Kelt Exploration Ltd T.KEL

Kelt's Oak Dilemma (amateur hour)

[PabloLafortune]

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.

[gassygeezer]

Having been in oil/gas longer than Wilson etal, i concur with your valid points, Pablo you''re no amatuer either!  My hands on experience with operated and 3rd party deep cut facilities is they often sit back and bleed you dry, then pounce opportunistically/cyclically(CNQ/Shell.IOR/CVE)...as for thousands of acres in a play worth x$per acre.. i simply discount that until dilineation

[PabloLafortune]

My guess is if a transaction were to happen now, what buyers would want is Wembley. Oak would be a throw in or Kelt would develop on their own.(...). By the way, as of 12/31/23, Wembley may have 50% more oil/conde than Crew, which is before adding that 3rd bench and the partial Charlie Lake bench there. Wild Wild guess, Wembley 2P oil reserves could reach 100M barrels @ 12/31/24.   As

[gassygeezer]

  RLI, is a good test, until price decks crash, then it's debt repayment  and covering/G&A while hoping, in kelts case investors stay longer, much longer  Kelts Oak strategy is perplexing but this Team always looks ahead to their future, perhaps they plan to sell the jewel with minimal exploitation/high romance and during interim allocate capital to their Teams Oak

[MyHoneyPot]

Oak might be perplexing to us, but the way i look at it is this.  INGA was a great play and they sold it at the bottom of the market for 530 million when there was a commodity crash.  I know the company that bough INGA and their view of the asset and it was a major and they had a long term view for the asset, they were not looking at short term gas prices.  OAK is one township

[gassygeezer]

Crew at 7.05 vs kelt 6.20ish why didn't Tou take Kelt instead as you stated Crew had"fair weather economics"? Inga was a forced sale of their best asset due incompetent financial stewardship/debt as they filed for covid benefits vs the usual selling options to supplement their income...1 twp away, rulerology hasn't worked since Cardium verticals in the 80's...learn about

[MyHoneyPot]

It looks like TOU is not going to make any major investments in the short term. Crew has a lot more debt than Kelt. Kelt has significantly higher liquids ration, and is worth a lot more.  Kelt suggest that they will exit 2024 at 50,000 boe/day 60% higher than Crew Crew/Talisman land block has be highly perspective since talisman owned them, and has never lived up to the potential hype

[gassygeezer]

You suck and blow simultaneously and lack sufficient oxygen to articulate 

[MyHoneyPot]

I am here to make money, and i really don't care what other people say that much.  Look at Sundance owned by ARX, they spent like 100 million dollars to increase dry gas capacity/electrify plant/ on a postage stamp play that was suppose to have the best economics on the planet is now shut in. So i only believe in common sense, all Crews assets are NOW in maintenance and TOU is not

[Trapped]

The harder you pump, the more desperate and dishonest you appear.  And I'm glad ARX still lives rent-free inside your head. You were dead wrong and still can't keep it out of your mouth. What does that say about you? The temporary shut-in was the right thing to do in a brutal price enviroment, and it won't impact total production.  Maybe time to give your head a shake...

[PabloLafortune]

You make a couple of interesting points. First, David Wilson's time horizon. Yeah if he's willing to wait 5-10 years before selling Oak, then surely he can wait 3-4 years for Wembley.  I'm not as patient so I choose - sell Oak now so that Wembley can be sold in 3-4.  The 2nd important point is Mike Rose and Crew. Crew mgmt to me had an emotional attachment to Groundbirch, it

[MyHoneyPot]

The is so much dry gas in Canada the gas market could easily be destroyed if they companies don't show discipline.  My thoughts are if they don't have reasonable liquids associated with the gas, they dry gas should be shut in to maintain a $2 dollar price at AECO. Promoting the production of more valuable liquids.  MHP IMHO

[longrun86]

My view is that the only way these companies show discipline regarding shareholder capital is if shareholders are clear that companies that don't show discipline are not provided with capital! Say what you will about Eric Nuttal but he has been very public about this. I am on the fence about share buybacks but the message of "return capital to shareholders" seems to be a requirement

[PabloLafortune]

Probably better to hedge than expect everyone else to show discipline.  If that Gas Alberta data is correct- AECO ~$3/GJ for Q4 and ~$3.40 for Q1 - I'm definitely booking 50% for Q4 '24 and Q1 '25. Pretty sure Pouce Coupe West is proftable at those prices as would be Oak. You still have full upside on 50% of production. AECO outlook is better than HH IMO.  AECO has LNG