Kelt's Oak Dilemma (amateur hour)This is an amatuer hour opinion from someone who has never worked in oil and gas.
Oak EUR isn't very high compared to other drier plays but it has one thing they don't: a decent amount of oil.
But the play is not a good fit for Kelt for 5 reasons:
First, Kelt has pretty much only drilled in 1 township (6mi x 6mi) or 23,000 acres. They have 192,000 acres. It took them 4 years to drill 30 wells. They have 192,000 net acres. So given their size, it will take them a very long time to fully delineate this play.
Second, Kelt doesn't want/shouldn't take on too much debt lest control of the company passes to the banks. This means they have to allocate their capex judiciously. While Oak is a good play, Wembley is better - way more liquids. And while its now more or less fully delineated, its also in early stages. So there is an opportunity cost for Kelt to spend money at Oak - its money not spent at Wembley.
Third, Kelt is using a 3rd party plant (and oddly enough have committed for more processing capacity) which I believe is not a deep cut one (ie limited NGLs). (NGLs is a natural hedge against low natgas prices and basically no major operates with dry gas plants). At Enercom, Kel'ts CFO enunciated Kelt's strategy with Oak development: basically what they found was that the wells came online with a lot of oil initially such that the wells pay off in 15 months (no details provided). So that after 15 months, the remaining 80-85%? of the 1.3M EUR only has operating costs.
This is a good concept: you have less EUR (once well paid off) but if you run it properly your costs are going to be similar and you have a bit more liquids and of course your sustaining capital cost is zero (ARX in their Q2 results has laid out what the sustaining capital cost of their dry gas play is).
Problem with that is the comparables all operate their own deep cut plants. So for that Oak strategy to work, they'd have to have their own deep cut plant. Kelt doesn't. And to do so would cost a lot of $$$ and expertise they don't have either.
Fourth, Kelt has no expertise (or desire) in natural gas hedging (marketing is essentially SOP for small Western Canadian E&Ps). Which DOES NOT work in dry gas (which as we outlined in the 3rd point, is how Oak is setup to compete once the wells are paid off) in NA generally but even more so in Western Canada and even more so in BC. They also have no way IMO to participate in LNG (all the major natgas producers in NA are not on LNG head of contract much either). So the play on its own could conceivably be continuously in feast or famine mode.
Fifth, there is a lot of regulatory (treaty rights, etc) in BC, the royalty regime appears to be more complex as well. Which is fine for big companies but is a big burden on smaller companies. Historically, small E&Ps (Painted Pony, Storm, Crew, Kelt Inga) have ended up selling out (BC is also gassier which is a more difficult commodity environment to run a business compared to oil as a) you need to run your own deep cut plant and b) hedging is very important). As of this writing, only small players left that I know of in BC are Pacific Canbriam, Vermillion/Coelancth,and Kelt.
For all these reasons, Kelt should sell Oak at the opportune time which IMO is within the next 18 months. Meanwhile, don't subsidize its development from Alberta plays' cashflow, don't borrow to develop it and don't commit to any further 3rd party gas plant processing.