're predominantly a Montney company. We do have some very good Charlie Lake inventory. I'll talk a little bit about that when we get into the division where we're doing drilling in that zone. But as Sadiq mentioned, we've got a gas plant that's coming on stream here hopefully in the next couple of months that allows us to increase that production substantially. Oak/Flatrock, it's going to be probably about a 10% bump by the end of the year, but we're going to be quite aggressive in Oak there next year because we think that with the new LNG terminal coming online on the West Coast that the gas market in BC is going to be quite good, and we'll drill into that uptick in gas prices. So this is pretty much a snapshot of the whole company across the BC Alberta border. Again, like I said, we've got Oak up in BC and PouceCoupe/Progress in the middle of the page and then down in the right-hand corner is our Wembley/Pipestone division. As I mentioned, very much a Montney company, got 531 sections of Montney and 137 sections of Charlie Lake, so lots of inventory. I think that's probably the takeaway from today that an investor should have is that we're very long inventory in both plays. So here's why -- we -- the industry really covets Montney play. So you can see here that we've got the Montney section. And within that Montney section, in some areas, you've got as many as 5 different intervals that are being developed. So much like the Permian in the U.S., you've got this extremely thick interval that you're able to put multiple -- develop multiple layers in. So it makes it a very efficient play to develop. And as a result, it's something that has gained a lot of popularity here in Canada. I should just point out to that note that in PouceCoupe, we've got areas where we've actually developed 5 different horizons in the Montney section. So like I say, it's -- it makes for a lot of inventory when we start adding up all the different zones. So starting over in Oak, big land block, 300 sections. We actually have just finished shooting a big 3D program over here. So up until now, we've only had a very small little postage stamp 3D along with a bit of 2D -- but we pretty much shot the west, not quite the west half, but almost the west half of this block. We just come across the first river to the east, just east of the point where it says 6-35. And we went all the way west over to the other side of the block. The few little pieces in there that we weren't able to shoot. But for the most part, it's a pretty thorough 3D that we were able to get in here and get done. Jumping over to Alberta; I should just mention on Oak. I know I mentioned before that we'd have an aggressive program next year. So the reason that we did bump -- the reason we bumped the program and only are drilling 4 this year in BC is the Station 2 pricing there is quite weak, and we expect it to be weak up until LNG Canada starts up. And then we actually expect that to flip around and gas that was normally going to AECO through one of the big lines there, it will actually flip around and you'll have AECO gas coming into the Station 2 market. We think that's going to make a premium market in Station 2. Just the very fact that you're bringing AECO into Station 2 should make Station 2 pricing slightly higher than AECO, which we think will be already high due to the extra takeaway on the West Coast there. So next year, expect 12 to 15 wells here. So getting back into Alberta here. So this is a slide of our Montney lands in Alberta. The upper stuff in Progress, Pouce Coupe doesn't look like a big land block, but it's a bit deceiving because we haven't included our Charlie Lake lands here. When you lay over the Charlie Lake lands, it becomes a much more contiguous block. And the nice thing about this area is we're able to use the infrastructure, whether it's compression, pipelines, batteries. We're able to use whether it's a Montney play or Charlie Lake play, we're able to go into the same infrastructure and use that. So it's quite efficient. And I'll get into Wembley in a further in one of the next slides. But Pouce Coupe/Progress here, just to continue on it. We've got 4 different gas plants that we are going to be producing to. I say going to be because the one plant is a new plant, Gordondale West. It's expected to come on stream actually in May. And we'll be taking another 25 million a day at that plant. So it allows us to bring on some new production here. We've got -- like I said, it's a pretty interesting area here because there's actually 3 different types of Montney plays here. There's a dry gas play, a quite oily play, and then there's one that's almost in between there, maybe 60 or 70 barrels per million. So we'll continue to drill this Montney play along with some of the Charlie Lakes that I'm going to show you that are in the same area. Jumping down to Wembley. So what we're showing here is our Wembley block, about 172 sections net. And the red dots that you see are actually pads. So significantly more wells on here than what you're seeing as dots. So what we've done here is we went in and we -- I think we did a really good job of delineating the entire land block. So we're to the point now where you can point at any one of the green lands, and we should be able to tell you what sort of well you should get out of any particular layer in the Montney and what sort of liquid yields, what sort of productivity. So to that end, we've been able to go in here and develop this quite efficiently because we've been able to go in and put our infrastructure in place so that it's set up for full development mode. And you could see we've got the '25 budget. And with that, we're planning to spend -- it's going off memory, but I better not -- drill 19 wells. Now 4 of these will probably drill at the end of the year so that if something happens unforeseen on the commodity side, we can always pull it out of the budget if need be. But that's what our budget is here. So you can see we're growing this property quite quickly. So as I mentioned, with the delineation, we've been able to go in and build all our infrastructure in a way that allows us to go in and develop this at a fairly quick pace. So we've determined what kind of maximum flows would be through the pipelines, what we're going to need for batteries, what we need for compression. And for the most part, that's -- most of that's in place. Really, all we have to do is continue to add some compression as we bring on new wells, maybe a little more water injection and a few little -- small little tie-ins to this main infrastructure. So all the heavy lifting has been done, and we're at a point that where we can go to full development on this Wembley property. So I mentioned I'd get back on into the Pouce Coupe progress area with Charlie Lake. Like I said before, if you layer this land block of Charlie Lake overlay it over the Montney, you come up with a pretty nice, fairly contiguous land block. And to that end, we've started to drill up a lot of the Charlie Lake stuff that we've been putting off. This year, we've got 10 wells in the budget. Now again, like Wembley, we've got a couple of wells that we will push off towards the end of the year so that you can always -- if anything happens unexpected on the commodity front and you want to pull back on your capital a little bit, you can do that and push those into next year if need be. But right now, we've got 10 wells planned in the Charlie Lake. Two of those actually are down in Wembley/Pipestone, and they're already drilled and completed and on stream. So yes, other than that, the one thing I'd say about the Charlie Lake is just it's a really economic play for us that's quite oily. It pulls -- in most cases it pulls our oil content corporately up a bit because most of these wells are quite oily. And as a result, very good economics. So I won't belabor this slide too much other than I just should point out again that we're a very -- Kelt's [ think ] that's good. You see the U.S. we're kind of the exact opposite. We've got a lot of inventory that we could put a lot of capital to work on as we get more and more cash flow. So I think I'll leave that -- leave it at that and any questions? Doesn't sound like we've got any questions. So I think we'll just leave at that. And thank you for attending the meeting and presentation. And I guess we'll see you next year.