ANNUAL REPORT
AS AT AND FOR THE YEAR ENDED
DECEMBER 31, 2020
[THIS PAGE IS INTENTIONALLY BLANK]
FINANCIAL AND OPERATIONAL HIGHLIGHTS
Three months ended December 31
Year ended December 31
(CA$ thousands, except as otherwise indicated)
2020
2019
%
2020
2019
%
FINANCIAL
Petroleum and natural gas sales
Cash provided by operating activities
Adjusted funds from operations (1)
Basic ($/ common share) (1)
Diluted ($/ common share) (1)
41,961
3,288
10,758
0.06
0.06
97,763
35,396
46,655
0.25
0.25
-57
-91
-77
-76
-76
207,156
59,279
58,832
0.31
0.31
394,356
162,488
182,521
0.99
0.99
-47
-64
-68
-69
-69
Profit (loss) and comprehensive income (loss)
26,018
(2,628)
-1090
(324,807)
6,572
-5042
Basic ($/ common share)
Diluted ($/ common share)
Total capital expenditures, net of dispositions
Total assets
Net bank debt (surplus) (1)
Convertible debentures
Shareholders' equity
Weighted average shares outstanding (000s)
Basic
Diluted
OPERATIONS
Average daily production
Oil (bbls/d)
NGLs (bbls/d)
Gas (mcf/d)
Combined (BOE/d)
Production per million common shares (BOE/d) (1)
Average realized price, before financial instruments (1)
Oil ($/bbl)
NGLs ($/bbl)
Gas ($/mcf)
Operating netbacks ($/BOE) (1)
Petroleum and natural gas sales
Cost of purchases
Average realized price, before financial instruments (1)
Realized gain (loss) on financial instruments
Average realized price, after financial instruments (1)
Royalties
Production expense
Transportation expense
Operating netback (1)
Total landholdings
Gross acres
Net acres
Reserves – proved plus probable
Crude oil and liquids (mbbls) (2)
Gas (mmcf)
Combined (mBOE)
0.14
0.14
(0.01)
-1500
(0.01)
-1500
(1.73)
(1.73)
0.04
0.04
-4425
-4425
24,470
63,983
759,987
1,605,465
(26,261)
328,080
-
82,789
603,684
923,062
-62
-53
-108
-100
-35
(353,957)
315,624
759,987
1,605,465
(26,261)
328,080
-
82,789
603,684
923,062
188,551
189,270
184,763
185,108
2
2
188,093
188,093
184,302
184,946
4,057
2,722
58,179
16,476
87
50.30
22.42
2.91
27.69
(1.28)
26.41
(2.51)
23.90
(2.13)
(9.54)
(3.83)
8.40
9,900
4,888
98,844
31,262
169
63.25
21.01
2.95
33.99
(1.35)
32.64
(0.11)
32.53
(1.25)
(9.09)
(3.54)
18.65
800,270
1,053,445
579,764
819,557
75,619
216,324
618,975
1,467,941
178,782
460,981
-59
-44
-41
-47
-49
-20
7
-1
-19
-5
-19
2182
-27
70
5
8
-55
-24
-29
-65
-58
-61
7,057
4,161
82,646
24,992
133
40.80
15.04
2.33
22.65
(0.92)
21.73
0.99
22.72
(1.13)
(9.56)
(3.62)
8.41
9,361
4,490
96,658
29,961
163
66.94
20.62
3.26
36.06
(1.53)
34.53
34.45
(1.76)
(9.18)
(4.62)
18.89
800,270
1,053,445
579,764
819,557
75,619
216,324
618,975
1,467,941
178,782
460,981
(0.08)
-1338
-212
-53
-108
-100
-35
2
2
-25
-7
-14
-17
-18
-39
-27
-29
-37
-40
-37
-34
-36
4
-22
-55
-24
-29
-65
-58
-61
(1) Refer to advisories regarding non-GAAP financial measures and other key performance indicators.
(2) “Liquids” include field condensate and NGLs.
KELT EXPLORATION LTD.
1
2020 ANNUAL REPORT
MESSAGE TO SHAREHOLDERS
Kelt Exploration Ltd. (“Kelt” or the “Company”) reports its financial and operating results to shareholders for the fourth
quarter and year ended December 31, 2020.
The energy sector experienced a tumultuous year in 2020 that began with the unprecedented impact to global oil
demand destruction resulting from the COVID-19 pandemic, as well as excess oil supplies, as many oil producing
nations ramped up oil production as they sought to gain global market share.
Kelt was pro-active and took several initiatives to preserve shareholder value during a period of economic uncertainty
including cost-cutting measures, financial hedge contracts, production shut-ins and application to certain government
programs.
On August 21, 2020, Kelt completed the sale of its Inga/Fireweed/Stoddart Division (the “Inga Assets”) for net cash
proceeds of $503.9 million. Proceeds from the sale of the Inga Assets were directed towards re-payment of outstanding
amounts under the Company’s syndicated credit facility and towards the redemption of Kelt’s outstanding convertible
debentures, leaving the Company with a positive working capital position at December 31, 2020.
Average production for the three months ended December 31, 2020 was 16,476 BOE per day, down 47% compared
to average production of 31,262 BOE per day during the fourth quarter of 2019. Daily average production in the fourth
quarter of 2020 was 7% higher than pro-forma (excluding production related to the Inga Assets) production of 15,444
BOE per day for the fourth quarter of 2019.
Kelt’s 2020 fourth quarter production exceeded its previous guidance for the quarter by 17% as the Company brought
on-stream two Wembley/Pipestone wells earlier than anticipated. Production for the three months ended December 31,
2020 was weighted 41% to oil and NGLs and 59% to gas.
Kelt’s realized average oil price during the fourth quarter of 2020 was $50.30 per barrel, down 20% from $63.25 per
barrel in the fourth quarter of 2019. The Company’s realized average NGLs price during the fourth quarter of 2020 was
$22.42 per barrel, up 7% from $21.01 per barrel in the fourth quarter of 2019. Kelt’s realized average gas price for the
fourth quarter of 2020 was $2.91 per MCF, down 1% from $2.95 per MCF in the fourth quarter of 2019.
For the three months ended December 31, 2020, revenue was $42.0 million and adjusted funds from operations was
$10.8 million ($0.06 per share, diluted), compared to $97.8 million and $46.7 million ($0.25 per share, diluted)
respectively, in the fourth quarter of 2019. At December 31, 2020, Kelt had no bank debt and a working capital surplus
of $26.3 million compared to net bank debt of $328.1 million and outstanding convertible debentures of $89.9 million at
December 31, 2019.
Net capital expenditures incurred during the three months ended December 31, 2020 were $24.5 million, down 62%
compared to net capital expenditures of $64.0 million during the fourth quarter of 2019. During the fourth quarter of
2020, the Company spent $16.5 million on drill and complete operations and $7.3 million on equipment, facilities and
pipelines.
As at December 31, 2020, Kelt’s net working interest land holdings were 579,764 acres (906 sections). Kelt is focused
on long-term value creation by accumulating significant land acreage on resource style plays, with a primary focus on
the Triassic Montney oil and liquids-rich gas plays. At December 31, 2020, Kelt’s net Montney land holdings were
370,564 acres (579 sections). In addition, Kelt holds 74,714 net acres (117 sections) in the Triassic Charlie Lake play
in Alberta.
At Oak/Flatrock, Kelt currently has two Montney wells that have been drilled, completed and tested and eight additional
wells that have been drilled and are awaiting completion. The Company expects to construct a gas compression and
oil battery facility at Oak during the third quarter of 2021 and expects to bring on production, ten new wells during
October 2021.
At Pouce Coupe, Kelt drilled two high deliverability Montney gas wells during the fourth quarter of 2020 and
subsequently, in early 2021, the Company completed and tied-in both wells. The two wells have initially come on-
stream at a combined rate in excess of 20.0 MMcf per day. The Company has an inventory of 32 additional locations
on its high deliverability gas land block at Pouce Coupe West.
At Wembley/Pipestone, Kelt currently has three Montney wells that have been drilled, completed and tested and two
additional wells that have been drilled and are awaiting completion (“DUCs”). The Company expects to complete the
two DUCs and tie-in the wells by mid-year 2021.
KELT EXPLORATION LTD.
2
2020 ANNUAL REPORT
In anticipation of rising steel prices and given the upcoming completion programs, both at Oak and at Wembley, Kelt
has pre-purchased casing and line pipe in order to mitigate higher capital costs.
Kelt has actively reduced its exposure to rental equipment in all of its areas of operation in an effort to reduce future
operating expenses. Kelt is committed to its goal of being a low-cost producer.
With the strong performance in crude oil pricing, Kelt has revised its 2021 outlook and guidance. The Company has
changed its 2021 forecasted average commodity prices to reflect current futures strip pricing as follows: WTI crude oil
prices are expected to average US$59.95 per barrel, up 56% from the previous forecast of US$38.50 per barrel; and
NYMEX Henry Hub natural gas prices are expected to average US$2.82 per MMBtu, down 9% from the previous
forecast of US$3.10 per MMBtu. The Company will continue to monitor commodity prices and expects to provide
updated 2021 guidance, if necessary, by mid-year.
Kelt has increased its 2021 capital expenditure program to $120.0 million, up by 33% or $30.0 million from its previous
guidance. Production in 2021 is forecasted to average 19,000 BOE per day, up by 9% or 1,500 BOE per day from the
Company’s previous guidance. Adjusted funds from operations are forecasted to be $107.0 million in 2021, up by 61%
or $40.5 million from Kelt’s previous forecast. Kelt does not plan to have any bank debt at December 31, 2021. The
Company’s working capital surplus position is expected to be $7.0 million at the end of 2021, up by 75% or $4.0 million
compared to the Kelt’s previous forecast.
Kelt expects to report to shareholders its 2021 first quarter results on or about May 6, 2021.
On behalf of the Board of Directors,
[signed]
David J. Wilson
President and Chief Executive Officer
March 11, 2021
KELT EXPLORATION LTD.
3
2020 ANNUAL REPORT
MANAGEMENT’S DISCUSSION & ANALYSIS
Kelt Exploration Ltd. (“Kelt” or the “Company”) is an oil and gas company based in Calgary, Alberta, focused on the
exploration, development and production of crude oil and natural gas resources in Western Canada. Kelt’s business
plan is for long-term profitable growth by implementing a full cycle exploration and development program, with emphasis
on low-cost land accumulation with the potential for high rates of return on capital invested. Kelt has an active
exploration and development drilling program that it may complement with acquisitions and dispositions that optimize
its asset base.
three core operating divisions, namely:
The Company was incorporated under the Business Corporations Act (Alberta) on October 11, 2012. Kelt’s assets are
comprised of
(2) Pouce
Coupe/Progress/Spirit River in Alberta; and (3) Oak/Flatrock in British Columbia. The Company’s British Columbia
assets are operated by Kelt Exploration (LNG) Ltd. (“Kelt LNG”), a wholly owned subsidiary of Kelt. The head office of
the Company is located at Suite 300, 311 - 6th Avenue S.W., Calgary, Alberta T2P 3H2. The Company’s common
shares are listed on the Toronto Stock Exchange (“TSX”) under the symbol “KEL”. In the fourth quarter of 2020, all
outstanding 5% convertible debentures of the Company were redeemed, with the convertible debentures being delisted
from trading on the TSX effective October 5, 2020. Additional information relating to Kelt can be found on SEDAR at
www.sedar.com.
(1) Wembley/Pipestone
in Alberta;
This Management’s Discussion and Analysis (“MD&A”) is dated March 11, 2021 and should be read in conjunction with
the Company’s audited consolidated annual financial statements and related notes as at and for the year ended
December 31, 2020. The accompanying financial statements have been prepared in accordance with International
Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”). The
Company’s Board of Directors approved and authorized the consolidated annual financial statements for issue on
March 11, 2021.
GENERAL ADVISORY
This MD&A uses “funds flow”, “adjusted funds from operations”, “annualized quarterly adjusted funds from operations”,
“funds flow per common share”, “netback”, “operating netback”, “Kelt revenue”, “operating income”, “net bank debt
(surplus)”, “total revenue”, “average realized prices”, “net bank debt (surplus) to annualized quarterly adjusted funds
from operations ratio”, “working capital deficiency (surplus)”, “net debt (surplus) to cash flow”, “finding, development
and acquisition”, “recycle ratio”, “net asset value” and “net asset value per common share” which do not have
standardized meanings prescribed by generally accepted accounting principles (“GAAP”) and therefore may not be
comparable to similar measures presented by other companies where similar terminology is used. For further
information and reconciliation to Canadian generally accepted accounting principles “GAAP” measures, see “Non-
GAAP Financial Measure and Other Key Performance Indicators” in this MD&A.
This MD&A contains forward-looking information within the meaning of applicable Canadian securities laws. The use
of and of the words “will”, “expects”, “believe”, “plans”, potential”, “forecasts” and similar expressions are intended to
identify forward-looking statements. Such forward-looking information is based upon certain expectations and
assumptions and actual results may differ materially from those expressed or implied by such forward-looking
information. For further information regarding the forward-looking information contained herein, including the
assumptions underlying such forward-looking information, see “Advisories Regarding Forward-Looking Statements” in
this MD&A.
BASIS OF PRESENTATION
All dollar amounts are referenced in thousands of Canadian dollars, except when noted otherwise. This MD&A contains
various references to the abbreviation BOE which means barrels of oil equivalent. Where amounts are expressed on a
BOE basis, natural gas volumes have been converted to oil equivalence at six thousand cubic feet per barrel and
sulphur volumes have been converted to oil equivalence at 0.6 long tons per barrel. The term BOE may be misleading,
particularly if used in isolation. A BOE conversion ratio of six thousand cubic feet per barrel is based on an energy
equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the
wellhead and is significantly different than the value ratio based on the current price of crude oil and natural gas. This
conversion factor is an industry accepted norm and is not based on either energy content or current prices. Such
KELT EXPLORATION LTD.
4
2020 ANNUAL REPORT
abbreviation may be misleading, particularly if used in isolation. References to “oil” in this MD&A include crude oil and
field condensate. References to “natural gas liquids” or “NGLs” include pentane, butane, propane, and ethane.
References to “liquids” include field condensate and NGLs. References to “gas” include natural gas and sulphur.
COVID-19
On January 30, 2020 the World Health Organization (“WHO”) declared a Public Health Emergency of International
Concern for a novel coronavirus strain which was later named COVID-19. By March 2020, the WHO declared the
COVID-19 a pandemic with governments around the world imposing significant public health measures in order to
reduce its spread. The COVID-19 pandemic resulted in an unprecedented global crude oil demand reduction in 2020
which in turn significantly lowered the average global benchmark crude oil price in 2020. Positive vaccine development
along with temporary production curtailments from OPEC+ and non-OPEC nations, resulted in a recovery in crude oil
prices in the second half of 2020. However, potential delays in the rollout of global vaccination programs and the
emergence of new COVID-19 variants, remains a risk to the continued length of the pandemic and the extent of the
impact on the global economy and crude oil prices.
FINANCIAL AND OPERATING SUMMARY
(CA$ thousands, except as otherwise indicated)
2020
2019
%
2020
2019
%
Three months ended December 31
Year ended December 31
FINANCIAL PERFORMANCE
Petroleum and natural gas sales
Cash provided by operating activities
Adjusted funds from operations (1)
Diluted ($/ common share) (1)
Profit (loss) and comprehensive income (loss)
Diluted ($/ common share)
Total capital expenditures, net of dispositions
Net bank debt (surplus) (1)
41,961
3,288
10,758
0.06
26,018
0.14
24,470
97,763
35,396
46,655
0.25
-57
-91
-77
-76
207,156
59,279
58,832
0.31
394,356
162,488
182,521
0.99
-47
-64
-68
-69
(2,628)
-1090
(324,807)
6,572
-5042
(0.01)
-1500
(1.73)
0.04
-4425
63,983
-62
(353,957)
(26,261)
328,080
-108
(26,261)
315,624
328,080
-212
-108
OPERATIONAL PERFORMANCE
Average daily production (BOE/d)
Average realized price, before financial instruments (1)
Average realized price, after financial instruments (1)
Operating netback (1)
16,476
31,262
26.41
23.90
8.40
32.64
32.53
18.65
Reserves – proved plus probable (mboe)
178,782
460,981
(1) Refer to advisories regarding non-GAAP financial measures and other key performance indicators.
-47
-19
-27
-55
-61
24,992
29,961
21.73
22.72
8.41
34.53
34.45
18.89
178,782
460,981
-17
-37
-34
-55
-61
Kelt’s key financial and operating results in 2020 are highlighted by the following:
• On August 21, 2020, Kelt completed the disposition of its Inga Assets (the “Inga Asset Disposition”) for
consideration of $503.9 million after closing adjustments. Kelt’s 2020 financial and operating results include
the Inga Assets until the closing of the disposition on August 21, 2020.
• Proceeds of the Inga Asset Disposition were primarily used to repay the Company’s outstanding bank debt
and redeem all outstanding convertible debentures resulting in a positive working capital surplus of $26.3
million as at December 31, 2020.
•
•
The fourth quarter of 2020 was the first full quarter after the sale of the Inga Assets and production averaged
16,476 BOE per day (41% oil/NGLs).
The COVID-19 pandemic resulted in an unprecedented global crude oil demand reduction in 2020 which in
turn significantly lowered the average benchmark crude oil price in 2020. Kelt’s average realized price before
financial instruments of $21.73 per BOE for the year ended December 31, 2020 and $26.41 per BOE for the
fourth quarter of 2020 was 37% and 19% lower, respectively, than the comparable periods in 2019.
KELT EXPLORATION LTD.
5
2020 ANNUAL REPORT
• Petroleum and natural gas sales for the year ended December 31, 2020 was $207.2 million and for the fourth
quarter of 2020 was $42.0 million, down 47% from the year ended December 31, 2019, and down 57% from
the fourth quarter of 2019.
• Kelt’s operating netback of $8.41 per BOE for the year ended December 31, 2020 and $8.40 per BOE for the
quarter ended December 31, 2020 decreased by 55% for both comparable periods in 2019.
• Adjusted funds from operations of $58.8 million during the year ended December 31, 2020 ($0.31 per share,
diluted) and $10.8 million during the fourth quarter of 2020 ($0.06 per share, diluted), decreased 68% and
77% from the comparable periods in 2019.
•
Fourth quarter capital expenditures, prior to minor acquisitions and dispositions, were $24.2 million, which
focused on drilling 5.0 net wells (three at Wembley and two at Pouce Coupe) and 2.0 net completions at
Wembley.
•
The Company reported oil and gas reserves as at December 31, 2020:
o Proved developed producing reserves of 29.6 million BOE (34% oil and NGLs);
o Total proved reserves of 96.0 million BOE (40% oil and NGLs); and
o Total proved plus probable reserves of 178.8 million BOE (42% oil and NGLs).
PRODUCTION
(CA$ thousands, except as otherwise indicated)
2020
2019
%
2020
2019
%
Three months ended December 31
Year ended December 31
Average daily production:
Oil (bbls/d)
NGLs (bbls/d)
Gas (mcf/d)
Combined (BOE/d)
Oil and NGLs weighting
4,057
2,722
58,179
16,476
41%
9,900
4,888
98,844
31,262
47%
-59
-44
-41
-47
-13
7,057
4,161
9,361
4,490
82,646
96,658
24,992
29,961
45%
46%
-25
-7
-14
-17
-3
Average production for the three months and year ended December 31, 2020 decreased 47% and 17%, respectively,
over the comparative periods in 2019, primarily due to the Inga Asset Disposition. The fourth quarter of 2020 is the first
full quarter following the closing of the Inga Asset Disposition. For the three months ended December 31, 2019,
production from the Inga Assets was 15,818 BOE per day.
Oil and NGLs weighting of total production decreased in 2020 to 41% during the fourth quarter and 45% for the year,
versus the 47% and 46% in the comparable periods in 2019.
KELT EXPLORATION LTD.
6
2020 ANNUAL REPORT
REVENUE
All references to revenue in this discussion are before royalties.
(CA$ thousands, except as otherwise indicated)
2020
2019
%
2020
2019
%
Three months ended December 31
Year ended December 31
Revenue, before royalties and financial instruments:
Oil
NGLs
Gas
Revenue, before marketing
Marketing revenue (2)
Total revenue (1)
Cost of purchases (3)
Kelt Revenue (4)
18,761
5,615
15,768
40,144
1,817
41,961
(1,938)
40,023
57,503
9,449
27,081
94,033
3,730
97,763
(3,890)
93,873
-67
-41
-42
-57
-51
-57
-50
-57
105,316
226,875
22,904
33,796
71,932
110,409
200,152
371,080
7,004
23,276
207,156
394,356
(8,303)
(16,740)
198,853
377,616
-54
-32
-35
-46
-70
-47
-50
-47
(1) Petroleum and natural gas sales as reported in the consolidated financial statements is abbreviated as “total revenue”.
(2) Sales of third-party volumes related to the Company's oil blending operations and natural gas activities.
(3) Cost of third-party volumes purchased for use and resale in the Company's oil blending operations and natural gas activities.
(4) "Kelt Revenue" is a non-GAAP measure and includes petroleum and natural gas sales, net of the cost of the third-party volumes purchased.
Revenue before marketing for the fourth quarter of 2020 was $40.1 million, a decrease of 57% from $94.0 million from
the fourth quarter of 2019. Revenue before marketing for the twelve months ending December 31, 2020 was $200.2
million, down 46% from the comparable period in 2019.
The decrease in revenue was driven by lower combined average realized pricing and lower production volumes. Kelt’s
average realized prices decreased 19% in the fourth quarter of 2020 and 37% in the twelve months ending December
31, 2020 versus the comparable period in 2019. Compared to the prior period in 2019, production decreased 47%
decrease in the fourth quarter of 2020 and 17% for the twelve months ending December 31, 2020. The decrease in
production is due to the Inga Asset Disposition.
Kelt Realized Prices
(CA$ thousands, except as otherwise indicated)
2020
2019
%
2020
2019
%
Three months ended December 31
Year ended December 31
Average realized prices before financial instruments (1)
Oil ($/bbl)
NGLs ($/bbl)
Gas ($/mcf)
Combined ($/BOE)
50.30
22.42
2.91
26.41
63.25
21.01
2.95
32.64
-20
7
-1
-19
40.80
15.04
2.33
21.73
66.94
20.62
3.26
34.53
-39
-27
-29
-37
(1) Average realized prices are calculated based on Kelt Revenue and reflect Kelt’s realized commodity prices plus the net benefit of oil blending and
natural gas marketing activities. Refer to additional information under the heading of “Non-GAAP Financial Measures and Other Key Performance
Indicators”.
KELT EXPLORATION LTD.
7
2020 ANNUAL REPORT
Benchmark Prices
(CA$ thousands, except as otherwise indicated)
2020
2019
%
2020
2019
%
Three months ended December 31
Year ended December 31
Average benchmark prices
Oil and NGLs
WTI Cushing Oklahoma (US$/bbl) (1)
WTI Cushing Oklahoma (CA$/bbl) (1)
Mixed Sweet Blend Edmonton (“MSW”) ($/bbl) (2)
Edmonton Pentane (3)
Edmonton Butane (3)
Edmonton Propane (3)
Edmonton Ethane (3)
Natural Gas
NYMEX Henry Hub (US$/MMBtu) (4)
NYMEX Henry Hub (CA$/MMBtu) (4)
AECO 5A (CA$/MMBtu) (4)
Chicago-City Gate (CA$/MMBtu) (6)
Dawn (CA$/MMBtu) (4)(5)
Malin (CA$/MMBtu) (6)
Sumas (CA$/MMBtu) (6)
Station 2 (CA$/MMBtu) (4)(5)
42.45
55.26
50.23
55.86
19.33
16.32
7.33
2.66
3.46
2.64
3.00
2.93
3.81
4.62
2.54
56.96
75.18
68.00
74.95
40.93
26.88
6.87
2.49
3.29
2.47
2.88
2.95
3.50
5.54
1.49
Average exchange rate (CA$/US$) (7)
1.3030
1.3200
-25
-26
-26
-25
-53
-39
7
7
5
7
4
-1
9
-17
70
-1
39.24
52.30
45.34
49.85
21.87
16.31
6.20
2.08
2.77
2.23
2.51
2.49
2.87
3.10
2.18
56.98
75.62
69.19
71.39
23.71
17.16
6.31
2.62
3.47
1.76
3.20
3.19
3.54
5.04
1.02
1.3412
1.3268
-31
-31
-34
-30
-8
-5
-2
-21
-20
27
-22
-22
-19
-38
114
1
(1) Source: U.S Energy Information Administration, Canadian dollar equivalent price WTI price (“CA$WTI”) is calculated based on the monthly average
US dollar WTI price and the monthly average CA$/US$ exchange rate (7).
(2) Source: Tidal Energy Marketing.
(3) Source: Sproule Associates Limited.
(4) Source: Canadian Gas Price Reporter converted to CA$/MMBtu using monthly average CA$/US$ exchange rate (7).
(5) Source: ICE NGX (US$/MMBtu) converted to CA$/MMBtu using monthly average CA$/US$ exchange rate (7).
(6) Source: Platts (US$/MMBtu) converted to CA$/MMBtu using monthly average CA$/US$ exchange rate (7).
(7) Source: Bank of Canada.
Average realized prices decreased 19% to $26.41 per BOE and 37% to $21.73 per BOE in the three months and twelve
months ending year ended December 31, 2020, respectively, versus the comparable periods in 2019. The decrease in
realized prices was primarily due to a decrease in benchmark oil and NGLs prices which was offset by an increase in
Canadian natural gas prices.
Oil prices
Benchmark WTI crude oil prices decreased 31% for the year ended December 31, 2020 from the 2019 average price,
as global crude oil demand was impacted due to the COVID-19 pandemic. However, by the end of 2020, crude oil
prices had partially rebounded due to positive vaccine developments and continued production curtailments from
OPEC+ countries, with the benchmark WTI crude oil price in the fourth quarter of 2020 averaging 25% lower than the
fourth quarter of 2019.
NGL prices
NGLs prices are impacted both by benchmark WTI prices, as well as localized market supply and demand issues.
For the year ended 2020, Kelt’s realized NGLs price decreased 27% as compared to the year ended 2019, primarily
due to a decrease in benchmark WTI prices. However, in the fourth quarter 2020, Kelt’s realized NGLs prices increased
7% as compared to the fourth quarter of 2019, primarily due to Kelt’s realized NGLs prices in the fourth quarter of 2019
being depressed as compared to benchmark Edmonton butane and propane prices.
KELT EXPLORATION LTD.
8
2020 ANNUAL REPORT
Natural gas prices
Canadian AECO 5A and Station 2 natural gas benchmark prices increased in 2020 as compared to 2019. Canadian
natural gas fundamentals improved due to a combination of increased Alberta natural gas demand, improved storage
injections, and higher pipeline exports when compared to historical five year averages.
The US natural gas benchmark price indices declined at the beginning of 2020, primarily due to higher than normal
storage levels from a warm 2019 winter, followed by demand concerns in 2020 due to the COVID-19 pandemic.
However, by the fourth quarter of 2020, the significant reduction in North American shale oil drilling activities (and
associated natural gas production) combined with record US LNG exports at the end of 2020 resulted in an increase
to both US and Canadian natural gas benchmark price indices.
Kelt actively manages its natural gas marketing portfolio in order to maximum its netbacks. Starting in the fourth quarter
of 2019, Kelt began reducing its exposure to US natural gas markets and increasing its exposure to AECO 5A and
Station 2 as the fundamentals for Canadian natural gas prices improved. In the fourth quarter of 2020, Kelt’s natural
gas sold at US indices comprised of approximately 52% of natural gas sales compared to approximately 75% in the
fourth quarter of 2019. For the year ended December 31, 2020 Kelt’s natural gas sales at US indices comprised of
approximately 60% of natural gas sales, compared to approximately 95% in 2019.
Kelt’s realized natural gas price decreased by 1% to $2.91 per MCF in the fourth quarter of 2020 compared to the fourth
quarter of 2019, and decreased by 29% in the year ended December 31, 2020 from the comparable period in 2019.
The decrease in realized natural gas prices in 2020 was offset by lower transportation costs as the Company increased
its exposure to AECO 5A and Station 2.
RISK MANAGEMENT AND HEDGING ACTIVITIES
The Company may enter into fixed price contracts and derivative financial instruments for commodity prices, currency
exchange and interest rates in order to secure future cash flows or to protect a desired level of capital spending. Fair
value accounting for derivative financial instruments may cause significant fluctuations in the reported amounts of
derivative financial instrument assets and liabilities and the resultant magnitude of unrealized gains and losses.
The table below summarizes realized and unrealized gains (losses) on risk management contracts:
(CA$ thousands, except as otherwise indicated)
Realized gain (loss)
Unrealized gain (loss)
Gain (loss) on derivative financial instruments
$ per BOE
Commodity price risk
Three months ended December 31
Year ended December 31
2020
(3,806)
3,925
119
0.08
2019
%
2020
2019
%
(304)
1152
9,913
(912)
-1187
(3,996)
(4,300)
(1.50)
-198
-103
-105
3,767
(4,902)
13,680
(5,814)
1.49
(0.53)
-177
-335
-381
Inherent to the business of producing oil and gas, the Company’s cash provided by operating activities is subject to
commodity price risk. Commodity price risk is the risk that future cash flows will fluctuate as a result of changes in
commodity prices. Commodity prices are impacted by world economic events that dictate the levels of supply and
demand as well as the currency exchange rate relationship between the Canadian and US dollar.
As at March 10, 2021, the following commodity price risk management contracts are outstanding:
Contract Type(1)(2)(3)
Crude oil derivative contracts
WTI fixed price swap
WTI fixed price swap
WTI fixed price swap
WTI-MSW basis swap
Notional Volume
Contract Price
Remaining Term
1,500 bbl/d
1,500 bbl/d
1,500 bbl/d
1,500 bbl/d
CAD$56.17/bbl
CAD$58.52/bbl
CAD$70.00/bbl
Jan – Mar 2021
Apr – Jun 2021
Jul – Sep 2021
WTI less USD$4.55 per bbl
Apr – Sep 2021
KELT EXPLORATION LTD.
9
2020 ANNUAL REPORT
Contract Type(1)(2)
Notional Volume
Contract Price
Remaining Term
Natural gas derivative contracts
NYMEX fixed price swap
10,000 MMBtu/d
CAD$4.00/MMBtu
AECO 5A fixed price swap
5,000 GJ/d
CAD$2.70/GJ
Jan – Oct 2021
Jan – Oct 2021
(1) West Texas Intermediate (“WTI”)
(2) NYMEX Henry Hub (“NYMEX”)
(3) Mixed Sweet Blend (“MSW”)
ROYALTIES
(CA$ thousands, except as otherwise indicated)
Royalties
Average royalty rate (1)
$ per BOE
Three months ended December 31
Year ended December 31
2020
3,224
8.0%
2.13
2019
%
2020
2019
3,606
-11
10,354
19,301
3.8%
111
1.25
70
5.2%
1.13
5.2%
1.76
%
-46
-
-36
(1) Average royalty rate is calculated based on total royalties as a percentage of “Revenue, before marketing” which excludes revenue related to the sale
of third-party production volumes used in oil blending operations (see table under the heading of “Revenue”).
Kelt’s average royalty rate was 8.0% during the fourth quarter of 2020, compared to 3.8% during the fourth quarter of
2019. Kelt’s average royalty rate for the twelve months ended December 31, 2019 remained consistent at 5.2% as
compared to the year ended December 31, 2019.
The increase in the royalty rate in the fourth quarter of 2020 compared to the fourth quarter of 2019 is primarily due to
a gas cost allowance adjustment in Alberta, and overall higher royalties in 2020 due to fewer wells eligible for deep well
deductions.
In 2020, Kelt recognized a $1.2 million ($0.9 million in 2019) royalty credit from the BC Infrastructure Royalty Credit
Program. The credit is applied against royalties as they are incurred, resulting in a lower average royalty rate when
compared to the same period in 2019.
PRODUCTION EXPENSES
(CA$ thousands, except as otherwise indicated)
Production expense
$ per BOE
Three months ended December 31
Year ended December 31
2020
14,460
9.54
2019
26,143
9.09
%
-45
5
2020
2019
87,447
100,384
9.56
9.18
%
-13
4
Fourth quarter production expenses in 2020 decreased 45% compared to the same period in 2019. Production
expenses for the year ended December 31, 2020 decreased by 13% compared to the year ended December 31, 2019.
The decrease in production expenses in 2020 was primarily a result of less assets, which were sold as part of the Inga
Asset Disposition.
On a per BOE basis, production expenses per BOE increased 5% in the fourth quarter of 2020, and increased 4% for
the year ended December 31, 2020 versus the comparable periods in 2019. The increase was primarily due to higher
gas processing costs, and slightly higher costs in Alberta compared to the assets disposed of as part of the Inga Asset
Disposition. This was partially offset by cost savings initiatives and a reduction in field activities implemented in 2020
as a result of the COVID-19 pandemic.
KELT EXPLORATION LTD.
10
2020 ANNUAL REPORT
TRANSPORTATION EXPENSES
(CA$ thousands, except as otherwise indicated)
Transportation expense (1)
$ per BOE
Three months ended December 31
Year ended December 31
2020
5,807
3.83
2019
10,195
3.54
%
-43
8
2020
2019
33,155
50,516
3.62
4.62
%
-34
-22
(1) Pipeline tariffs are classified as transportation expenses when the Company has firm commitments or contractual arrangements on the pipeline.
Pipeline tariffs may also be incurred indirectly by way of deduction from the base price paid by the purchasers of the Company’s oil, NGLs and gas sales.
In the latter case, and in the absence of a firm contractual obligation on the pipeline, the pipeline tariffs are presented as a reduction of revenue rather
than as transportation expense.
Transportation expenses averaged $3.83 per BOE during the fourth quarter of 2020, an increase of 8% from $3.54 per
BOE in the fourth quarter of 2019. The increase was primarily due to one time costs as the Company rationalized its
transportation commitments following the Inga Asset Disposition.
Transportation expenses averaged $3.62 per BOE during the twelve months ending December 31, 2020, a decrease
of 22% from $4.62 per BOE in the twelve months ended December 31, 2019. Commencing in the fourth quarter of
2019, the Company began reducing its natural gas exposure to US natural gas markets, while increasing its exposure
to AECO 5A and Station 2 prices. This has resulted in a significant reduction in transportation commitments and
transportation costs that are required to ship natural gas to US markets.
FINANCING EXPENSES
Three months ended December 31
Year ended December 31
(CA$ thousands, except as otherwise indicated)
2020
Interest on bank debt
Fees on bank debt
Interest on convertible debentures
Interest on finance lease
Interest on financing liability
Total interest expense
Accretion of convertible debentures
Accretion of decommissioning obligations
Total financing expense
Interest expense per BOE (1)
Average principal amount outstanding during period:
Bank debt (3)
Convertible debentures
Average total principal amount of debt outstanding
Average interest rates:
Bank debt (2) (3)
Convertible debentures (3)
36
9
37
22
-
104
-
324
428
0.07
NA
1,955
1,955
NA
NA
2019
2,988
240
1,134
32
34
%
-99
-96
-97
-31
-100
4,428
-98
1,159
-100
718
6,305
1.54
-55
-93
-95
2020
7,047
713
3,399
148
1,200
2019
9,833
782
4,496
165
%
-28
-9
-24
-10
104 1054
12,507
15,380
3,640
1,892
4,399
2,994
18,039
22,773
1.37
1.41
298,793
-100
201,287
249,910
89,910
388,703
-98
-99
67,801
89,910
269,088
339,820
4.0%
5.0%
-100
-100
3.5%
5.0%
3.9%
5.0%
-19
-17
-37
-21
-3
-19
-25
-21
-10
-
(1) Interest expense used in the calculation of “Interest expense per BOE” includes interest and fees on bank debt and accrued cash interest on
convertible debentures.
(2) Average interest rate excludes fees on bank debt which include bank commitment, standby and guarantee letter fees.
(3) In the fourth quarter of 2020, Kelt did not have any outstanding bank debt and redeemed all outstanding convertible debentures.
On August 21, 2020, the Company repaid the outstanding amount on its revolving committed term credit facility resulting
in a decrease of 19% in the average bank debt outstanding during and decrease of 21% in total interest expense for
the year ended December 31, 2020 as compared to the year ended December 31, 2019.
Additional information regarding the credit facility and debentures is provided under the heading of “Capital Resources
and Liquidity”.
KELT EXPLORATION LTD.
11
2020 ANNUAL REPORT
GENERAL AND ADMINISTRATIVE (“G&A”) EXPENSES
The following table summarizes significant components of the Company’s G&A expenses:
(CA$ thousands, except as otherwise indicated)
Salaries and benefits
Other G&A expenses
Gross G&A expenses
Overhead recoveries
Net G&A expenses
Gross G&A ($ per BOE)
Net G&A ($ per BOE)
Three months ended December 31
Year ended December 31
2020
2,036
809
2,845
(993)
1,852
1.88
1.22
2019
2,554
1,400
3,954
(1,477)
2,477
1.37
0.86
%
-20
-42
-28
-33
-25
37
42
2020
7,154
4,586
11,740
(4,418)
7,322
1.28
0.80
2019
10,340
4,949
15,289
(6,400)
8,889
1.40
0.81
%
-31
-7
-23
-31
-18
-9
-1
Net G&A expenses for the fourth quarter of 2020 was $1.9 million compared to $2.5 million in the prior year. On a per
BOE basis, the Inga Asset Disposition resulted in an increase in G&A per BOE as production decreased at a higher
rate than the reduction in the Company’s G&A expenses.
For the year ended December 31, 2020, net G&A, decreased 18% as compared to the same period in 2019 which is
largely due to a decrease in employee compensation and recoveries related to the federal government’s Canada
Emergency Wage Subsidy program.
G&A expenses are reported net of overhead recoveries; however, Kelt does not capitalize any direct G&A expenses.
SHARE BASED COMPENSATION (“SBC”)
(CA$ thousands, except as otherwise indicated)
Stock options
Restricted share units (“RSUs”)
Total SBC expense
$ per BOE
Three months ended December 31
Year ended December 31
2020
525
230
755
0.50
2019
898
559
1,457
0.51
%
-42
-59
-48
-2
2020
2,945
2,208
5,153
0.56
2019 %
4,152
2,707
6,859
0.63
-29
-18
-25
-11
The decrease in SBC expense during the quarter and year ended December 31, 2020 compared to the same periods
in 2019 is primarily due increased forfeitures of unvested stock options, fewer restricted shares units issued in recent
periods and the lower Black-Scholes value associated with recent option grants.
As at December 31, 2020, stock options and RSUs outstanding represent 5.5% of total shares outstanding (December
31, 2019 – 5.8%).
EXPLORATION AND EVALUATION (“E&E”) EXPENSES
(CA$ thousands, except as otherwise indicated)
Impairment and expiry of mineral leases
$ per BOE
Three months ended December 31
Year ended December 31
2020
256
0.17
2019
4,182
1.45
%
-94
-88
2020
3,219
0.35
2019 %
5,055
0.46
-36
-24
E&E expense was $0.3 million for the quarter ended December 31, 2020 and $3.2 million in the year ended December
31, 2020, compared to E&E expense of $4.2 million and $5.1 million in the comparative periods in 2019. The E&E
expense relates to the expiry and impairment of undeveloped land.
KELT EXPLORATION LTD.
12
2020 ANNUAL REPORT
DEPLETION, DEPRECIATION AND IMPAIRMENT
Three months ended December 31
Year ended December 31
(CA$ thousands, except as otherwise indicated)
2020
2019
Depletion and depreciation
Impairment
Total depletion, depreciation and impairment
Depletion and depreciation ($/BOE)
Impairment ($/BOE)
18,032
39,389
-
-
18,032
39,389
11.90
13.70
-
-
%
-54
-
-54
-13
-
2020
2019
%
112,623
156,396
-28
336,500
-
-
449,123
156,396
187
12.31
36.79
14.30
-14
-
-
The Company calculates depletion of development and production (“D&P”) assets based on production relative to total
proved reserves for each depletion unit. Depletion and depreciation expense of $18.0 million for the quarter ended
December 31, 2020 decreased by 54% from $39.4 million in the comparable period in 2019. Depletion and depreciation
expense for the year ended December 31, 2020 decreased 28% as compared to the prior year. The decrease was
primarily due to the sale of the Inga Assets, which were classified as Assets Held for Sale as of June 30, 2020 and not
depleted in the third and fourth quarter.
As at December 31, 2020 Kelt assessed its CGU’s for indicators of impairment or impairment reversals as compared
to its last impairment taken in the first quarter of 2020. Based on a recovery of commodity prices since March 31, 2020
and an increase in reserves for the year ended December 31, 2020 compared to December 31, 2019, the Company
determined that there were potential indicators of impairment reversals for the Alberta CGU. For the BC CGU, Kelt
determined that there were no potential indicators of impairment as at December 31, 2020.
Recoverable amounts for the Alberta CGU as of December 31, 2020 were estimated based on FVLCD methodology
which is calculated using the present value of the CGUs’ expected future cash flows (after-tax). The cash flow
information was derived from a report on the Company’s oil and gas reserves which was prepared by an independent
qualified reserve evaluator, Sproule Associates Limited (“Sproule”) as of December 31, 2020. The projected cash flows
used in the FVLCD calculation reflect market assessments of key assumptions as at December 31, 2020, including
forecasts of commodity prices, inflation rates, and foreign exchange rates (Level 3 fair value inputs). Cash flow forecasts
were based on Sproule’s December 31, 2020 evaluation of the Company’s reserves to determine production profiles
and volumes, operating costs, royalties, maintenance and future development capital expenditures. Future cash flow
estimates were discounted using after-tax risk-adjusted discount rates. The after-tax discount rate applied in the
impairment calculation as at December 31, 2020 was 16.0% and was based on the risks specific to the assets in the
CGU. As at December 31, 2020, the net carrying amount of PP&E, less decommissioning obligations, for the Alberta
CGU was $446.8 million.
Based on the results of the impairment test as at December 31, 2020 and continued economic uncertainty with the
COVID-19 pandemic, no impairment or impairment reversals were recorded for the Alberta CGU.
The recoverable amounts estimated pursuant to FVLCD calculations are sensitive to the discount rate and future
commodity price assumptions. As at December 31, 2020, holding all other variables in the FVLCD calculation constant:
o
o
if the discount rate increased (decreased) by 1%, the FVLCD of the Alberta CGU would decrease by
$28.7 million and increase by $31.3 million; and
if the forecast combined average realized price decreased (increased) by 5%, the FVLCD of the Alberta
CGU would decrease by $75.1 million and increase by $75.1 million.
Forecast future prices used in the impairment evaluation as at December 31, 2020 reflect the benchmark prices set-
forth in the tables below, adjusted for basis differentials to determine local reference prices, transportation costs and
tariffs, heat content and quality.
KELT EXPLORATION LTD.
13
2020 ANNUAL REPORT
As at December 31, 2020
WTI Cushing Oklahoma (US$/bbl)
Canadian Light Sweet 40 API ($/bbl)
NYMEX Henry Hub (US$/MMBtu)
AECO-C Spot ($/MMBtu)
(1) Prices escalate between 1.7%-2.5% in years 2026 to 2030
As at December 31, 2019
WTI Cushing Oklahoma (US$/bbl)
Canadian Light Sweet 40 API ($/bbl)
NYMEX Henry Hub (US$/MMBtu)
AECO-C Spot ($/MMBtu)
Exchange rate (CA$/US$)
(1) Prices escalate at 2-3% after 2024
2021
46.00
54.55
3.00
2.86
2020
60.25
71.58
2.57
2.05
2022
48.00
57.14
3.00
2.78
2021
63.11
75.33
2.79
2.32
2023
53.00
63.64
3.00
2.69
2022
66.02
77.51
2.99
2.60
2024
54.06
64.91
3.06
2.75
2023
67.64
79.77
3.15
2.74
2025(1)
55.14
66.21
3.12
2.80
2024(1)
69.16
81.60
3.22
2.82
1.3158
1.2987
1.2500
1.2500
1.2500
In the first quarter of 2020, as a result of the COVID-19 pandemic and a resulting collapse in global crude oil prices, an
impairment test was conducted over all Kelt's CGUs. Based on the impairment test performed on the Alberta CGU, it
was determined that the carrying value was in excess of the recoverable amount resulting in an impairment loss of
$77.1 million (before-tax). The impairment was primarily a result of a decrease in forecast crude oil prices as at March
31, 2020 compared to forecast prices as at December 31, 2019.
Recoverable amounts for each CGU as of March 31, 2020 were estimated based on FVLCD methodology which is
calculated using the present value of the CGUs’ expected future cash flows (after-tax). The cash flow information was
derived from a report on the Company’s oil and gas reserves which was prepared by an independent qualified reserve
evaluator, Sproule Associates Limited (“Sproule”) as of December 31, 2019, with the information rolled forward to March
31, 2020. The projected cash flows used in the FVLCD calculation reflect market assessments of key assumptions as
at March 31, 2020, including long-term forecasts of commodity prices, inflation rates, and foreign exchange rates (Level
3 fair value inputs). Cash flow forecasts were based on Sproule’s December 31, 2019 evaluation of the Company’s
reserves to determine production profiles and volumes, operating costs, maintenance and future development capital
expenditures. Future development capital was moved forward one year from the December 31, 2019 Sproule reserve
evaluation due to deferrals of the Company’s capital program as of March 31, 2020. The decrease in commodity prices
from December 31, 2019 resulted in the removal of wells which were previously economic in the December 31, 2019
Sproule report. Future cash flow estimates were discounted using after-tax risk-adjusted discount rates. The after-tax
discount rate applied in the impairment calculation as at March 31, 2020 was 12.0% and was based on the risks specific
to the assets in the CGUs. As at March 31, 2020, the net carrying amount of PP&E, less decommissioning obligations,
for the Alberta CGU was $463.5 million subsequent to the impairment taken.
As at March 31, 2020, holding all other variables in the FVLCD calculation constant:
o
o
if the discount rate increased (decreased) by 1%, the impairment of the Alberta CGU would decrease by
$28.5 million and increase by $31.3 million; and
if the forecast combined average realized price decreased (increased) by 5%, the impairment of the
Alberta CGU would decrease by $51.4 million and increase by $63.4 million.
Forecast future prices used in the impairment evaluation as at March 31, 2020 reflect the benchmark prices set-forth
in the tables below, adjusted for basis differentials to determine local reference prices, transportation costs and tariffs,
heat content and quality.
As at March 31, 2020
WTI Cushing Oklahoma (US$/bbl)
Canadian Light Sweet 40 API ($/bbl)
NYMEX Henry Hub (US$/MMBtu)
AECO-C Spot ($/MMBtu)
2020
30.00
29.72
2.08
1.78
2021
41.18
47.20
2.54
2.22
2022
49.88
59.66
2.79
2.42
2023
55.87
67.00
2.92
2.54
2024(1)
57.98
69.92
2.99
2.61
KELT EXPLORATION LTD.
14
2020 ANNUAL REPORT
(1) Prices escalate between 1.8%-3.1% in years 2025 to 2030
On August 21, 2020, the Company completed the disposition of the Inga Assets, which comprised the majority of the
Company’s BC CGU assets. In the second quarter of 2020, the BC CGU was impaired by $259.4 million (before-tax)
based on the transaction value contained in the Inga Asset Disposition purchase and sale agreement.
GAIN (LOSS) ON SALE OF ASSETS
(CA$ thousands, except as otherwise indicated)
Gain (loss) on sale of assets
Three months ended December 31
Year ended December 31
2020
(1,175)
2019
899
%
-231
2020
2019
%
(4,751)
6,902
-169
On August 21, 2020, Kelt completed the disposition of its Inga Assets, for consideration of $503.9 million after closing
adjustments and transaction costs. The Inga Assets had a carrying value of $511.0 million, resulting in a loss on sale
of $7.1 million.
FLOW-THROUGH SHARES
(CA$ thousands, except as otherwise indicated)
Premium on flow-through shares
2020
-
2019
-
%
-
2020
2019
1,346
-
%
-
Three months ended December 31
Year ended December 31
Management has issued common shares on a “flow-through” basis which are typically issued at a premium to the
market price of the Company’s common shares. The premium received by the Company in excess of the fair value of
its common shares at the time of the offering, is initially deferred and subsequently recognized in income as the premium
is earned by incurring qualifying capital expenditures.
Canadian tax legislation permits entities meeting specified criteria to issue flow-through common shares securities
(“FTS”) to investors whereby the deductions for tax purposes related to eligible expenditures may be claimed by the
investors rather than by the entity. As of December 31, 2020, all eligible expenditures have been incurred for the
Company’s flow through shares issued in 2019.
INCOME TAXES
Three months ended December 31
Year ended December 31
(CA$ thousands, unless otherwise indicated)
2020
2019
%
2020
2019
%
Deferred income tax (expense) recovery
Profit (Loss) before taxes
Effective tax recovery rate
31,879
(5,861)
775
4013
88,308
(2,835)
-3215
(3,403)
72
(413,115)
9,407
-4492
543.9%
22.8%
2288
21.4%
30.1%
-29
Kelt did not recognized any deferred tax assets in the first nine months of 2020 due to uncertainty regarding future
taxable income. Due to improving commodity prices, in the fourth quarter of 2020, Kelt recognized a deferred tax asset
of $31.9 million resulting in an effective tax rate of 544%.
Kelt does not expect to pay income taxes in the current year as the Company had sufficient income tax deductions
available to shelter taxable income. The Company’s consolidated tax pools are estimated to be approximately $714.6
million as of December 31, 2020, a decrease of 40% from December 31, 2019 as summarized in the table below. The
decrease was primarily a result from the Inga Asset Disposition.
KELT EXPLORATION LTD.
15
2020 ANNUAL REPORT
(CA$ thousands, unless otherwise indicated)
Canadian oil and gas property expenses (COGPE)
Canadian development expenses (CDE)
Canadian exploration expenses (CEE)
Undepreciated capital cost (1) (UCC)
Share and debt issue costs
Non-capital losses (2) (NCL)
Estimated tax deductions available, end of period
Rate
10-15%
30-45%
100%
25-37.5%
5 years
100%
December 31
December 31
%
2020
87,273
81,882
53,859
179,396
588
314,630
717,628
2019
115,792
254,985
109,508
264,870
1,805
437,754
1,184,714
-25
-68
-51
-32
-67
-28
-39
(1) The majority of the Company’s undepreciated capital cost deductions relate to Class 41 assets, which are deductible at a rate of 25-37.5% per year.
(2) The Company’s non-capital losses expire in years 2039 to 2040.
ADJUSTED FUNDS FROM OPERATIONS
The following table provides a continuity of income and expenses included in the Company’s calculation of operating
income and adjusted funds from operations generated during the three months and year ended December 31, 2020
and 2019 respectively.
THREE MONTHS ENDED DECEMBER 31TH
(CA$ thousands, unless otherwise indicated)
Petroleum and natural gas sales
Cost of purchases
Realized loss on financial instruments (1)
Royalties
Revenue, after royalties and financial instruments
2020
41,961
(1,938)
(3,806)
(3,224)
32,993
Amount
2019
97,763
(3,890)
%
-57
-50
(304)
1152
(3,606)
89,963
Production expense
Transportation expense
Operating income/netback (2)
Financing expense (3)
G&A expense
Realized loss on foreign exchange
Other income/expense
Adjusted funds from operations (2)
Basic ($ per common share) (4)
Diluted ($ per common share) (4)
Common shares outstanding (000s):
Basic, weighted average
Diluted, weighted average
(14,460)
(26,143)
(5,807)
(10,195)
12,726
(104)
(1,852)
(140)
128
53,625
(4,428)
(2,477)
(65)
-
10,758
46,655
0.06
0.06
0.25
0.25
188,551
184,763
189,270
185,108
-11
-63
-45
-43
-76
-98
-25
115
-
-77
-76
-76
2
2
$/BOE
2019
33.99
(1.35)
(0.11)
(1.25)
31.28
(9.09)
(3.54)
18.65
(1.54)
(0.86)
(0.02)
-
16.23
%
-19
-5
2182
70
-30
5
8
-55
-95
42
350
-
-56
2020
27.69
(1.28)
(2.51)
(2.13)
21.77
(9.54)
(3.83)
8.40
(0.07)
(1.22)
(0.09)
0.08
7.10
(1) Includes realized gains (losses) on commodity price and foreign exchange derivatives.
(2) Refer to advisories regarding non-GAAP financial measures and other key performance indicators.
(3) Excludes non-cash accretion of decommissioning obligations and convertible debentures.
(4) Adjusted funds from operations (3) per common share is calculated on a consistent basis with profit (loss) per common share, using basic and diluted
weighted average common shares as determined in accordance with GAAP.
During the three months ended December 31, 2020, adjusted funds from operations of $10.8 million ($0.06 per share,
diluted) decreased by 77% from $46.7 million ($0.25 per share, diluted) comparable period in 2019. The decrease in
adjusted funds from operations is primarily attributed to a 76% decrease in operating income.
KELT EXPLORATION LTD.
16
2020 ANNUAL REPORT
YEAR ENDED DECEMBER 31TH
(CA$ thousands, unless otherwise indicated)
Petroleum and natural gas sales
Cost of purchases
Amount
2020
2019
207,156
394,356
(8,303)
(16,740)
%
-47
-50
Realized gain (loss) on financial instruments (1)
9,048
(912)
-1092
Royalties
(10,354)
(19,301)
Revenue, after royalties and financial instruments
197,547
357,403
Production expense
Transportation expense
Operating income/netback (3)
Financing expense (4)
G&A expense
Realized gain on financial instruments (2)
Realized loss on foreign exchange
Other income/expense
Adjusted funds from operations (3)
Basic ($ per common share) (5)
Diluted ($ per common share) (5)
Common shares outstanding (000s):
Basic, weighted average
Diluted, weighted average
(87,447)
(100,384)
(33,155)
(50,516)
76,945
206,503
(12,507)
(15,380)
(7,322)
(8,889)
865
(28)
879
-
(275)
562
58,832
182,521
0.31
0.31
0.99
0.99
188,093
184,302
188,093
184,946
-46
-45
-13
-34
-63
-19
-18
-
-90
56
-68
-69
-69
2
2
$/BOE
2019
36.06
(1.53)
%
-37
-40
(0.08)
-1338
(1.76)
32.69
(9.18)
(4.62)
18.89
(1.41)
(0.81)
-
-36
-34
4
-22
-55
-3
-1
-
(0.03)
-100
0.05
16.69
100
-61
2020
22.65
(0.92)
0.99
(1.13)
21.59
(9.56)
(3.62)
8.41
(1.37)
(0.80)
0.09
-
0.10
6.43
(1) Includes realized gains (losses) on commodity price and foreign exchange derivatives.
(2) Includes realized gains (losses) on cash premium on financial instruments and interest rate derivatives.
(3) Refer to advisories regarding non-GAAP financial measures and other key performance indicators.
(4) Excludes non-cash accretion of decommissioning obligations and convertible debentures.
(5) Adjusted funds from operations (3) per common share is calculated on a consistent basis with profit (loss) per common share, using basic and diluted
weighted average common shares as determined in accordance with GAAP.
During the year ended December 31, 2020, adjusted funds from operations of $58.8 million ($0.31 per share, diluted)
decreased by 68% from $182.5 million ($0.99 per share, diluted) during the year ended December 31, 2019. The
decrease in adjusted funds from operations is primarily attributed to a 63% decrease in operating income.
PROFIT (LOSS) AND COMPREHENSIVE INCOME (LOSS)
Three months ended December 31
Year ended December 31
(CA$ thousands, unless otherwise indicated)
2020
2019
%
2020
2019
%
Profit (loss) and comprehensive income (loss)
26,018
(2,628)
-1090
(324,807)
6,572
-5042
$ per common share, basic
$ per common share, diluted (1)(2)
$ per BOE
0.14
0.14
17.17
(0.01)
-1500
(0.01)
-1500
(1.73)
(1.73)
0.04
-4425
0.04
-4425
(0.88)
-2051
(35.51)
0.60
-6018
Wtd avg. shares outstanding, basic (000s)
188,551
184,763
Wtd avg. shares outstanding, diluted (000s) (1)(2)
189,270
185,108
2
2
188,093
184,302
188,093
184,946
2
2
(1) The Company uses the treasury stock method to determine the dilutive effect of stock options and RSUs. Under this method, only “in-the-money”
dilutive instruments impact the calculation of diluted profit per common share. For the year ended December 31, 2020, the effect stock options and RSUs
were anti-dilutive therefore excluded in calculating diluted weighted average common shares outstanding.
(2) The common shares potentially issuable on conversion of the debentures are excluded from the calculation of diluted weighted average shares
outstanding as they were anti-dilutive to the loss reported for year ended December 31, 2019.
Kelt reported a profit of $26.0 million ($0.14 per common share, diluted) for the quarter ended December 31, 2020,
compared to a loss of $2.6 million ($0.01 per common share, diluted) in the same quarter of 2019. Kelt reported a loss
of $324.8 million ($1.73 per common share, diluted) for the year ended December 31, 2020, compared to a profit of
$6.6 million ($0.04 per common share, diluted) in the prior year.
KELT EXPLORATION LTD.
17
2020 ANNUAL REPORT
INVESTING ACTIVITIES
CAPITAL EXPENDITURES
The Company’s total capital expenditures, including acquisitions and dispositions (“A&D”), are summarized in the
following table:
(CA$ thousands, unless otherwise indicated)
2020
2019
%
2020
2019
%
Three months ended December 31
Year ended December 31
Capital expenditures:
Lease acquisition and retention
Geological and geophysical
Drilling and completion of wells
Facilities, pipeline and well equipment
Corporate assets
Capital expenditures, before A&D
Property acquisitions
Property dispositions
Total capital expenditures, net of A&D
141
18
16,467
7,270
349
420
94
35,098
28,907
-66
-81
-53
-75
1,285
1,525
2,249
1,319
70,174
184,735
78,667
128,252
11
3073
438
771
24,245
64,530
327
(102)
24,470
775
(1,322)
63,983
-62
-58
-92
-62
152,089
317,326
2,343
7,183
(508,389)
(8,885)
5622
(353,957)
315,624
-212
-43
16
-62
-39
-43
-52
-67
Capital expenditures before A&D decreased 62% in the fourth quarter of 2020 and 52% from the year ended December
31, 2020 versus the comparable periods in 2019. The Company reduced its 2020 capital budget at the onset of COVID-
19. On August 21, 2020, Kelt completed the Inga Asset Disposition, located in British Columbia, for consideration of
$503.9 million after closing adjustments. The Inga Asset Disposition had an effective date of July 1, 2020. The Inga
Assets had a carrying value of $511.0 million, resulting in a loss on sale of $7.1 million.
Kelt’s facility, pipeline and well equipment expenditures were $78.7 million for the year ending December 31, 2020 and
related primarily to refrigeration and dehydration at the Inga 2-10 gas plant and facility and pipeline projects at Wembley.
Drilling and completion expenditures in 2020 were significantly lower than in 2019. In April, the Company deferred much
of its remaining 2020 capital program in response to lower crude oil prices. For the fourth quarter of 2020, drilling and
completion costs of $16.5 million included the drilling of 5.0 net wells and completion of 2.0 net wells. For the year
ended December 31, 2020, drilling and completion costs of $70.2 million included the drilling of 14.0 net wells and the
completion of 9.0 net wells.
Net Wells
Drilling
Completion
LAND HOLDINGS
Three months ended December 31
Year ended December 31
2020
5.0
2.0
2019
6.0
6.0
%
-17
-67
2020
14.0
9.0
2019
33.0
36.0
%
-58
-75
The table below sets-out Kelt’s significant Montney land holdings across British Columbia and Alberta as at December
31, 2020.
MONTNEY RIGHTS
British Columbia
Alberta
Total
CHARLIE LAKE RIGHTS
Alberta
Net Acres
Net Sections
206,144
164,420
370,564
322.1
256.9
579.0
74,714
116.7
Kelt’s has amassed a significant stake of Montney rights with 579.0 net sections, as well as a sizable stake of Charlie
KELT EXPLORATION LTD.
18
2020 ANNUAL REPORT
Lake rights with 116.7 net sections.
CAPITAL RESOURCES AND LIQUIDITY
LIQUIDITY
Kelt’s objective is to maintain a flexible capital structure that provides sufficient liquidity for the Company to meet its
obligations when due and to execute on its capital investment program. The Company manages its capital structure in
response to changes in economic conditions and the risk characteristics of its underlying oil and natural gas assets.
As a result of the COVID-19 pandemic, global economic markets have been volatile and crude oil demand remains
below pre-pandemic levels. The length and severity of the impacts of COVID-19 on crude oil demand and pricing is
currently uncertain. Management believes that the long-term viability of the oil and gas industry remains intact and
commodity prices have improved following the initial response to COVID-19 and the related economic restrictions
imposed in many countries.
In the third quarter of 2020, Kelt sold its Inga Assets for cash proceeds of $510.0 million before closing adjustments. In
addition, the purchaser assumed $28.8 million of financing liabilities and $1.1 million of lease and other liabilities.
Proceeds of the disposition were used to repay the Company’s outstanding bank debt, and redeem Kelt’s outstanding
convertible debentures. Following the repayment of the bank debt, disposition of the financing obligations and
redemption of the convertible debentures, Kelt is without any long-term bank or financial obligations and ended
December 31, 2020 with a working capital surplus of $26.3 million. The Company expects to fund Kelt’s 2021 capital
expenditure program using this working capital surplus plus adjusted funds from operations.
The Inga Asset Disposition agreement included customary indemnification provisions with an associated holdback
amount of $15.0 million, with the outstanding balance held in trust and recorded as a deposit on the balance sheet. The
holdback of $15.0 million will be released over the course of 12 months from the transaction closing date of August 21,
2020 in three equal amounts, provided no claims are brought forth by the purchaser. Kelt has received the first
installment of $5.0 million, leaving $10.0 million as a deposit held in trust at December 31, 2020.
The Company has a $20.0 million demand revolving credit facility that is currently expected to be used only for the
purpose of short-term working capital management, hedging and letters of credit. Based on current commodity prices
and the uncertain impacts of COVID-19, Kelt does not anticipate using bank debt to fund capital expenditures in 2021.
Bank debt
Working capital deficiency (surplus)
Net bank debt (surplus) (1)
Annualized quarterly adjusted funds from operations (1)(2)
Net bank debt (surplus) to annualized quarterly adjusted funds from operations ratio (1)
December 31,
2020
-
(26,261)
(26,261)
43,032
(0.6)
December 31,
2019
300,000
28,080
328,080
186,620
1.8
(1) Refer to advisories regarding non-GAAP financial measures and other key performance indicators.
(2) Adjusted funds from operations are annualized based on the most recent quarter’s adjusted funds from operations.
The Company monitors its capital structure and short-term financing requirements using a net bank debt (surplus) to
annualized quarterly adjusted funds from operations ratio, which is a non-GAAP financial measure. Kelt targets a net
bank debt (surplus) to annualized quarterly adjusted funds from operations ratio of less than 2.0 times.
The Company may adjust its future capital structure according to market conditions in order to maintain flexibility to
achieve its objectives. To adjust its capital structure, the Company may increase or decrease capital expenditures
including acquisitions and dispositions, issue new shares, issue new debt or repay existing debt.
CREDIT FACILITY
Concurrent with the closing of the Inga Asset Disposition, the Company repaid the amounts outstanding under its
previous $350.0 million revolving committed term credit facility with a syndicate of lenders and entered into a $20.0
KELT EXPLORATION LTD.
19
2020 ANNUAL REPORT
million demand revolving credit facility (“the Credit Facility”) with a Canadian chartered bank. Currently the primary
purpose of the Credit Facility is to hold the Company’s letters of credit, and to allow the use of hedging activities.
Repayments of principal are not required provided that the borrowings under the facility do not exceed the authorized
borrowing amount and the Company is in compliance with all covenants, representations and warranties.
There are no financial covenants under the Credit Facility and Kelt is in compliance with all other covenants. Covenants
include industry standard positive and negative covenants including reporting requirements, permitted indebtedness,
permitted risk management activities, permitted encumbrances and other standard business operating covenants.
Security is provided for by a demand debenture with a floating charge over all assets in the amount of $100.0 million.
SHARE INFORMATION
The Company is authorized to issue an unlimited number of common shares and an unlimited number of preferred
shares. At December 31, 2020 there were 188.6 million common shares issued and outstanding. There are no preferred
shares issued or outstanding.
At December 31, 2020, officers, directors, and employees have been granted options to purchase 10.0 million common
shares of the Company at an average exercise price of $3.88 per common share. In addition, there are 0.3 million
RSUs outstanding.
The following table outlines Kelt’s common share trading activity during 2020 and 2019:
SHARE TRADING ACTIVITY (KEL)
YTD 2020
YTD 2019
High ($)
Low ($)
Close ($)
Volume traded (thousands)
Value traded ($ thousands)
Weighted average trading price ($)
5.00
0.67
1.80
310,802
561,903
1.81
6.14
2.45
4.87
237,903
1,012,073
4.25
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
As of December 31, 2020, the Company is committed to future payments under the following agreements:
(CA$ thousands)
2021
2022
2023
2024
2025 Thereafter
Firm processing commitments (1)
Firm transportation commitments (2)
11,549
20,670
11,557
19,247
11,566
14,922
11,607
13,451
9,455
34,776
12,250
22,101
Total commitments
32,219
30,804
26,488
25,058
21,705
56,877
(1) A portion of Kelt’s commitments on the Alliance pipeline is denominated in US dollars. The volumes committed vary over the term of the contract,
which is effective until October 31, 2023, respectively. Amounts are translated to Canadian dollars at the spot rate on December 31, 2020 of
CA$/US$1.2732.
Following the closing of the Inga Asset Disposition, approximately $278.1 million of Kelt’s processing and transportation
commitments were acquired by the purchaser including a take-or-pay firm processing commitment for 75 MMcf/d raw
gas under a 10-year term and a firm transportation commitment on the North Montney Mainline under a 20-year term.
RELATED PARTY TRANSACTIONS
The Company has engaged a law firm where a director of Kelt was a partner in 2020, and has engaged the services of
a registrar and transfer agent where an officer of Kelt is a director of the company. During the year ended December
31, 2020, the Company incurred $0.8 million (2019 – $0.5 million) in disbursements to related parties.
OFF-BALANCE SHEET TRANSACTIONS
The Company did not engage in any off-balance sheet transactions during the periods ended December 31, 2020 and
2019.
KELT EXPLORATION LTD.
20
2020 ANNUAL REPORT
RESERVES
Kelt retained Sproule Associates Limited (“Sproule”), an independent qualified reserve evaluator to prepare a report on
its oil and gas reserves (the “Sproule Report”). The Company has a Reserves Committee which oversees the selection,
qualifications and reporting procedures of the independent engineering consultants. Reserves as at December 31,
2020 and at December 31, 2019 were determined using the guidelines and definitions set out under National Instrument
51-101 (“NI 51-101”). The Sproule Report is dated February 16, 2021 and is effective as of December 31, 2020.
On August 21, 2020, Kelt completed the sale of its Inga Assets, one of the Company’s four main division resulting in a
overall decrease in reserves when compared to reserves at December 31, 2019. During 2020, primarily during the
period subsequent to the Inga Asset Disposition, Kelt was active operationally in its remaining three main divisions,
resulting in increases in all categories of reserves compared to the previous year, despite a significant reduction in
Sproule’s future commodity price forecasts that resulted in negative reserve revisions due to economic factors in the
2020 reserve report.
At December 31, 2020, Kelt’s proved plus probable reserves were 178.8 million BOE, down 61% from 461.0 million
BOE at December 31, 2019. The Company’s net present value of proved plus probable reserves at December 31,
2020, discounted at 10% before tax, was $931.7 million, a decrease of 77% from $3.9 billion at December 31, 2019.
The undiscounted future net cash flow, before tax, was $1.9 billion as of December 31, 2020, a decrease of 81% from
$10.2 billion as of December 31, 2019. Sproule’s forecasted commodity prices for 2021 used to determine the present
value of the Company’s reserves at December 31, 2020, are US$46.00 per barrel for WTI oil and CAD$2.71 per GJ for
AECO-C gas.
At December 31, 2020, the weighting of proved plus probable reserves was 42% oil/NGLs and 58% natural gas. At
December 31, 2019, the weighting of proved plus probable reserves was 47% oil/NGLs and 53% natural gas.
The following table outlines a summary of the Company’s reserves volumes at December 31, 2020:
SUMMARY OF RESERVE VOLUMES
Crude Oil
(mbbls)
Liquids(1)
(mbbls)
Natural Gas
Combined
FDC Costs
(mmcf)
(mBOE)
($ thousands)
Proved developed producing
Proved developed non-producing
Proved undeveloped
Total Proved
Probable additional
Total Proved plus Probable
(1) “Liquids” include field condensate and NGLs.
4,867
646
9,937
15,450
12,718
28,168
5,333
491
16,629
22,453
24,998
47,451
116,437
6,454
225,424
348,315
270,660
29,606
2,213
64,137
95,956
82,826
618,975
178,782
25
18,789
517,892
536,706
389,844
926,550
CHANGE IN RESERVES – YEAR OVER YEAR (mBOE)
Proved developed producing
Proved developed non-producing
Proved undeveloped
Total Proved
Probable additional
Total Proved plus Probable
December 31
2020
December 31
2019 % Change
29,606
2,213
64,137
95,956
82,826
178,782
48,854
4,844
170,884
224,582
236,399
460,981
-39
-54
-62
-57
-65
-61
KELT EXPLORATION LTD.
21
2020 ANNUAL REPORT
The following tables reconcile the change in total proved (“1P”) reserves and the change in total proved plus probable
(“2P”) reserves during the year:
RESERVES RECONCILIATION – 1P
Crude Oil
TOTAL PROVED
Balance, December 31, 2019
Extensions
Technical revisions
Economic factors
Dispositions
Net additions
2020 Production (2)
Balance, December 31, 2020 (2)
(mbbls)
13,687
1,361
3,257
(1,246)
(222)
3,150
(1,387)
15,450
(1) “Liquids” include field condensate and NGLs.
(2) Sulphur production of 13 MBOE have been excluded in the above table.
RESERVES RECONCILIATION – 2P
TOTAL PROVED PLUS PROBABLE
Balance, December 31, 2019
Extensions
Technical revisions
Economic factors
Dispositions
Net additions
2020 Production (2)
Balance, December 31, 2020 (2)
Crude Oil
(mbbls)
25,090
3,274
3,099
(1,565)
(343)
4,465
(1,387)
28,168
Liquids(1)
(mbbls)
89,605
2,733
3,231
(2,009)
(68,388)
(64,433)
(2,719)
22,453
Liquids(1)
(mbbls)
Natural Gas
Combined
(mmcf)
727,740
13,587
58,365
(16,948)
(404,257)
(349,253)
(30,172)
348,315
(mBOE)
224,582
6,359
16,216
(6,080)
(135,986)
(119,491)
(9,135)
95,956
Natural Gas
Combined
(mmcf)
191,234
1,467,941
8,275
2,479
(1,608)
(150,210)
(141,064)
(2,719)
47,451
42,604
53,357
(29,979)
(884,776)
(818,794)
(30,172)
618,975
(mBOE)
460,981
18,650
14,472
(8,170)
(298,016)
(273,064)
(9,135)
178,782
(1) “Liquids” include field condensate and NGLs.
(2) Sulphur production of 13 MBOE have been excluded in the above table.
The following table outlines future development capital (“FDC”) (as hereafter defined) expenditures outlays for total
proved reserves and total proved plus probable reserves included in the December 31, 2020 reserve evaluations:
FDC EXPENDITURES ($ thousands)
2021
2022
2023
2024
2025
Thereafter
Total
Proved reserves
Proved plus probable
33,431
143,919
152,190
114,416
92,750
48,978
209,511
255,489
214,631
197,941
-
-
536,706
926,550
The following table outlines FDC expenditures and future wells to be drilled by province, included in the December 31,
2020 and 2019 reserve evaluations for proved plus probable reserves:
FDC EXPENDITURES
Year ended December 31, 2020
Year ended December 31, 2019
TOTAL PROVED PLUS PROBABLE
FDC ($M)
Net Wells
FDC ($M)
Net Wells
Alberta Montney Wells
B.C. Montney Wells
Total Montney Wells
Other formations (including Doig/Charlie Lake)
Other expenditures
Total FDC Expenditures
670,593
58,076
728,669
148,778
49,103
926,550
121.3
11.0
132.3
42.0
-
581,614
1,463,797
2,045,411
355,148
53,888
174.3
2,454,447
101.3
270.0
371.3
85.4
-
456.7
KELT EXPLORATION LTD.
22
2020 ANNUAL REPORT
The following table outlines forecasted future prices that Sproule has used in their evaluation of the Company’s reserves
at December 31, 2020:
FUTURE COMMODITY PRICE FORECAST
WTI Cushing
Canadian
NYMEX
AECO-C
USD/CAD
2021
2022
2023
2024
2025
Five year average
Oklahoma
Light Sweet
Henry Hub
Spot
Exchange
US$/bbl
CA$/bbl
US$/MMBtu
CA$/GJ
US$/CA$
46.00
48.00
53.00
54.06
55.14
51.24
54.55
57.14
63.64
64.91
66.21
61.29
3.00
3.00
3.00
3.06
3.12
3.04
2.71
2.64
2.55
2.61
2.66
2.63
0.77
0.77
0.77
0.77
0.77
0.77
The following table summarizes the net present value of the Company’s reserves (before tax) as at December 31,
2020:
NET PRESENT VALUE (BEFORE TAX)
(CA$ millions)
Proved developed producing
Proved developed non-producing
Proved undeveloped
Total Proved
Probable additional
Total Proved plus Probable
Undiscounted
NPV 5% BT
NPV 10% BT
141.0
17.2
608.9
767.1
1,139.4
1,906.5
210.0
11.8
360.7
582.5
727.9
1,310.4
202.5
7.9
219.5
429.9
501.8
931.7
The following table summarizes the net present value of the Company’s reserves (after tax) as at December 31, 2020:
NET PRESENT VALUE (AFTER TAX)
(CA$ millions)
Proved developed producing
Proved developed non-producing
Proved undeveloped
Total Proved
Probable additional
Undiscounted
NPV 5% AT
NPV 10% AT
141.0
17.2
566.2
724.4
876.5
210.0
11.8
340.1
561.9
562.7
202.5
7.9
209.1
419.5
390.2
809.7
Total Proved plus Probable
1,600.9
1,124.6
During 2020, the Company’s capital expenditures, net of dispositions, resulted in net proved plus probable reserve
dispositions of 273.0 million BOE, resulting in 2P finding, development, acquisition and disposition (“FDA&D”) costs of
$6.89 per BOE (2019 - $7.66 per BOE), including FDC expenditures. Net proved reserve dispositions in 2020 were
119.5 million BOE, resulting in proved FDA&D costs of $10.01 per BOE (2019 - $10.68 per BOE), including FDC
expenditures.
Capital expenditures, after dispositions, in 2020 were negative $354.0 million. The Company completed the disposition
of reserves relating to the Inga Assets at a price that exceeded the FD&A cost to add reserves in all of the Company’s
other assets. Despite significantly lower commodity prices in 2020, Kelt was able to generate a 2P recycle ratio of 1.2
times for the year.
KELT EXPLORATION LTD.
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2020 ANNUAL REPORT
The following table outlines the calculation of the Company’s 1P FD&A costs and 1P recycle ratio:
FINDING, DEVELOPMENT & ACQUISITION COSTS – 1P
(CA$ thousands, except as otherwise noted)
Proved (1P) reserves:
Total capital expenditures, net of dispositions (1)
Change in FDC costs required to develop 1P reserves
Total capital costs
1P Reserve additions, net (mBOE)
1P FD&A cost, including FDC ($/BOE)
Operating netback ($/BOE) (2)
1P Recycle ratio
Year ended December 31
2020
2019
(353,957)
(842,190)
(1,196,147)
(119,491)
10.01
8.41
0.8 x
315,624
507,348
822,972
77,053
10.68
18.89
1.8 x
(1) Comprised of the Company’s total exploration and development capital expenditures, as well as acquisitions, net of proceeds from dispositions. Refer
to “Capital Expenditures” table in this MD&A.
(2) Kelt’s “Operating netback” calculation is provided under the heading of “Non-GAAP Financial Measures and Other Key Performance Indicators”.
The following table outlines the calculation of the Company’s 2P FD&A costs and 2P recycle ratio:
FINDING, DEVELOPMENT & ACQUISITION COSTS – 2P
(CA$ thousands, except as otherwise noted)
Proved plus probable (2P) reserves:
Total capital expenditures, net of dispositions (1)
Change in FDC costs required to develop 2P reserves
Total capital costs
2P Reserve additions, net (mBOE)
2P FD&A cost, including FDC ($/BOE)
Operating netback ($/BOE) (2)
2P Recycle ratio
Year ended December 31
2020
2019
(353,957)
(1,527,897)
(1,881,854)
(273,064)
6.89
8.41
1.2 x
315,624
980,349
1,295,973
169,217
7.66
18.89
2.5 x
(1) Comprised of the Company’s total exploration and development capital expenditures, as well as acquisitions, net of proceeds from dispositions. Refer
to “Capital Expenditures” table in this MD&A.
(2) Kelt’s “Operating netback” calculation is provided under the heading of “Non-GAAP Financial Measures and Other Key Performance Indicators”.
“FD&A cost per BOE” is a key performance indicator commonly used in the oil and gas industry. Readers are cautioned
that these amounts may not be directly comparable to other companies, as the term “FD&A cost” does not have a
standardized meaning under GAAP or NI 51-101 (refer to advisories under the heading of “Non-GAAP Financial
Measures and Other Key Performance Indicators”).
The recycle ratio is a measure for evaluating the effectiveness of a company’s re-investment program. The ratio
measures the efficiency of capital investment. It accomplishes this by comparing the operating netback per BOE to the
same period’s reserve FD&A cost per BOE.
NET ASSET VALUE
The Company estimates its net asset value to be $1.0 billion or $5.44 per common share as at December 31, 2020
based on the present value of its 2P reserves before tax, discounted at 10%. The components of Kelt’s net asset value
calculation are set-forth in the table below. The reader is cautioned that these amounts may not be directly comparable
to other companies, as the term “net asset value” does not have a standardized meaning under GAAP or NI 51-101.
The net present value of petroleum and natural gas (“P&NG”) reserves was determined by Sproule in their year-end
evaluation reports, based on a discount rate of 10% before-tax. Undeveloped land at December 31, 2020 was internally
valued at an average price of $195 per acre (2019 – $600 per acre).
KELT EXPLORATION LTD.
24
2020 ANNUAL REPORT
(CA$ thousands, except per share amounts)
December 31, 2020
December 31, 2019
Present value of 2P P&NG reserves, discounted at 10% before tax
Undeveloped land
Net bank debt (surplus) (3)
Proceeds from exercise of stock options (1)
Net asset value
Common shares, RSU’s and “in the money” stock options (000s) (1)(2)
Net asset value ($ per common share)
931,756
80,196
26,261
2,331
1,040,544
191,271
5.44
3,988,482
350,617
(328,080)
29,145
4,040,164
215,187
18.78
(1) The calculation of proceeds from exercise of stock options and the diluted number of common shares outstanding only include stock options that are
“in-the-money” based on the closing price of KEL of $1.80 and $4.64 per common share respectively, as at December 31, 2020 and 2019. All outstanding
RSUs are included in diluted common shares outstanding.
(2) The 5% convertible debentures that mature on May 31, 2021 are convertible to common shares at $5.50 per share. At the December 31, 2019 closing
price of $4.87 per share, the convertible debentures are “out-of-the-money” and 19.4 million shares issuable at a 5% discount are included in diluted
common shares outstanding.
(3) Refer to advisories regarding non-GAAP financial measures and other key performance indicators.
SUMMARY OF QUARTERLY RESULTS
The following tables summarize the Company’s financial and operating results over the past eight quarters:
(CA$ thousands, except as otherwise indicated)
Q4 2020
Q3 2020
Q2 2020
Q1 2020
Petroleum and natural gas sales
Cash provided by (used in) operating activities
Adjusted funds from operations (1)
Per share – basic ($/common share)
Per share – diluted ($/common share)
41,961
3,288
10,758
0.06
0.06
48,823
(8,610)
9,002
0.05
0.05
45,454
14,429
11,712
0.06
0.06
70,918
50,172
27,360
0.15
0.15
Profit (loss) and comprehensive income (loss)
26,018
(24,080)
(252,661)
(74,085)
Per share – basic ($/common share)
Per share – diluted ($/common share)
0.14
0.14
(0.13)
(0.13)
Total capital expenditures, net of dispositions
24,470
(497,321)
(1.35)
(1.35)
27,768
(0.39)
(0.39)
91,126
Total assets
Net bank debt (surplus) (1)
Convertible debentures
Shareholders’ equity
Average daily production (BOE/d)
Average realized price ($/BOE) (1)(2)
Operating netback ($/BOE) (1)
Operating netback % of average realized price (2)
759,987
(26,261)
-
603,684
16,476
23.90
8.40
35%
824,751
1,295,965
1,608,870
(127,584)
89,910
576,862
22,443
19.31
7.02
36%
383,200
85,181
599,399
30,366
20.67
6.56
32%
344,664
83,957
850,486
30,806
26.65
11.28
42%
KELT EXPLORATION LTD.
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2020 ANNUAL REPORT
Petroleum and natural gas sales
Cash provided by operating activities
Adjusted funds from operations (1)
Per share – basic ($/common share)
Per share – diluted ($/common share)
Profit (loss) and comprehensive income (loss)
Per share – basic ($/common share)
Per share – diluted ($/common share)
Total capital expenditures, net of dispositions
Total assets
Net bank debt (1)
Convertible debentures
Shareholders’ equity
Average daily production (BOE/d)
Average realized price ($/BOE) (1)(2)
Operating netback ($/BOE) (1)
Operating netback as a % of average realized price (2)
Q4 2019
Q3 2019
Q2 2019
Q1 2019
97,763
35,396
46,655
0.25
0.25
(2,628)
(0.01)
(0.01)
63,983
93,274
14,640
39,173
0.21
0.21
(2,909)
(0.02)
(0.02)
52,657
100,734
102,585
58,639
45,234
0.25
0.25
2,740
0.01
0.01
53,813
51,459
0.28
0.28
9,369
0.05
0.05
91,022
107,962
1,605,465
1,602,566
1,577,824
1,515,227
328,080
82,789
923,062
31,262
32.53
18.65
57%
320,507
81,630
908,190
31,150
30.85
15.68
51%
308,636
258,351
80,512
79,426
909,373
904,835
30,314
27,057
35.01
18.50
53%
40.31
23.39
58%
(1) Refer to advisories regarding non-GAAP financial measures and other key performance indicators.
(2) In this table, average realized prices are after financial instruments.
Kelt’s realized oil prices and production volumes increased at the beginning of 2019, combined with higher average
production, drove the increase in Company revenues, cash provided by operating activities, and operating netbacks
during the first quarter of 2019. In the last nine months of 2019 concerns about global consumer demand and a
reduction of future forecasted oil demand resulted in lower global benchmark oil prices.
In March 2020, the WHO declared the COVID-19 a pandemic with governments around the world imposing significant
public health measures in order to reduce its spread. The COVID-19 pandemic created an unprecedented global crude
oil demand reduction for 2020, resulting in a significant decrease in 2020 benchmark crude oil prices as well as
forecasted future crude oil prices.
On August 21, 2020, Kelt completed the Inga Asset Disposition for consideration of $503.9 million after closing
adjustments. This resulted in a reduction of Kelt’s production and total assets subsequent to the transaction, along with
a full repayment of the Company’s outstanding bank debt and the redemption of all outstanding convertible debentures.
Crude oil prices reached a bottom in the second quarter of 2020, with unprecedented negative WTI benchmark prices
being reached in April 2020. At the end of 2020, positive vaccine development and rollout, along with significant
production curtailments from OPEC+ and non-OPEC nations, resulted in a significant re-bound in crude oil prices
reaching $47.02 per BBL in December 2020. However potential delays in the rollout of global vaccination programs,
the emergence of new COVID-19 variants, and uncertainty around the continuation of production curtailments,
continues to impact forecasts on the estimated length of the pandemic, the extent of the impact on the global economy,
and the future impact of the pandemic on the oil and gas industry.
Benchmark natural gas prices in the US declined in the first half of 2020 with higher than average North American
natural gas inventory levels and demand concerns relating to the COVID-19 pandemic. Offsetting the downward
pressure in natural gas benchmark prices is a decrease in North American natural gas supply in 2020 due to a reduction
of drilling activity in the North American basins.
Canadian natural gas prices have improved in 2020 as changes to increased demand and exports as well as the priority
service for the Nova Gas Transmission Ltd. natural gas pipeline to allow deliveries of natural gas into storage during
seasonal gas demand lows and maintenance. This additional storage capacity has resulted in a re-balancing of the
Canadian natural gas market and has significantly narrowed the Canadian/US natural gas differentials.
KELT EXPLORATION LTD.
26
2020 ANNUAL REPORT
Refer to the “Financial and Operating Summary” section of this MD&A for further discussion. Additional information
relating to Kelt, including the Company’s MD&A for previous quarters, is filed on SEDAR and can be viewed at
www.sedar.com
SELECTED ANNUAL INFORMATION
The following table summarizes key annual financial and operating information over the three most recently completed
financial years.
(CA$ thousands, except as otherwise indicated)
Petroleum and natural gas sales
Cash provided by operating activities
Adjusted funds from operations (1)
Per share – basic ($/common share)
Per share – diluted ($/common share)
Profit (loss) and comprehensive income (loss)
Per share – basic ($/common share)
Per share – diluted ($/common share)
Total capital expenditures, net of dispositions
Total assets
Net bank debt (surplus) (1)
Convertible debentures
Shareholders’ equity
Average daily production (BOE/d)
Average realized price ($/BOE) (1)(2)
Operating netback ($/BOE) (1)
Operating netback as a % of average realized price (2)
2020
207,156
59,279
58,832
0.31
0.31
(324,807)
(1.73)
(1.73)
(353,957)
759,987
(26,261)
-
603,684
24,992
22.72
8.41
37%
2019
394,356
162,488
182,521
0.99
0.99
6,572
0.04
0.04
2018
389,277
186,383
186,839
1.02
1.01
8,154
0.04
0.04
315,624
285,498
1,605,465
1,423,521
328,080
82,789
923,062
29,961
34.45
18.89
55%
196,416
78,390
893,796
27,006
36.70
20.56
56%
(1) Refer to advisories regarding non-GAAP financial measures and other key performance indicators.
(2) In this table, average realized prices are after financial instruments.
OUTLOOK AND GUIDANCE
The Company’s Board of Directors has approved an increase to the 2021 capital expenditure budget of $30.0 million
to $120.0 million. The 2021 capital expenditures are expected to be allocated as follows: $78.5 million for drilling and
completing wells, $36.5 million for facilities, pipeline and equipment and $5.0 million for land and seismic. Kelt expects
to drill 15.0 net wells, complete 18.0 net wells and have 4.0 net DUC wells by the end of 2021.
The increase to the capital program is expected to be funded by the increase to adjusted funds from operations after
taking in to account the improvement in commodity prices from November 10, 2020, the date of the Company’s original
2021 guidance. Kelt is continuing to forecast a positive working capital balance at the end of 2021.
Forecasted average production for 2021 is estimated to be approximately 19,000 BOE per day, representing 15%
growth from the fourth quarter of 2020. Kelt’s forecasted 2021 production will be weighted approximately 38% to oil
and NGLs and 62% to natural gas.
WTI crude oil prices are forecasted to average US$59.95 per barrel in 2021, and Canadian Light Sweet is forecasted
to average $70.16 per barrel in 2021, an increase of 53% and 55% respectively over 2020 prices. Natural gas prices
are forecast to average US$2.28 per mmbtu for AECO and US$2.82 per mmbtu for NYMEX in 2021, an increase of
37% and 36% respectively over 2020 prices.
The Company has reduced its NYMEX Henry Hub natural gas forecast for 2021 to US$2.82 per MMBtu, down 9%
from its previous forecast. Kelt estimates that the CAD/USD exchange rate will average $1.267 (US$0.798), up 6%
from its previous forecast of $1.340 (US$0.746).
KELT EXPLORATION LTD.
27
2020 ANNUAL REPORT
Using the revised commodity price forecasts for 2021 and including the hedging contracts, Kelt is forecasting 2021
adjusted funds from operations of $107.0 million, up 61% from its previous forecast. Kelt estimates a working capital
surplus of $7.0 million at the end of December 31, 2021. The Company’s 2021 capital program is expected to be funded
by Kelt’s adjusted funds from operations and available cash as of December 31, 2020.
A 10% increase/decrease in the Company’s forecasted average oil/NGLs price for 2021 would increase/decrease
forecasted adjusted funds from operations by approximately $8.6 million. A 10% increase/decrease in the Company’s
average gas price forecasted for 2021 would increase/decrease adjusted funds from operations by approximately $6.6
million.
The table below outlines the Company’s updated forecast for 2021 with a comparison to the previously announced
guidance included in Kelt’s press release dated November 10, 2020 and comparison to 2020 actuals:
(CA$ millions, except as otherwise indicated)
Average Production
Oil and NGLs (bbls/d)
Gas (mmcf/d)
Combined (BOE/d)
Production per million common shares (BOE/d)
Forecasted Average Commodity Prices
WTI oil price (US$/bbl)
Canadian Light Sweet ($/bbl)
NYMEX natural gas price (US$/MMBTU)
AECO natural gas price (US$/MMBTU)
Average Exchange Rate (US$/CA$)
Capital Expenditures
Drilling & completions
Facilities, pipeline & well equipment
Land & seismic
Property acquisitions and dispositions
Total Capital Expenditures before Inga Asset Disposition
Inga Asset Disposition
Net Capital Expenditures
Adjusted funds from operations (1)
Per common share, diluted (1)
Net bank debt (surplus) (1)
Weighted average common shares outstanding (millions) (1)
Previous
2021
Guidance
(Nov 10,
2020)
%
Change
to
Current
2021
Budget
Current
2021
Budget
%
Change
to
Current
2021
Budget
2020
Actuals
7,145
71
6,500
66
19,000
17,500
101
93
59.95
70.16
2.82
2.28
0.789
78.5
36.5
5.0
-
120.0
-
120.0
107.0
0.56
(7.0)
188.6
38.50
46.23
3.10
2.40
0.746
58.5
27.5
4.0
-
90.0
-
90.0
66.5
0.35
(4.0)
188.6
10
11,218
8
9
9
56
52
-9
-5
6
34
33
25
-
33
-
33
61
60
75
-
83
24,992
133
39.24
45.34
2.08
1.67
0.746
70.2
78.7
3.2
(2.2)
149.9
(503.9)
(354.0)
58.8
0.31
(26.3)
188.1
-36
-14
-24
-24
53
55
36
37
6
12
-54
54
-100
-20
-100
-134
82
81
-73
-
(1) Refer to advisories regarding non-GAAP financial measures and other key performance indicators.
Kelt continues to focus on maintaining a strong balance sheet, giving the Company the ability to take advantage of
opportunities as they arise. The Company’s capital expenditure program is also flexible, with the ability to increase or
decrease expenditures into the future if the current economic environment deteriorates rapidly.
KELT EXPLORATION LTD.
28
2020 ANNUAL REPORT
Changes in forecasted commodity prices and variances in production estimates can have a significant impact on
estimated adjusted funds from operations and profit. Please refer to the advisories regarding forward-looking
statements and to the cautionary statement below.
The information set out herein is “financial outlook” within the meaning of applicable securities laws. The purpose of
this financial outlook is to provide readers with disclosure regarding Kelt’s reasonable expectations as to the anticipated
results of its proposed business activities for the calendar year 2021. Readers are cautioned that this financial outlook
may not be appropriate for other purposes.
SIGNIFICANT JUDGMENTS AND ESTIMATES
The significant accounting policies applied by the Company are disclosed in note 4 of the consolidated annual financial
statements as at and for the year ended December 31, 2020. The timely preparation of the financial statements requires
management to make judgments, estimates and assumptions that affect the application of accounting policies and the
reported amount of assets, liabilities, income and expenses. Actual results may differ materially from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognized in the period in which the estimates are reviewed and for any future years affected. Significant judgments,
estimates and assumptions made by management in the consolidated annual financial statements are discussed
below.
Depletion, depreciation and reserves
The Company calculates depletion based on total proved reserves. Proved reserves are determined in accordance
with the Canadian Oil and Gas Evaluation Handbook (“COGEH”). The process of determining reserves is complex.
Significant judgments are based on available geological, geophysical, engineering, and economic data. These
judgments are based on estimates and assumptions that may change substantially as additional data from ongoing
development activities and production performance becomes available and as economic conditions impacting oil and
gas prices and costs change. The reserve estimates are based on production forecasts, prices and economic
conditions. As circumstances change and additional data becomes available, reserve estimates also change. Estimates
made are reviewed and revised, either upward or downward, as warranted by the new information. Revisions are often
required due to changes in well performance, forecasted prices, economic conditions and governmental regulation.
Although every reasonable effort is made to ensure that reserve estimates are accurate, reserve estimation can be
impacted by subjective decisions, new geological or production information and a changing environment. In addition,
revisions to reserve estimates can arise from changes in forecast oil and gas prices and reservoir performance. Such
revisions can be either positive or negative.
Changes in reserve estimates impact the financial results of the Company as reserves and estimated future
development costs are used to calculate depletion. Reserves are used in measuring the fair value less costs of disposal
(“FVLCD”) of property, plant and equipment for impairment calculations and for determining the fair value of PP&E
acquired in a business combination. Reserves also impact the Company’s assessment of the commercial viability and
technical feasibility of an exploration project which impacts the decision to transfer exploration and evaluation assets
to PP&E.
Exploration and evaluation assets
Judgment is required to determine the level at which E&E is assessed for impairment. For Kelt, the carrying value of
E&E assets is assessed for overall impairment at the operating segment level and on a specific identification basis prior
to transferring E&E assets to PP&E. The decision to transfer assets from E&E to PP&E requires judgment as it is based
on estimated proved reserves, which are used, in part, to determine a project’s technical feasibility and commercial
viability. Refer to additional information regarding E&E assets in note 6 of the consolidated annual financial statements.
Determination of Cash Generating Units (“CGUs”)
The determination of CGUs requires judgment in defining a group of assets that generate cash inflows that are largely
independent of the cash inflows from other assets or groups of assets. CGUs are determined by similar geological
structure, shared infrastructure, geographical proximity, commodity type, similar exposure to market risks and
materiality. As at December 31, 2020, the Company has one CGU for its assets located in the province of British
KELT EXPLORATION LTD.
29
2020 ANNUAL REPORT
Columbia and one CGU for its assets located in the province of Alberta. Refer to specific information regarding the
Company’s CGUs in note 7 of the consolidated annual financial statements.
Impairment of non-financial assets
Significant judgment is required to assess the Company’s non-financial assets, namely E&E and PP&E, for impairment
or potential reversals of previously recorded impairment. Management must first determine whether indicators of
impairment exist that suggest the carrying value may not be recoverable through the asset’s continued use or sale. In
addition, judgment is required to assess whether a previously recognized impairment for an asset no longer exists or
has decreased.
Significant assumptions used to estimate the recoverable amount of PP&E in the impairment test include proved and
probable reserve volumes, long term commodity price forecasts, future production volumes, future production costs,
future development capital expenditures and the discount rate.
Significant judgment and estimates are required to calculate the recoverable amount of PP&E in an impairment test.
Management calculates the recoverable amount of each CGU based on its FVLCD, using an after-tax discounted cash
flow analysis derived from proved plus probable reserves. Reserve estimates and expected future cash flows from
production of reserves are subject to measurement uncertainty as discussed above and are subject to variability due
to changes in forecasted commodity prices. In addition, the present value of forecast future cash flows is highly sensitive
to the discount rate. Judgment is required to determine an appropriate discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset. Refer to note 7 of the consolidated annual
financial statements for a discussion of the specific estimates and assumptions applied in the impairment test performed
at December 31, 2020.
Business combinations
Business combinations are accounted for using the acquisition method of accounting. The determination of fair value
often requires management to make assumptions and estimates about future events. The assumptions and estimates
with respect to determining the fair value of exploration and evaluation assets and property, plant and equipment
acquired generally require significant judgment and include estimates of reserves acquired, forecast benchmark
commodity prices and discount rates. Assumptions are also required to determine the fair value of decommissioning
obligations associated with the properties. Changes in any of these assumptions or estimates used in determining the
fair value of acquired assets and liabilities could impact the amounts assigned to assets, liabilities and goodwill in the
acquisition equation. Future profit (loss) can be affected as a result of changes in future depletion and depreciation or
impairment.
Decommissioning obligations
The Company estimates the decommissioning obligations for oil and gas wells and their associated production facilities
and infrastructure. In most instances, dismantling of assets and remediation occurs many years into the future. The
value of the ultimate decommissioning obligation can fluctuate in response to many factors including changes to
relevant legal requirements, the emergence of new restoration techniques, experience at other production sites,
changes to the risk-free discount rate and changes to inflation. The expected timing and amount of expenditure can
also change in response to changes in reserves or changes in laws and regulations. Judgments include the most
appropriate discount rate to use, which management has determined to be a risk-free rate. Key assumptions are
disclosed in note 10 of the consolidated annual financial statements.
Kelt estimates abandonment and reclamation costs based on a combination of publicly available industry benchmarks
and internal site specific information. For producing wells and facilities, the expected timing of settlement is estimated
based on the proved plus probable period to abandonment for each depletable area, as per the independent reserve
report. For non-producing wells, the expected timing of settlement is estimated to be half of the period applied to
producing wells in that field, unless the timing to abandon and reclaim a specific well site or facility is known based on
budgeted expenditures.
Deferred income taxes
The Company follows the liability method for calculating deferred income taxes. Tax interpretations, regulations and
KELT EXPLORATION LTD.
30
2020 ANNUAL REPORT
legislation in the jurisdictions in which the Company operates are subject to change. As such, deferred income taxes
are subject to measurement uncertainty. The provision for deferred income taxes also includes the following significant
judgments of management:
• Deferred income tax assets are assessed by management at the end of the reporting period to determine the likelihood
that they will be realized from future taxable earnings, and are reduced to the extent it is no longer probable that the
related tax benefit will be realized. The Company’s non-capital losses expire in years 2039 to 2040.
• Intangible drilling and completion costs booked as Canadian development expenses (“CDE”) may be deducted on a
declining basis at 30%-45% per year. The allocation of costs to CDE may therefore impact the period in which Kelt may
become taxable in the future. In addition, the designation of CDE expenditures may impact the Company’s ability to
satisfy its flow-through share obligations; and
• Recognition of unrecognized deferred income tax asset – per IAS 12, deferred income taxes are not initially recognized
on transactions that are not business combinations. The Company did not initially recognize a deferred income tax
asset of $14.4 million that arose on the spin-out of certain assets from Celtic Exploration Ltd. (“Celtic”) at Kelt’s inception
on February 26, 2013. The initially unrecognized deferred tax asset is now being amortized at a rate of 2.5% per quarter,
which management believes is a reasonable estimate as it reflects the weighted average depletion rate of the properties
at the time of the spin-out and is aligned with Kelt’s corporate average depletion rate.
Share based compensation
The Company uses the fair value method of accounting for its long-term incentive plans, which include an Incentive
Stock Option Plan and a Restricted Share Unit Plan. Judgments include which valuation model is most appropriate for
the grant of the award to estimate its fair value. Estimates and assumptions are then used in the valuation model to
determine fair value.
For stock options, the Company uses the Black-Scholes option pricing model which requires that management make
assumptions for the expected life of the option, the anticipated volatility of the share price over the life of the option, the
risk-free interest rate for the life of the option, and the number of options that will ultimately vest. The assumptions used
by the Company are discussed in note 13 of the consolidated annual financial statements.
The fair value of restricted share units is estimated based on the volume weighted average trading price (“VWAP”) on
the TSX over three trading days immediately prior to the date of grant. Judgment is also required to estimate the rate
of forfeiture, or number of restricted share units that will ultimately vest. The assumptions used by the Company are
discussed in note 13 of the consolidated annual financial statements.
Flow-through shares
Flow through shares are accounted for under the residual method. Under this method, judgement is required to
determine the fair value of ordinary shares. Typically, it is based on the share price at the time the parties agree to the
transaction. In situations where flow-through shares are issued concurrent with an ordinary common share offering, the
difference in subscription prices is used to value the premium. Otherwise, the Company uses the VWAP of KEL
common shares for the five trading days immediately preceding the date of the binding agreement, to value the ordinary
common shares.
Judgment is also required to determine when the Company has fulfilled its obligation to pass on the tax deduction to
investors, at which time the premium on flow-through shares is recognized in income. The Company deems the
obligation to have been fulfilled in the period that eligible expenditures are incurred, regardless of the period in which
the tax deductions are legally renounced.
Leases
The Company applies judgement in reviewing each of its contractual arrangements to determine whether the lease
falls within the scope of IFRS 16. In determining the lease term to be recognized, management considers all facts and
circumstances that create an economic incentive to exercise an extension option, or not to exercise a termination
option.
The measurement of right-of-use (“ROU”) assets and lease liabilities are subject to management’s judgement of the
KELT EXPLORATION LTD.
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2020 ANNUAL REPORT
applicable incremental borrowing rate when the rate implicit in a lease is not readily determinable. Applicable
incremental borrowing rates are based on management’s judgements of the economic environment, term, the
underlying risk inherent to the asset (which may vary due to changes in the market conditions) and the expected lease
term.
DISCLOSURE CONTROLS AND PROCEDURES
The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) have designed, or caused to be designed
under their supervision, disclosure controls and procedures as defined in National Instrument 52-109 of the Canadian
Securities Administrators, to provide reasonable assurance that: (i) material information relating to the Company is
made known to the CEO and the CFO by others, particularly during the period in which the annual and interim filings
are being prepared; and (ii) information required to be disclosed by the Company in its annual filings, interim filings or
other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within
the time periods specified in securities legislation.
The CEO and the CFO have evaluated the effectiveness of Kelt’s disclosure controls and procedures as at December
31, 2020 and have concluded that such disclosure controls and procedures are effective. The assessment was based
on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
The CEO and the CFO have designed, or caused to be designed under their supervision, internal controls over financial
reporting as defined in National Instrument 52-109 of the Canadian Securities Administrators, in order to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with IFRS.
A significant portion of the Company’s workforce has been working remotely since March 2020 due to the COVID-19
pandemic, however there were no significant changes to the Company’s internal controls over financial reporting during
the interim period from October 1, 2020 to December 31, 2020 and year ended December 31, 2020. The CEO and the
CFO have evaluated the effectiveness of Kelt’s internal controls over financial reporting as at December 31, 2020 and
have concluded that such internal controls over financial reporting are effective. The assessment was based on the
framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
Due to its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. In
addition, projections of any evaluation relating to the effectiveness in future periods are subject to the risk that controls
may become inadequate as a result of changes in conditions, or that the degree of compliance with policies and
procedures may deteriorate.
BUSINESS RISKS
The Company is exposed to various operational and financial risks inherent in the exploration, development, production
and marketing of crude oil, NGLs and natural gas liquids. These inherent risks include, but are not limited to, the
following:
•
The impact of the COVID-19 virus on the global economy and crude oil demand;
• Reservoir quality and the uncertainty of reserves estimates;
• Volatility in the prevailing prices of crude oil, NGLs and natural gas;
•
The actions of OPEC+ on global oil supply and its impact on price;
• Regulatory risk related to the approval for exploration and development activities, which can add to costs or
cause delays in projects;
• Environmental impact risk associated with exploration and development activities, including GHG;
KELT EXPLORATION LTD.
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2020 ANNUAL REPORT
•
Future legislative and regulatory developments related to environmental regulation;
• Geopolitical risks associated with changing governments or governmental policies, social instability and other
political, economic or diplomatic developments in the regions where the Company has its operations;
•
•
The ability to find, produce and replace reserves at a reasonable cost, including the risk of reserve revisions
due to economic and technical factors. Reserve revisions can have a positive or negative impact on asset
valuations, ARO, lending capacity and depletion rates;
Labour risk to complete projects in a timely and cost efficient manner;
• Operating hazards inherent in the exploration, development, production and sale of crude oil and natural gas;
• Credit risk related to non-payment for sales contracts or other counterparties;
•
•
Interest rate risk associated with the Company’s ability to ability to secure financing on commercially
acceptable terms;
Foreign exchange risk as commodity sales are predominantly based on US dollar denominated benchmarks;
• Business interruptions because of unexpected events such as fires or explosions whether caused by human
error or nature, severe storms and other calamitous acts of nature, blowouts, freeze-ups, mechanical or
equipment failures of facilities and infrastructure and other similar events affecting the Company or other
parties whose operations or assets directly or indirectly impact the Company and that may or may not be
financially recoverable;
• Potential actions of governments, regulatory authorities and other stakeholders that may result in costs or
restrictions in the jurisdictions where the Company has operations;
• Changing carbon tax and royalty regimes. The Company incurred $4.1 million in carbon tax expense in 2020.
The majority of the carbon tax in 2020 and relates to Kelt’s BC operations;
•
•
•
The ability to secure adequate transportation for products which could be affected by pipeline and storage
constraints, the construction by third parties of new or expansion of existing pipeline capacity and other factors;
The access to markets for the Company’s products; and
The risk of significant interruption or failure of the Company's information technology systems and related
data and control systems or a significant breach that could adversely affect the Company's operations.
The Company uses a variety of means to help mitigate or minimize these risks. The Company maintains a
comprehensive insurance program to reduce risk. Operational control is enhanced by focusing on large core areas with
high working interests and operatorship of drilling and completion operations. Product mix is diversified between natural
gas, NGLs and oil which reduces price risk in certain market conditions. Accounts receivable from the sale of crude oil
and natural gas are mainly with customers in the crude oil and natural gas industry and are subject to normal industry
credit risks. The Company manages these risks by monitoring exposure to individual customers, contractors, suppliers
and joint venture partners on a regular basis and when appropriate, ensuring parental guarantees or letters of credit
are in place, and as applicable, taking other mitigating actions to minimize the impact in the event of a default. The
Company is exposed to possible losses in the event of non-performance by counterparties to derivative financial
instruments; however, the Company manages this credit risk by primarily entering into agreements with counterparties
that are investment grade financial institutions, and reviews its counterparties on an on-going basis. The Company has
implemented cyber security protocols and procedures to reduce the risk of failure or a significant breach of the
Company’s information technology systems and related data and control systems. The Company’s capital structure
mix is also monitored on a continual basis to ensure that it optimizes flexibility, minimizes cost and offers the greatest
opportunity for growth. This includes the determination of a reasonable level of debt and any interest rate exposure risk
that may exist.
A more detailed description of the Company’s risks is included in the Annual Information Form as at December 31,
2020, dated March 10, 2021 which can be found at www.sedar.com.
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2020 ANNUAL REPORT
ADVISORY REGARDING FORWARD-LOOKING STATEMENTS
The information set out herein is “financial outlook” within the meaning of applicable securities laws. The purpose of
this financial outlook is to provide readers with disclosure regarding Kelt’s reasonable expectations as to the anticipated
results of its proposed business activities for the calendar year 2020. Readers are cautioned that this financial outlook
may not be appropriate for other purposes.
Certain information with respect to Kelt contained herein, including management’s assessment of future plans and
operations, contains forward-looking statements. These forward-looking statements are based on assumptions and are
subject to numerous risks and uncertainties, many of which are beyond Kelt’s control, including the impact of general
economic conditions, industry conditions, volatility of commodity prices, currency exchange rate fluctuations,
imprecision of reserve estimates, environmental risks, competition from other explorers, stock market volatility and
ability to access sufficient capital. As a result, Kelt’s actual results, performance or achievement could differ materially
from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given
that any events anticipated by the forward-looking statements will transpire or occur.
In addition, the reader is cautioned that historical results are not necessarily indicative of future performance. The
forward-looking statements contained herein are made as of the date hereof and the Company does not intend, and
does not assume any obligation, to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise unless expressly required by applicable securities laws.
This MD&A contains forward-looking statements and forward-looking information within the meaning of applicable
securities laws. The use of any of the words “expect”, “anticipate”, “continue”, “estimate”, “objective”, “ongoing”, “may”,
“will”, “project”, “should”, “believe”, “plans”, “intends”, “potentially” and similar expressions are intended to identify
forward-looking information or statements. In particular, this MD&A contains forward-looking statements pertaining to
the following: Kelt’s expected price realizations and future commodity prices; the cost and timing of future capital
expenditures and expected results; the Company’s ability to continue accumulating land at a low-cost in its core
operating areas and potentially monetize non-core assets; the expected timing of well completions, the expected timing
of wells bring brought on-production, the expected timing of facility expenditures, the expected timing of facility start-up
dates, the expected timing of production additions from capital expenditures; and the Company's expected future
financial position and operating results. Statements relating to "reserves" or “resources” are deemed to be forward
looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the
reserves described exist in the quantities predicted or estimated and that the reserves can be profitably produced in
the future. Actual reserves may be greater than or less than the estimates provided herein.
Although Kelt believes that the expectations and assumptions on which the forward-looking statements are based are
reasonable, undue reliance should not be placed on the forward-looking statements because Kelt cannot give any
assurance that they will prove to be correct. Since forward-looking statements address future events and conditions,
by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those
currently anticipated due to a number of factors and risks. These include, but are not limited to, the risks associated
with the oil and gas industry in general, operational risks in development, exploration and production; delays or changes
in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve
estimates; the uncertainty of estimates and projections relating to production, costs and expenses; failure to obtain
necessary regulatory approvals for planned operations; health, safety and environmental risks; uncertainties resulting
from potential delays or changes in plans with respect to exploration or development projects or capital expenditures;
volatility of commodity prices, currency exchange rate fluctuations; imprecision of reserve estimates; as well as general
economic conditions, stock market volatility; and the ability to access sufficient capital. We caution that the foregoing
list of risks and uncertainties is not exhaustive.
Certain information set out herein may be considered as “financial outlook” within the meaning of applicable securities
laws. The purpose of this financial outlook is to provide readers with disclosure regarding Kelt’s reasonable expectations
as to the anticipated results of its proposed business activities for the periods indicated. Readers are cautioned that
the financial outlook may not be appropriate for other purposes.
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2020 ANNUAL REPORT
NON-GAAP FINANCIAL MEASURES AND OTHER KEY PERFORMANCE INDICATORS
This MD&A contains certain financial measures, as described below, which do not have standardized meanings
prescribed by GAAP. In addition, this MD&A contains other key performance indicators (“KPI”), financial and non-
financial, that do not have standardized meanings under the applicable securities legislation. As these non-GAAP
financial measures and KPI are commonly used in the oil and gas industry, the Company believes that their inclusion
is useful to investors. The reader is cautioned that these amounts may not be directly comparable to measures for other
companies where similar terminology is used.
Non-GAAP financial measures
“Operating income” is calculated by deducting royalties, production expenses and transportation expenses from
petroleum and natural gas sales, net of the cost of purchases and after realized gains or losses on associated financial
instruments. The Company refers to operating income expressed per unit of production as an “operating netback”.
“Adjusted funds from operations” is calculated as cash provided by operating activities before changes in non-cash
operating working capital, and adding back (if applicable): transaction costs associated with acquisitions and
dispositions, provisions for potential credit losses, and settlement of decommissioning obligations. Adjusted funds from
operations per common share is calculated on a consistent basis with profit (loss) per common share, using basic and
diluted weighted average common shares as determined in accordance with GAAP.
Adjusted funds from operations, annualized quarterly adjusted funds from operations and operating income or netbacks
are non-GAAP measures used by management to measure operating performance. Adjusted funds from operations,
annualized quarterly adjusted funds from operations, and operating income or netbacks are non-GAAP measures used
by management as a key measure to assess the ability of the Company to fund operating activities, capital expenditures
and the repayment of debt however; it is not intended to be viewed as an alternative to cash provided by operating
activities, profit or other measures of financial performance calculated in accordance with GAAP. The following table
reconciles cash provided by operating activities reported in accordance with GAAP to Adjusted funds from operations:
Three months ended December 31
Year ended December 31
(CA$ thousands, unless otherwise indicated)
Cash provided by operating activities
Change in non-cash working capital
Funds from operations
Settlement of decommissioning obligations
2020
3,288
6,620
9,908
850
2019
35,396
11,045
46,441
%
-91
-40
-79
2020
2019
59,279
162,488
%
-64
(2,392)
17,699
-114
56,887
180,187
214
297
1,945
2,334
-68
-17
-68
Adjusted funds from operations
10,758
46,655
-77
58,832
182,521
Throughout this MD&A, reference is made to “total revenue”, “Kelt Revenue” and “average realized prices”. “Total
revenue” refers to petroleum and natural gas sales (before royalties) as reported in the consolidated financial
statements in accordance with GAAP, and is before realized gains or losses on financial instruments. "Kelt Revenue"
is a non-GAAP measure and is calculated by deducting the cost of purchases from petroleum and natural gas sales
(before royalties). “Average realized prices” are calculated based on “Kelt Revenue” divided by production and reflect
the Company's realized selling prices plus the net benefit of oil blending/marketing activities. In addition to using its
own production, the Company may purchase butane and crude oil from fourth parties for use in its blending operations,
with the objective of selling the blended oil product at a premium. Marketing revenue from the sale of third-party volumes
is included in total petroleum and natural gas sales as reported in the Consolidated Statement of Profit (Loss) and
Comprehensive Income (Loss) in accordance with GAAP. Given the Company’s per unit operating statistics disclosed
throughout this MD&A are calculated based on Kelt’s production volumes, management believes that disclosing its
average realized prices based on Kelt Revenue is more appropriate and useful, because the cost of third party volumes
purchased to generate the incremental marketing revenue has been deducted.
“Average realized prices” referenced throughout this MD&A are before financial instruments, except as otherwise
indicated as being after financial instruments.
“Net bank debt (surplus)” is equal to “bank debt”, net of “working capital deficit (surplus)”. Working capital deficit
(surplus) excludes current bank debt, current convertible debentures, and assets and liabilities held for sale. “Net bank
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2020 ANNUAL REPORT
debt (surplus)” is calculated by adding the working capital deficit (surplus) to bank debt. The Company uses a “net bank
debt (surplus) and working capital deficit (surplus) to annualized quarterly adjusted funds from operations ratio” and as
a benchmark on which management monitors the Company’s capital structure and short-term financing requirements.
Management believes that this ratio, as well as the Company’s “net bank debt (surplus)”, provides investors with
information to understand the Company’s liquidity risk. The “net bank debt (surplus) and working capital deficit (surplus)
to annualized quarterly adjusted funds from operations ratio” is also indicative of the “net debt (surplus) to cash flow”
calculation used to determine the applicable margin for a quarter under the Company’s Credit Facility agreement
(though the calculation may not always be a precise match, it is representative).
Other KPI
“Production per common share” is calculated by dividing total production by the basic weighted average number of
common shares outstanding, as determined in accordance with GAAP.
“Finding, development and acquisition” (“FD&A”) cost is the sum of capital expenditures incurred in the period and the
change in future development capital (“FDC”) required to develop reserves. FD&A cost per BOE is determined by
dividing current period net reserve additions into the corresponding period’s FD&A cost. Readers are cautioned that
the aggregate of capital expenditures incurred in the year, comprised of exploration and development costs and
acquisition costs, and the change in estimated FDC generally will not reflect total FD&A costs related to reserves
additions in the year.
“Recycle ratio” is a measure for evaluating the effectiveness of a company’s re-investment program. The ratio measures
the efficiency of capital investment by comparing the operating netback per BOE to FD&A cost per BOE.
“Net asset value” is calculated by adding the present value of proved plus probable petroleum and natural gas reserves
discounted at 10% before tax, undeveloped land value, proceeds from exercise of stock options, and net bank debt
(surplus). “Net asset value per common share” is calculated by dividing the “Net Asset Value” by the diluted number of
common shares outstanding. The calculation of proceeds from exercise of stock options and the diluted number of
common shares outstanding only include stock options that are “in-the-money” based on the closing price of KEL
common shares as at the calculation date. The diluted number of common shares outstanding includes common shares
issuable upon conversion of the convertible debentures that are “in-the-money” based on the closing price of KEL
common shares as at the calculation date.
ADDITIONAL INFORMATION
Additional information relating to Kelt, including the Company’s Annual Information Form (“AIF”) dated March 10, 2021
is filed on SEDAR and can be viewed on their website at www.sedar.com. Copies of the AIF can also be obtained by
contacting Sadiq H. Lalani, Vice President and Chief Financial Officer at Kelt Exploration Ltd., Suite 300, 311 Sixth
Avenue SW, Calgary, Alberta, Canada, T2P 3H2. Further information relating to Kelt is also available on its website at
www.keltexploration.com.
KELT EXPLORATION LTD.
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2020 ANNUAL REPORT
MANAGEMENT’S REPORT
The accompanying financial statements of Kelt Exploration Ltd. (the “Company”) are the responsibility of management.
The financial statements have been prepared by management in Canadian dollars in accordance with International
Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and include
certain estimates that reflect management’s best judgments. When alternative accounting methods exist, management
has chosen those it deems most appropriate in the circumstances.
Management has the overall responsibility for internal controls and maintains a system of internal controls over financial
reporting that provides reasonable assurance that the financial information is relevant, reliable and accurate and that
the Company’s assets are properly accounted for and adequately safeguarded.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and
internal control. The Board exercises this responsibility with the assistance of the Audit Committee. This Committee,
consisting of non-management directors, meets with management and independent auditors to ensure that each group
is properly discharging its responsibilities and to discuss adequacy of internal controls, accounting policies and financial
reporting matters. The Audit Committee has reviewed the financial statements and has reported thereon to the Board
of Directors. The Board of Directors has approved the financial statements and authorized them for issuance to
shareholders.
PricewaterhouseCoopers LLP, an independent firm of Chartered Professional Accountants, has been engaged, as
approved by the shareholders of the Company, to provide an independent audit opinion on the Company’s financial
statements. Their report, contained herein, outlines the nature of their audit and expresses an unqualified opinion on
the financial statements.
[signed]
David J. Wilson
President and Chief Executive Officer
March 11, 2021
[signed]
Sadiq H. Lalani
Vice President and Chief Financial Officer
March 11, 2021
KELT EXPLORATION LTD.
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2020 ANNUAL REPORT
Independent auditor’s report
To the Shareholders of Kelt Exploration Ltd.
Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects,
the financial position of Kelt Exploration Ltd. and its subsidiary (together, the Company) as at
December 31, 2020 and 2019, and its financial performance and its cash flows for the years then ended in
accordance with International Financial Reporting Standards (IFRS).
What we have audited
The Company’s consolidated financial statements comprise:
the consolidated statements of financial position as at December 31, 2020 and 2019;
the consolidated statements of profit (loss) and comprehensive income (loss) for the years then
ended;
the consolidated statements of changes in shareholders’ equity for the years then ended;
the consolidated statements of cash flows for the years then ended; and
the notes to the consolidated financial statements, which include significant accounting policies and
other explanatory information.
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of
the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
Independence
We are independent of the Company in accordance with the ethical requirements that are relevant to our
audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities
in accordance with these requirements.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our
audit of the consolidated financial statements for the year ended December 31, 2020. These matters were
PricewaterhouseCoopers LLP
111-5th Avenue SW, Suite 3100, Calgary, Alberta, Canada T2P 5L3
T: +1 403 509 7500, F: +1 403 781 1825
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
addressed in the context of our audit of the consolidated financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on these matters.
Key audit matter
How our audit addressed the key audit matter
The impact of crude oil and natural gas
reserves on net property, plant and equipment
(PP&E)
Refer to note 3(c) – Significant judgments and
estimates, note 4 – Significant and new accounting
policies and note 6 – Property, plant and equipment
to the consolidated financial statements.
The Company has $608 million of net PP&E as at
December 31, 2020. Depletion and depreciation
(D&D) expense was $113 million for the year then
ended. PP&E is depleted using the unit of
production method by reference to the ratio of
production in the year to the related proved
reserves, taking into account estimated future
development costs necessary to bring those
reserves into production.
On a quarterly basis, management assesses its
cash generating units (CGUs) for indicators that
suggest that the carrying amount of a CGU may
exceed its recoverable amount. Where such
indicators are identified, management performs an
impairment test. Impairment is evaluated by
comparing the recoverable amount of the CGU to
its carrying amount. Management used fair value
less costs of disposal (FVLCD), estimated based on
the discounted after-tax cash flows from proved
plus probable crude oil and natural gas reserves
less estimated selling costs, to determine the
recoverable amounts of the Company’s CGUs. The
Company’s crude oil and natural gas reserves are
prepared by the Company’s independent qualified
reserve evaluator (management’s experts). As at
March 31, 2020, an impairment test was conducted
over all of the Company’s CGUs. Based on the
impairment test performed on the Alberta CGU, it
was determined that the carrying value was in
excess of the recoverable amount, resulting in an
Our approach to addressing the matter included the
following procedures, among others:
The work of management’s experts was used
in performing the procedures to evaluate the
reasonableness of the crude oil and natural gas
reserves used to determine the D&D expense
and the recoverable amount of the Company’s
CGUs. As a basis for using this work,
management’s experts’ competence, capacity
and objectivity were evaluated, their work
performed was understood and the
appropriateness of their work as audit evidence
was evaluated by considering the relevance
and reasonableness of the methods and
assumptions.
Tested how management determined the
recoverable amount of the Company’s CGUs
and D&D expense, which included the
following:
Evaluated the appropriateness of the
methods used by management in making
these estimates.
Tested the data used in determining these
estimates.
Evaluated the reasonableness of significant
assumptions used, including the estimate
of proved and probable reserves, future
production volumes, long-term commodity
price forecasts, future production costs and
future development capital expenditures by
considering the current and past
performance of the Company, consistency
with industry benchmark pricing forecasts
and consistency with evidence obtained in
other areas of the audit as applicable.
Professionals with specialized skill and
knowledge were also used to assist in
Key audit matter
How our audit addressed the key audit matter
evaluating the reasonableness of the
recoverable amounts of the Company’s
CGUs, including the discount rate used
within the models.
Recalculated the unit-of-production rates used
to calculate D&D expense.
impairment loss of $77 million before tax. As at
December 31, 2020, the Company determined that
there were indicators of potential impairment
reversal for the Alberta CGU, and the recoverable
amount was estimated. Based on the results of the
impairment test and continued economic
uncertainty with the COVID-19 pandemic, no
impairment or impairment reversals were recorded.
There were no indicators of impairment for the BC
CGU.
Significant assumptions developed by management
used to estimate the recoverable amount of the
Company’s CGUs include proved and probable
reserve volumes, long-term commodity price
forecasts, future production volumes, future
production costs, future development capital
expenditures and the discount rate.
We determined that this is a key audit matter due to
(i) the significant judgments made by management,
including the use of management’s experts, when
developing the expected future cash flows to
determine the recoverable amount and the proved
and probable crude oil and natural gas reserves; (ii)
a high degree of auditor judgment, subjectivity and
effort in performing procedures relating to the
significant assumptions; and (iii) the audit effort that
involved the use of professionals with specialized
skill and knowledge in the field of valuation.
Other information
Management is responsible for the other information. The other information comprises the Management’s
Discussion and Analysis, which we obtained prior to the date of this auditor’s report and the information,
other than the consolidated financial statements and our auditor’s report thereon, included in the annual
report, which is expected to be made available to us after that date.
Our opinion on the consolidated financial statements does not cover the other information and we do not
and will not express an opinion or any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other
information identified above and, in doing so, consider whether the other information is materially
inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.
If, based on the work we have performed on the other information that we obtained prior to the date of this
auditor’s report, we conclude that there is a material misstatement of this other information, we are
required to report that fact. We have nothing to report in this regard. When we read the information, other
than the consolidated financial statements and our auditor’s report thereon, included in the annual report,
if we conclude that there is a material misstatement therein, we are required to communicate the matter to
those charged with governance.
Responsibilities of management and those charged with governance for the
consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial
statements in accordance with IFRS, and for such internal control as management determines is
necessary to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the
Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends to liquidate
the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting
process.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as
a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s
report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards
will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of
not detecting a material misstatement resulting from fraud is higher than for one resulting from error,
as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of
internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report
to the related disclosures in the consolidated financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to
the date of our auditor’s report. However, future events or conditions may cause the Company to
cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements,
including the disclosures, and whether the consolidated financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the Company to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and performance of the group audit. We
remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in internal
control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.
From the matters communicated with those charged with governance, we determine those matters that
were of most significance in the audit of the consolidated financial statements of the current period and
are therefore the key audit matters. We describe these matters in our auditor’s report unless law or
regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we
determine that a matter should not be communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is Ryan McKay.
/s/PricewaterhouseCoopers LLP
Chartered Professional Accountants
Calgary, Alberta
March 10, 2021
KELT EXPLORATION LTD.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT DECEMBER 31, 2020 AND DECEMBER 31, 2019
(CA$ thousands)
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable and accrued sales
Prepaid expenses, deposits and other
Derivative financial instruments
Total current assets
Investment in securities
Deferred income tax asset
Exploration and evaluation assets
Property, plant and equipment
Total assets
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities
Derivative financial instruments
Deferred premium on flow-through shares
Decommissioning obligations
Financing liability
Lease liability
Total current liabilities
Bank debt
Convertible debentures
Deferred income tax liability
Decommissioning obligations
Lease liability
Total liabilities
SHAREHOLDERS' EQUITY
Shareholders' capital
Reserve from common control transaction
Contributed surplus
Deficit
Total shareholders' equity
Total liabilities and shareholders' equity
Commitments
[Notes]
December 31, 2020 December 31, 2019
31,570
20,954
11,696
2,673
66,893
-
31,879
53,449
607,766
759,987
36,565
1,214
-
2,169
-
684
40,632
-
-
-
114,891
780
156,303
1,141,517
(57,668)
38,615
(518,780)
603,684
759,987
8,365
44,972
2,226
-
55,563
5,600
-
73,891
1,470,411
1,605,465
76,072
2,305
1,346
2,094
771
1,055
83,643
300,000
82,789
56,429
157,929
1,613
682,403
1,137,121
(57,668)
37,582
(193,973)
923,062
1,605,465
[14]
[5]
[14]
[14]
[15]
[6]
[7]
[14]
[10]
[11]
[12]
[8]
[9]
[15]
[10]
[12]
[13]
[18]
The accompanying notes form an integral part of these consolidated financial statements.
On behalf of the Board of Directors:
[signed]
[signed]
David J. Wilson, Director
Neil G. Sinclair, Director
KELT EXPLORATION LTD.
44
2020 ANNUAL REPORT
KELT EXPLORATION LTD.
CONSOLIDATED STATEMENT OF PROFIT (LOSS) AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2020 AND DECEMBER 31, 2019
(CA$ thousands, except per share amounts)
[Notes]
Revenue
Petroleum and natural gas sales
[16]
Royalties
Expenses
Production
Transportation
Cost of purchases
Financing
General and administrative
Share based compensation
Exploration and evaluation
Depletion, depreciation and impairment
Gain (loss) on derivative financial instruments
Foreign exchange gain (loss)
Unrealized gain (loss) on investment
Gain (loss) on sale of assets
Loss on redemption of convertible debentures
Premium on flow-through shares
Other income
Other expenses
Profit (loss) before taxes
[17]
[19]
[13]
[6]
[7]
[14]
[14]
[5]
[9]
Deferred income tax recovery (expense)
[15]
Profit (loss) and comprehensive income (loss)
Profit (loss) per common share
Basic
Diluted
[13]
[13]
Year ended December 31
2020
2019
207,156
(10,354)
196,802
87,447
33,155
8,303
18,039
7,322
5,153
3,219
449,123
611,761
13,680
(29)
(5,600)
(4,751)
(3,481)
1,346
1,080
(401)
(413,115)
88,308
(324,807)
(1.73)
(1.73)
394,356
(19,301)
375,055
100,384
50,516
16,740
22,773
8,889
6,859
5,055
156,396
367,612
(5,814)
(286)
600
6,902
-
-
562
-
9,407
(2,835)
6,572
0.04
0.04
The accompanying notes form an integral part of these consolidated financial statements.
KELT EXPLORATION LTD.
45
2020 ANNUAL REPORT
KELT EXPLORATION LTD.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
AS AT AND FOR THE YEARS ENDED DECEMBER 31, 2020 AND DECEMBER 31, 2019
(CA$ thousands)
Balance at December 31, 2018
Initial adoption of IFRS 16
Profit and comprehensive income
Common shares issued, net of costs:
Private placements
Premium on flow-through shares
Share issue costs, net of tax
Exercise of stock options
Vesting of restricted share units
Share based compensation
Balance at December 31, 2019
Loss and comprehensive loss
Share issue costs, net of tax
Exercise of stock options
Vesting of restricted share units
Share based compensation
Shareholders’ capital
Number of
Shares (000s)
[Notes]
Amount
Contributed
($ thousands)
Reserve
surplus
Retained
earnings
(deficit)
Total
shareholders’
equity
184,003
1,119,232
(57,668)
32,556
(200,324)
893,796
-
-
3,450
-
-
4
329
-
-
-
17,423
(1,346)
(34)
18
1,828
-
-
-
-
-
-
-
-
-
187,786
1,137,121
(57,668)
-
-
277
517
-
-
2
397
3,997
-
-
-
-
-
-
-
-
-
-
-
(5)
(1,828)
6,859
37,582
-
-
(123)
(3,997)
5,153
(221)
6,572
-
-
-
-
-
-
(221)
6,572
17,423
(1,346)
(34)
13
-
6,859
(193,973)
(324,807)
923,062
(324,807)
-
-
-
-
2
274
-
5,153
[13]
[13]
[13]
[13]
[13]
[13]
[13]
[13]
[13]
[13]
Balance at December 31, 2020
188,580
1,141,517
(57,668)
38,615
(518,780)
603,684
The accompanying notes form an integral part of these consolidated financial statements.
KELT EXPLORATION LTD.
46
2020 ANNUAL REPORT
KELT EXPLORATION LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
[UNAUDITED]
(CA$ thousands)
Operating activities
[Notes]
Year ended December 31
2020
2019
Profit (loss) and comprehensive income (loss)
(324,807)
6,572
Items not affecting cash:
Accretion
Share based compensation
Exploration and evaluation
Depletion, depreciation and impairment
Unrealized (gain) loss on derivative financial instruments
Unrealized (gain) loss on investment in securities
Premium on flow-through shares
Loss on redemption of convertible debentures
(Gain) loss on sale of assets
Deferred income tax expense (recovery)
Other
Settlement of decommissioning obligations
Change in non-cash operating working capital
Cash provided by operating activities
Financing activities
Increase (decrease) in bank debt
Increase (decrease) in financing liability
Issue of common shares, net of costs
Proceeds on exercise of stock options
Redemption of convertible debentures
Repayment of lease liability principle
Cash provided by (used in) financing activities
Investing activities
Exploration and evaluation assets
Property, plant and equipment
Property acquisitions
Property dispositions
Investment in securities
Change in non-cash investing working capital
Cash provided by investing activities
Impact of foreign currency on cash balances
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
[17]
[10]
[20]
[8]
[11]
[13]
[13]
[9]
[12]
[5]
[5]
[14]
[20]
5,532
5,153
3,219
449,123
(3,767)
5,600
(1,346)
3,481
4,751
(88,308)
201
(1,945)
2,392
59,279
(300,000)
28,024
3
274
(89,910)
(1,070)
(362,679)
(2,853)
(149,236)
(15)
506,061
-
(27,351)
326,606
(1)
23,205
8,365
31,570
7,393
6,859
5,055
156,396
4,902
(600)
-
-
(6,902)
2,835
11
(2,334)
(17,699)
162,488
131,119
771
17,377
13
-
(1,114)
148,166
(9,001)
(308,325)
(4,002)
5,704
(4,000)
10,891
(308,733)
(11)
1,910
6,455
8,365
The accompanying notes form an integral part of these consolidated financial statements.
KELT EXPLORATION LTD.
47
2020 ANNUAL REPORT
KELT EXPLORATION LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT AND FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
(All tabular amounts in thousands of Canadian dollars, except as otherwise indicated)
1. DESCRIPTION OF THE BUSINESS
Kelt Exploration Ltd. (“Kelt” or the “Company”) is an oil and gas company based in Calgary, Alberta, focused on the
exploration, development and production of crude oil and natural gas resources, primarily in northwestern Alberta and
northeastern British Columbia. The Company’s British Columbia assets are operated by Kelt Exploration (LNG) Ltd.
(“Kelt LNG”), a wholly owned subsidiary of Kelt. The Company’s common shares are listed on the Toronto Stock
Exchange (“TSX”) under the symbol “KEL”.
The head office of Kelt is located at Suite 300, 311 - 6th Avenue S.W., Calgary, Alberta T2P 3H2.
2. COVID-19 and Significant Judgements and Estimates
On January 30, 2020 the World Health Organization (“WHO”) declared a Public Health Emergency of International
Concern for a novel coronavirus strain which was later named COVID-19. By March 2020, the WHO declared the
COVID-19 a pandemic with governments around the world imposing significant public health measures in order to
reduce its spread. The COVID-19 pandemic resulted in an unprecedented global crude oil demand reduction in 2020
which in turn significantly lowered the average global benchmark crude oil price in 2020. Positive vaccine development
along with temporary production curtailments from OPEC+ and non-OPEC nations, resulted in a recovery in crude oil
prices in the second half of 2020. However, potential delays in the rollout of global vaccination programs and the
emergence of new COVID-19 variants, remains a risk to the continued length of the pandemic and the extent of the
impact on the global economy and crude oil prices.
The timely preparation of the financial statements requires management to make judgments, estimates and
assumptions that affect the application of accounting policies and the reported amount of assets, liabilities, income and
expenses. Actual results may differ materially from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognized in the period in which the estimates are reviewed and for any future years affected. Significant judgments,
estimates and assumptions made by management in these financial statements are outlined in note 3 of the
consolidated annual financial statements.
These estimates require assumptions for future commodity prices, exchange rates, interest rates, future oil and natural
gas production, and other economic issues that have a high degree of uncertainty. As the understanding of the longer-
term impacts of COVID-19 on commodity, credit and equity markets develops in 2021, so will the assumptions for the
valuation of Kelt’s exploration and evaluation assets, the valuation of its cash generating units, the timing around its
decommissioning obligations, the fair value of its investments in securities, the Company’s calculated expected credit
loss provision and the general collectability of its accounts receivables, and its liquidity.
3. BASIS OF PRESENTATION
The Company’s Board of Directors approved and authorized these consolidated annual financial statements on March
10, 2021 for issue on March 11, 2021.
a) Statement of compliance
The Company prepares its financial statements in accordance with Canadian generally accepted accounting principles
(“GAAP”) as set out in the CPA Canada Handbook - Accounting. These consolidated annual financial statements have
been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International
Accounting Standards Board (“IASB”), applicable to the preparation of annual financial statements.
KELT EXPLORATION LTD.
48
2020 ANNUAL REPORT
b) Basis of measurement
All references to dollar amounts in these financial statements and related notes are thousands of Canadian dollars,
unless otherwise indicated.
The financial statements have been prepared on a historical cost basis, except for certain financial instruments which
are recorded at fair value. The methods used to measure fair values are described in note 14 of these financial
statements.
c) Significant judgments and estimates
The timely preparation of the financial statements requires management to make judgments, estimates and
assumptions that affect the application of accounting policies and the reported amount of assets, liabilities, income and
expenses. Actual results may differ materially from these estimates. Estimates and underlying assumptions are
reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates
are reviewed and for any future years affected. Significant judgments, estimates and assumptions made by
management in these financial statements are discussed below.
Depletion, depreciation and reserves
The Company calculates depletion based on total proved reserves. Proved reserves are determined in accordance
with the Canadian Oil and Gas Evaluation Handbook (“COGEH”). The process of determining reserves is complex.
Significant judgments are based on available geological, geophysical, engineering, and economic data. These
judgments are based on estimates and assumptions that may change substantially as additional data from ongoing
development activities and production performance becomes available and as economic conditions impacting oil and
gas prices and costs change. The reserve estimates are based on production forecasts, prices and economic
conditions. As circumstances change and additional data becomes available, reserve estimates also change. Estimates
made are reviewed and revised, either upward or downward, as warranted by the new information. Revisions are often
required due to changes in well performance, forecasted prices, economic conditions and governmental regulation.
Although every reasonable effort is made to ensure that reserve estimates are accurate, reserve estimation can be
impacted by subjective decisions, new geological or production information and a changing environment. In addition,
revisions to reserve estimates can arise from changes in forecast oil and gas prices and reservoir performance. Such
revisions can be either positive or negative.
Changes in reserve estimates impact the financial results of the Company as reserves and estimated future
development costs are used to calculate depletion. Reserves are used in measuring the fair value less costs of disposal
(“FVLCD”) of property, plant and equipment for impairment calculations and for determining the fair value of PP&E
acquired in a business combination. Reserves also impact the Company’s assessment of the commercial viability and
technical feasibility of an exploration project which impacts the decision to transfer exploration and evaluation assets
to PP&E.
Exploration and evaluation assets
Judgment is required to determine the level at which E&E is assessed for impairment. For Kelt, the carrying value of
E&E assets is assessed for overall impairment at the operating segment level and on a specific identification basis prior
to transferring E&E assets to PP&E. The decision to transfer assets from E&E to PP&E requires judgment as it is based
on estimated proved reserves, which are used, in part, to determine a project’s technical feasibility and commercial
viability. Refer to additional information regarding E&E assets in note 6 of these financial statements.
Determination of Cash Generating Units (“CGUs”)
The determination of CGUs requires judgment in defining a group of assets that generate cash inflows that are largely
independent of the cash inflows from other assets or groups of assets. CGUs are determined by similar geological
structure, shared infrastructure, geographical proximity, commodity type, similar exposure to market risks and
materiality. As at December 31, 2020, the Company has one CGU for its assets located in the province of British
Columbia and one CGU for its assets located in the province of Alberta. Refer to specific information regarding the
Company’s CGUs in note 7 of the consolidated financial statements.
KELT EXPLORATION LTD.
49
2020 ANNUAL REPORT
Impairment of non-financial assets
Significant judgment is required to assess the Company’s non-financial assets, namely E&E and PP&E, for impairment
or potential reversals of previously recorded impairment. Management must first determine whether indicators of
impairment exist that suggest the carrying value may not be recoverable through the asset’s continued use or sale. In
addition, judgment is required to assess whether a previously recognized impairment for an asset no longer exists or
has decreased.
Significant assumptions used to estimate the recoverable amount of PP&E in the impairment test include proved and
probable reserve volumes, long term commodity price forecasts, future production volumes, future production costs,
future development capital expenditures and the discount rate.
Management calculates the recoverable amount of each CGU based on its FVLCD, using an after-tax discounted cash
flow analysis derived from proved plus probable reserves. Reserve estimates and expected future cash flows from
production of reserves are subject to measurement uncertainty as discussed above and are subject to variability due
to changes in forecasted commodity prices. In addition, the present value of forecast future cash flows is highly sensitive
to the discount rate. Judgment is required to determine an appropriate discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset. Refer to note 7 of the consolidated annual
financial statements for a discussion of the specific estimates and assumptions applied in the impairment test performed
at December 31, 2020.
Business combinations
Business combinations are accounted for using the acquisition method of accounting. The determination of fair value
often requires management to make assumptions and estimates about future events. The assumptions and estimates
with respect to determining the fair value of exploration and evaluation assets and property, plant and equipment
acquired generally require significant judgment and include estimates of reserves acquired, forecast benchmark
commodity prices and discount rates. Assumptions are also required to determine the fair value of decommissioning
obligations associated with the properties. Changes in any of these assumptions or estimates used in determining the
fair value of acquired assets and liabilities could impact the amounts assigned to assets, liabilities and goodwill in the
acquisition equation. Future profit (loss) can be affected as a result of changes in future depletion and depreciation or
impairment.
Decommissioning obligations
The Company estimates the decommissioning obligations for oil and gas wells and their associated production facilities
and infrastructure. In most instances, dismantling of assets and remediation occurs many years into the future. The
value of the ultimate decommissioning obligation can fluctuate in response to many factors including changes to
relevant legal requirements, the emergence of new restoration techniques, experience at other production sites,
changes to the risk-free discount rate and changes to inflation. The expected timing and amount of expenditure can
also change in response to changes in reserves or changes in laws and regulations. Judgments include the most
appropriate discount rate to use, which management has determined to be a risk-free rate. Key assumptions are
disclosed in note 10 of these financial statements.
Kelt estimates abandonment and reclamation costs based on a combination of publically available industry benchmarks
and internal site specific information. For producing wells and facilities, the expected timing of settlement is estimated
based on the proved plus probable period to abandonment for each depletable area, as per the independent reserve
report. For non-producing wells, the expected timing of settlement is estimated to be half of the period applied to
producing wells in that field, unless the timing to abandon and reclaim a specific well site or facility is known based on
budgeted expenditures.
Deferred income taxes
The Company follows the liability method for calculating deferred income taxes. Tax interpretations, regulations and
legislation in the jurisdictions in which the Company operates are subject to change. As such, deferred income taxes
are subject to measurement uncertainty. The provision for deferred income taxes also includes the following significant
judgments of management:
KELT EXPLORATION LTD.
50
2020 ANNUAL REPORT
• Deferred income tax assets are assessed by management at the end of the reporting period to determine the likelihood
that they will be realized from future taxable earnings, and are reduced to the extent it is no longer probable that the
related tax benefit will be realized. The Company’s non-capital losses expire in years 2039 to 2040.
• Intangible drilling and completion costs booked as Canadian development expenses (“CDE”) may be deducted on a
declining basis at 30%-45% per year. The allocation of costs to CDE may therefore impact the period in which Kelt may
become taxable in the future. In addition, the designation of CDE expenditures may impact the Company’s ability to
satisfy its flow-through share obligations; and
• Recognition of unrecognized deferred income tax asset – per IAS 12, deferred income taxes are not initially recognized
on transactions that are not business combinations. The Company did not initially recognize a deferred income tax
asset of $14.4 million that arose on the spin-out of certain assets from Celtic Exploration Ltd. (“Celtic”) at Kelt’s inception
on February 26, 2013. The initially unrecognized deferred tax asset is now being amortized at a rate of 2.5% per quarter,
which management believes is a reasonable estimate as it reflects the weighted average depletion rate of the properties
at the time of the spin-out and is aligned with Kelt’s corporate average depletion rate.
Share based compensation
The Company uses the fair value method of accounting for its long-term incentive plans, which include an Incentive
Stock Option Plan and a Restricted Share Unit Plan. Judgments include which valuation model is most appropriate for
the grant of the award to estimate its fair value. Estimates and assumptions are then used in the valuation model to
determine fair value.
For stock options, the Company uses the Black-Scholes option pricing model which requires that management make
assumptions for the expected life of the option, the anticipated volatility of the share price over the life of the option, the
risk-free interest rate for the life of the option, and the number of options that will ultimately vest. The assumptions used
by the Company are discussed in note 13 of these financial statements.
The fair value of restricted share units is estimated based on the volume weighted average trading price (“VWAP”) on
the TSX over three trading days immediately prior to the date of grant. Judgment is also required to estimate the rate
of forfeiture, or number of restricted share units that will ultimately vest. The assumptions used by the Company are
discussed in note 13 of these financial statements.
Flow-through shares
Flow through shares are accounted for under the residual method. Under this method, judgement is required to
determine the fair value of ordinary shares. Typically, it is based on the share price at the time the parties agree to the
transaction. In situations where flow-through shares are issued concurrent with an ordinary common share offering, the
difference in subscription prices is used to value the premium. Otherwise, the Company uses the VWAP of KEL
common shares for the five trading days immediately preceding the date of the binding agreement, to value the ordinary
common shares.
Judgment is also required to determine when the Company has fulfilled its obligation to pass on the tax deduction to
investors, at which time the premium on flow-through shares is recognized in income. The Company deems the
obligation to have been fulfilled in the period that eligible expenditures are incurred, regardless of the period in which
the tax deductions are legally renounced.
Leases
The Company applies judgement in reviewing each of its contractual arrangements to determine whether the lease
falls within the scope of IFRS 16. In determining the lease term to be recognized, management considers all facts and
circumstances that create an economic incentive to exercise an extension option, or not to exercise a termination
option.
The measurement of right-of-use (“ROU”) assets and lease liabilities are subject to management’s judgement of the
applicable incremental borrowing rate when the rate implicit in a lease is not readily determinable. Applicable
incremental borrowing rates are based on management’s judgements of the economic environment, term, the
underlying risk inherent to the asset (which may vary due to changes in the market conditions) and the expected lease
term.
KELT EXPLORATION LTD.
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2020 ANNUAL REPORT
4. SIGNIFICANT AND NEW ACCOUNTING POLICIES
Joint interests
A portion of the Company’s exploration, development and production activities is conducted jointly with others through
unincorporated joint ventures. These financial statements reflect only the Company’s proportionate interest of these
jointly controlled assets and the proportionate share of the relevant revenue and related costs.
Foreign currency translation
The financial statements are presented in Canadian dollars, which is the Company’s functional and presentation
currency. Transactions in U.S. dollars are initially recorded at the exchange rate in effect at the time of the transactions.
Monetary assets and liabilities denominated in U.S. dollars are translated to Canadian dollars using the closing
exchange rate at the Consolidated Statement of Financial Position date. The resulting exchange rate differences are
included in the Consolidated Statement of Profit (Loss) and Comprehensive Income (Loss).
Business combinations
Business combinations are accounted for using the acquisition method. The identifiable net assets acquired are
measured at their fair value at the date of acquisition. Any excess of the purchase price over the fair value of the net
assets acquired is recognized as goodwill. Any deficiency of the purchase price below the fair value of the net assets
acquired is recorded as a gain in the Consolidated Statement of Profit (Loss) and Comprehensive Income (Loss).
Transaction costs associated with the acquisition are expensed when incurred.
Principles of consolidation
As at December 31, 2020, the Company has one wholly-owned subsidiary, Kelt LNG. Subsidiaries are entities
controlled by the Company. Control exists when the Company has the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities. The consolidated financial statements include the
accounts of Kelt and Kelt LNG. The financial statements of Kelt LNG are prepared for the same reporting period as
Kelt, using uniform accounting policies. Subsidiaries are consolidated from the date of acquisition of control and
continue to be consolidated until the date there is a loss of control. All intercompany balances, transactions, revenue
and expenses are eliminated on consolidation.
Assets held for sale
Non-current assets are classified as held for sale if their carrying amounts will be recovered through a sale transaction
rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the
asset or disposal group is available for immediate sale in its present condition subject only to terms that are usual and
customary for sales of such assets. Management must be committed to the sale, which should be expected to qualify
for recognition as a completed sale within one year from the date of classification as held for sale. Non-current assets
and disposal groups classified as held for sale are measured at the lower of the carrying amount and fair value less
costs of disposal, and depletion & depreciation ceases at the time this designation is made.
If a non-current asset or disposal group has been classified as held for sale, but subsequently ceases to meet the
criteria to be classified as held for sale, the Company ceases to classify the asset or disposal group as held for sale.
Non-current assets and disposal groups that cease to be classified as held for sale are measured at the lower of
carrying amount before the asset or disposal group was classified as held for sale (adjusted for any depreciation,
amortization or revaluation that would have been recognized had the asset or disposal group not been classified as
held for sale) and its recoverable amount at the date of the subsequent decision not to sell. Any adjustment to the
carrying amount is recognized in profit or loss in the period in which the asset ceases to be classified as held for sale.
Financial instruments
Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the
instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or
have been transferred and the Company has transferred substantially all risks and rewards of ownership.
Financial assets and liabilities are offset and the net amount is reported in the Consolidated Statement of Financial
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2020 ANNUAL REPORT
Position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on
a net basis, or realize the asset and settle the liability simultaneously.
At initial recognition, the Company classifies its financial instruments in the following categories depending on the
purpose for which the instruments were acquired:
i) Financial assets and liabilities at fair value through profit or loss
A financial asset or liability is classified in this category if acquired principally for the purpose of selling or repurchasing
in the short-term. Derivatives are also included in this category unless they are designated as hedges.
Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are
expensed in the Consolidated Statement of Profit (Loss) and Comprehensive Income (Loss). Gains and losses arising
from changes in fair value are presented in profit or loss in the period in which they arise.
Financial assets and liabilities at fair value through profit or loss are classified as current in the Consolidated Statement
of Financial Position, except for any portion expected to be realized or paid beyond twelve months of the Consolidated
Statement of Financial Position date.
ii) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in
an active market. The Company’s loans and receivables are comprised of cash and cash equivalents, accounts
receivable and deposits. They are included in current assets due to their short-term nature.
Loans and receivables are initially recognized at the amount expected to be received less any required discount to
reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at amortized cost
using the effective interest method less any provision for impairment.
iii) Financial liabilities at amortized cost
Financial liabilities at amortized cost include accounts payable and bank debt. Accounts payable are initially recognized
at the amount required to be paid less any required discount to reduce the payables to fair value. Bank debt is
recognized initially at fair value, net of any transaction costs incurred, and subsequently at amortized cost using the
effective interest method. Financial liabilities are classified as current liabilities if payment is due within twelve months.
Otherwise, they are presented as non-current liabilities.
iv) Derivative financial instruments
The Company may use derivative financial instruments for risk management purposes. All derivatives have been
classified at fair value through profit or loss. Financial instruments are included on the Consolidated Statement of
Financial Position within derivative financial instruments and are classified as current or non-current based on the
contractual terms specific to the instrument. Gains and losses on re-measurement of derivatives are included in profit
or loss in the period in which they arise.
Investments in securities
Investments in securities are classified as fair value through profit or loss. Investments in the securities of private entities
are carried at fair value, which is estimated using values based on equity issuances and other indications of value (level
three fair value hierarchy estimates).
Exploration and evaluation assets (“E&E”) and property, plant and equipment (“PP&E”)
i) Recognition and measurement
Pre-license costs
Costs incurred prior to acquiring the legal rights to explore an area are charged directly to profit or loss as exploration
expense in the period incurred. The Company did not incur pre-license costs in the current or prior period.
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2020 ANNUAL REPORT
Exploration and evaluation assets
All costs directly associated with the exploration and evaluation of petroleum and natural gas reserves are initially
capitalized. Exploration and evaluation costs include unproved property acquisition costs such as undeveloped land
and mineral leases, geological and geophysical costs, and costs associated with exploratory drilling and appraisals.
Such costs are not subject to depletion or depreciation until they are reclassified from E&E to PP&E.
The costs are accumulated by exploration area pending determination of technical feasibility and commercial viability.
The technical feasibility and commercial viability is considered to be achieved when a sufficient amount of economically
recoverable reserves relative to the estimated potential resources is estimated to exist, combined with available
infrastructure to support commercial development. Prior to being transferred to PP&E, E&E costs are first tested for
impairment. If proved/probable reserves have not been established through the completion of exploration and
evaluation activities, and there are no future plans for activity in that exploration area, then the costs are determined to
be impaired and the amounts are charged to the Consolidated Statement of Profit (Loss) and Comprehensive Income
(Loss).
Property, plant and equipment
Property, plant, and equipment primarily consists of petroleum and natural gas development and production assets,
and is measured at cost less accumulated depletion and depreciation and accumulated impairment losses. These costs
include property acquisitions, development drilling, completion, gathering and
infrastructure, estimated
decommissioning costs and transfers from E&E. In addition, borrowing costs incurred for the construction of qualifying
assets are capitalized during the period of time that is required to complete and prepare the assets for their intended
use.
ii) Subsequent costs
Costs incurred subsequent to the determination of technical feasibility and commercial viability and the costs of
replacing components of equipment are recognized as property, plant and equipment only when they increase the
future economic benefits embodied in the specific asset to which they relate. All other expenditures are expensed as
incurred. Such capitalized amounts generally represent costs incurred in developing proved and/or probable reserves
and bringing in or enhancing production from such reserves. The carrying amount of any replaced or sold component
is derecognized.
The gain or loss from the divestitures of property, plant and equipment is recognized in the Consolidated Statement of
Profit (Loss) and Comprehensive Income (Loss). In addition, risk-sharing agreements in which the Company cedes a
portion of its working interest to a third-party are generally considered to be disposals of property, plant and equipment,
potentially resulting in a gain or loss on disposition.
Exchanges of property, plant and equipment are measured at fair value unless the exchange transaction lacks
commercial substance or the fair value of neither the asset received nor the asset given up is reliably measurable.
Unless the fair value of the asset received is more clearly evident, the cost of the acquired asset is measured at the
fair value of the asset given up. Where fair value is not used, the cost of the acquired asset is measured at the carrying
amount of the asset given up. The gain or loss on derecognition of the asset given up is recognized in profit or loss.
Property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to
arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the
difference between the net disposal proceeds and the carrying value of the asset) is included in profit or loss in the
period in which the item is derecognized.
iii) Depletion and depreciation
Development and production costs are accumulated on a area basis (“depletion units”). The net carrying value of each
depletion unit is depleted using the unit of production method by reference to the ratio of production in the year to the
related proved reserves, taking into account estimated future development costs necessary to bring those reserves into
production. Proved reserves and future development cost estimates are reviewed by independent reserve engineers
at least annually. Where significant components of development and production (“D&P”) assets have different useful
lives, they are accounted for and depreciated as separate items of property, plant and equipment.
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2020 ANNUAL REPORT
iv) Major maintenance expenditures
The costs of major maintenance associated with turnaround activities that benefit future years of operations are
capitalized and depreciated over the period to the next major maintenance turnaround. All other maintenance costs are
expensed as incurred.
Impairment of assets
Non-financial assets
The Company reviews the carrying value of its non-financial assets, including PP&E and E&E, on a quarterly basis to
determine whether there is any indication of impairment. For the purpose of impairment testing, assets are grouped
together into the smallest group of assets that generates cash inflows from continuing use that are largely independent
of the cash inflows of other assets or CGUs. The recoverable amount of an asset or a CGU is the greater of its value
in use and its FVLCD. E&E assets are assessed for overall impairment at the operating segment level and individual
E&E assets are assessed for impairment prior to transferring to PP&E.
FVLCD is defined as the amount obtainable from the sale of an asset or cash generating unit in an arm’s length
transaction between knowledgeable, willing parties, less the costs of disposal. The Company calculates FVLCD by
reference to the after-tax future cash flows expected to be derived from production of proved plus probable reserves,
less estimated selling costs. The estimated after-tax future cash flows are discounted to their present value using a
discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
Value in use is generally computed by reference to the present value of the future cash flows expected to be derived
from production of proved and probable reserves.
An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable
amount. Impairment losses are recognized in the Consolidated Statement of Profit (Loss) and Comprehensive Income
(Loss). Impairment losses recognized in respect of CGUs are allocated to reduce the carrying amounts of the assets
in the CGU on a pro rata basis.
Impairment losses recognized in prior years are assessed at each reporting date for any indication that the loss has
decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimate used to
determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount
does not exceed the carrying amount that would have been determined, net of depletion and depreciation, if no
impairment loss had been recognized.
Financial assets
A financial asset measured at amortized cost is assessed at each reporting date using an expected credit loss (“ECL”)
model to determine whether it is impaired. The Company applies the simplified approach to providing for ECLs, as
prescribed by IFRS 9, which permits the use of the lifetime expected loss provision for all trade receivables. The
Company uses a combination of historical and forward looking information to determine the appropriate loss allowance
provision. ECLs are a probability-weighted estimate of all possible default events over the expected life of the financial
asset which is based on credit quality since initial recognition.
All impairment losses are recognized in profit or loss. An impairment loss is reversed if the reversal can be related
objectively to an event occurring after the impairment loss was recognized. For financial assets measured at amortized
cost the reversal is recognized in profit or loss.
Leases
The Company recognizes a ROU asset and corresponding liability on the balance sheet at the date when the leased
asset is available for use. Interest expense on the lease liability is recognized over the lease term with an increase to
the underlying lease liability. The ROU asset is depreciated over the shorter of the asset’s useful life and lease term
using the straight line method of depreciation.
ROU assets and lease liabilities are initially measured on a present value basis. Lease liabilities are measured as the
net present value of lease payments, less any lease incentives. Lease payments may include fixed lease payments,
variable lease payments based on an index or rate, amounts expected to be payable under residual value guarantees,
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2020 ANNUAL REPORT
exercise price of a purchase option if the Company is reasonably certain to exercise that option, and payments related
to early lease termination penalties. ROU assets are measured at cost comprising of the initial measurement of the
lease liability, any lease payments made at, or before, the commencement date and any initial direct costs and asset
restoration costs. The lease liability is discounted using the Company’s incremental borrowing rate when the rate implicit
in the lease is not readily determinable.
The Company uses a single discount rate for a portfolio of leases with similar characteristics. Leases with lease terms
under 12 months and leases where the underlying asset is of low value are not recognized on the balance sheet and
are accounted as an expense as incurred.
Provisions and contingencies
Provisions are recognized when the Company has a present obligation as a result of a past event, if it is probable that
an outflow of resources will be required and if a reliable estimate can be made of the amount of the obligation. Provisions
are measured based on the best estimate of discounted future cash outflows.
Decommissioning obligations
The Company’s activities give rise to dismantling, decommissioning and site disturbance remediation activities. An
obligation is accrued for the estimated cost of site restoration and the corresponding amount is included in the cost of
the assets to which the obligations relate. Decommissioning obligations are measured at the present value of
management’s best estimate of the expenditure required to settle the present obligation at the Consolidated Statement
of Financial Position date. Subsequent to the initial measurement, the obligation is adjusted at the end of each period
to reflect the passage of time and changes in the estimated future cash flows underlying the obligation, changes to the
expected timing of site restoration, as well as any changes in the risk-free discount rate and inflation rate. Increases in
the provision due to the passage of time are recognized as a financing expense in the Consolidated Statement of Profit
(Loss) and Comprehensive Income (Loss) whereas increases/decreases due to changes in the estimated future cash
flows are capitalized. Actual costs incurred upon settlement of the decommissioning obligations are charged against
the provision to the extent the provision is established.
Contingencies
Contingent liabilities are possible obligations whose existence will only be confirmed by future events not wholly within
the control of the Company. When a contingency is substantiated by confirming events, can be reliably measured and
will likely result in an economic outflow, a liability is recognized in the financial statements as the best estimate required
to settle the obligation. A contingent liability is disclosed where the existence of an obligation will only be confirmed by
future events, or where the amount of a present obligation cannot be measured reliably or will likely not result in an
economic outflow.
Contingent assets are only disclosed when the inflow of economic benefits is probable. When the economic benefit
becomes virtually certain, the asset is no longer contingent and is recognized in the financial statements.
Convertible debentures
The Debentures are a non-derivative financial instrument that creates a financial liability of the entity and grants an
option to the holder of the instrument to convert it into common shares of the Company. The liability component of the
Debentures is initially recorded at the fair value of a similar liability that does not have a conversion option. The equity
component is recognized initially, net of deferred income taxes, as the difference between gross proceeds and the fair
value of the liability component. Transaction costs are allocated to the liability and equity components in proportion to
the allocation of proceeds. Subsequent to initial recognition, the liability component of the Debentures is measured at
amortized cost using the effective interest method and is accreted each period, such that the carrying value will equal
the principal amount outstanding at maturity. The equity component is not re-measured. The carrying amounts of the
liability and equity components of the Debentures are reclassified to shareholders’ capital on conversion to common
shares.
Income taxes
Total income tax expense is composed of both current and deferred income taxes.
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2020 ANNUAL REPORT
Current tax is the expected tax payable on taxable income for the year, using tax rates enacted or substantively enacted
at the reporting date, and any adjustment to tax payable in respect of previous years.
The Company follows the liability method of accounting for income taxes. Under this method, deferred income tax is
recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes. Deferred taxes are allocated between income and
equity depending on the nature of the account balance or transaction that gives rise to the temporary difference.
Deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are recognized for
deductible temporary differences, unused tax losses and unused tax credits only if it is probable that sufficient future
taxable income will be available to utilize those temporary differences and losses. Such deferred tax liabilities and
assets are not recognized if the temporary difference arises from goodwill or from the initial recognition of an asset or
liability in a transaction which is not a business combination and, at the time of the transaction, affects neither
accounting profit nor taxable income. Deferred tax is measured at the tax rates that are expected to be applied to
temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the
reporting date. The effect of a change in income tax rates on deferred tax assets and liabilities is recognized in the
Consolidated Statement of Profit (Loss) and Comprehensive Income (Loss) in the period that the change occurs.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and
assets, and they relate to income taxes levied by the same tax authority on the same taxable entity or on different tax
entities but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be
realized simultaneously. Deferred tax assets and liabilities are recorded on a non-discounted basis.
Revenue recognition
Kelt recognizes revenue at a point in time when control of the product has been transferred to the customer and
performance obligations have been satisfied. This is generally met when the customer obtains legal title to the product
and physical delivery at a delivery point has taken place. Revenue is measured based on the consideration specified
in the contracts the Company has with its customers.
The Company applies a practical expedient and does not disclose quantitative or qualitative information on remaining
performance obligations that have an original duration of one year or less. Kelt also applies a practical expedient that
allows any incremental costs of obtaining contracts with customer to be recognized as an expense when incurred rather
than being capitalized.
Kelt evaluates its arrangements with third parties and partners to determine if a principal or agent relationship exists.
In making this evaluation, management considers if it maintains control of the product, which is indicated by the
Company having the primary responsibility for the delivery of the product, having the ability to establish prices or having
inventory risk. If management determines that the Company does not maintain control of the product, then revenue is
recognized net of fees, if any, realized by the party from the transaction.
Royalty income is recognized as it accrues in accordance with the terms of the overriding royalty agreements.
Financing expense
Financing expenses include interest expense on borrowings and accretion of the discount on decommissioning
obligations due to the passage of time.
Borrowing costs incurred for the construction of qualifying assets are capitalized during the period of time required to
complete and prepare the assets for their intended use. All other borrowing costs are recognized in financing expense
using the effective interest method.
Share based compensation
The Company has an Incentive Stock Option Plan and Restricted Share Unit Plan (collectively, the “Plans”). Pursuant
to the Plans, stock options and restricted share units (“RSUs”) may be granted to officers, directors, employees and
certain consultants, which call for settlement through the issuance of new common shares of the Company.
The Company applies the fair value method of accounting for stock options, whereby each tranche in an award is
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2020 ANNUAL REPORT
valued separately on the grant date using the Black-Scholes option pricing model. The fair value of RSUs is calculated
based on the volume weighted average trading price over three trading days immediately prior to the date of grant. The
total fair value associated the stock options and RSUs is recognized over the service period using graded vesting, as
share based compensation expense with a corresponding increase to contributed surplus. An estimated forfeiture rate
is applied against the total fair value on the grant date and is adjusted to reflect the actual number of options that
ultimately vest each period. The consideration received by the Company on the exercise of stock options is recorded
as an increase in shareholders’ capital, together with the corresponding amounts previously recognized in contributed
surplus.
Flow-through shares
Canadian tax legislation permits entities meeting specified criteria to issue securities to investors whereby the
deductions for tax purposes related to eligible expenditures may be claimed by the investors rather than by the entity
(herein referred to as “flow-through shares”). The Company uses the residual method to account for flow-through
shares. Under this method, the proceeds from the issuance are allocated between i) the proceeds of the offering of
shares, and ii) the renunciation of tax deductions. At the time the flow-through shares are issued: i) shareholders’ capital
is credited based on the fair value of ordinary common shares, and ii) the tax deductions to be renounced are deferred
and presented a liability in the Consolidated Statement of Financial Position, at an amount equal to the residual
difference between the fair value of the Company’s ordinary common shares relative to the amount the investor pays
for the flow-through shares. At the time the Company fulfills its obligation to pass on the tax deductions to investors,
which is deemed to occur when the eligible expenditures are incurred, the liability (deferred premium) is drawn down
in proportion to the eligible expenditures incurred in the period and the premium on flow-through shares is recognized
as income in the Consolidated Statement of Profit (Loss) and Comprehensive Income (Loss). Concurrently, a deferred
income tax liability is recognized for the taxable temporary difference that arises from the difference between the
carrying amount of the eligible expenditures capitalized as an asset for accounting purposes and a tax base of nil,
because the deduction has been renounced to investors.
Per share amounts
Basic profit (loss) per common share is calculated by dividing profit (loss) for the period attributable to common
shareholders of the Company by the weighted average number of common shares outstanding during the period.
Common shares issued as part of the consideration transferred in a business combination or common control
transaction are included in the weighted average number of common shares starting from the acquisition date.
Diluted profit (loss) per common share is calculated giving effect to the potential dilution that would occur if all
outstanding “in-the-money” stock options were exercised or converted to common shares. The weighted average
number of common shares outstanding during the period is adjusted by the incremental number of shares calculated
in accordance with the treasury stock method. The treasury stock method assumes that the proceeds received from
the exercise of all potentially dilutive instruments are used to repurchase common shares at the volume weighted
average market price during the period.
Government grants
Government grants are recognized when there is a reasonable expectation that the conditions attached to the grants
have been met, and that the grants will be received. Government grants primarily related to asset expenditures will be
presented as a reduction to the capital cost of the asset the grant relates to. Government grants primarily related to
income will be presented in the Consolidated Statement of Profit or Loss as a reduction to the expense line item the
grant relates to, in the period in which the expenditures are incurred, or the related income is earned. Government
grants primarily related to decommissioning obligations will be presented as a reduction to the carrying value of the
obligation once the grant is received.
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5. PROPERTY ACQUISITIONS AND DISPOSITIONS
The following table summarizes the fair value of net assets acquired pursuant to property acquisitions during the year
ended December 31, 2020 and the prior year ended December 31, 2019:
Acquisitions
Exploration and evaluation assets
Property, plant and equipment
Decommissioning obligations
Total assets (liabilities) acquired
Consideration
Cash consideration
Non-cash consideration
Total consideration
Dispositions
Exploration and evaluation assets
Property, plant and equipment
Decommissioning obligations
Financing and other liabilities
Carrying value of net (assets) liabilities disposed
Consideration
Cash consideration, after closing adjustments (1)
Deposit held in trust
Non-cash consideration
Total consideration
Gain (loss) on sale of assets
December 31, 2020 December 31, 2019
2,113
1,245
(1,015)
2,343
(15)
(2,328)
(2,343)
6,969
828
(614)
7,183
(4,002)
(3,181)
(7,183)
December 31, 2020 December 31, 2019
(20,321)
(565,651)
42,917
29,915
(513,140)
496,061
10,000
2,328
508,389
(4,751)
(2,900)
28
889
-
(1,983)
5,704
-
3,181
8,885
6,902
(1) The amounts reported in the table above were estimated based on information available at the time of preparation of these interim financial statements.
In particular, closing adjustments were estimated based on interim statements of adjustments. The net gain or loss ultimately recognized by the Company
upon determination of final closing adjustments may differ from these estimates.
On August 21, 2020, Kelt completed the disposition of its assets located at Inga, Fireweed and Stoddart in British
Columbia (“Inga Assets”), for consideration of $503.9 million after closing adjustments and transaction costs. The
disposition (hereinafter referenced as the “Inga Assets Disposition”) had an effective date of July 1, 2020. The Inga
Assets had a carrying value of $511.0 million, resulting in a loss on sale of $7.1 million.
The Inga Asset Disposition agreement included customary indemnification provisions with an associated holdback
amount of $15.0 million, with the outstanding balance held in trust and recorded as a deposit on the balance sheet. The
holdback of $15.0 million will be released over the course of 12 months from the transaction closing date of August 21,
2020 in three equal amounts, provided no claims are brought forth by the purchaser. Kelt has received the first
installment of $5.0 million, leaving $10.0 million as a deposit held in trust at December 31, 2020.
6. EXPLORATION AND EVALUATION ASSETS
Exploration and evaluation assets consist of the Company’s undeveloped land, geological and geophysical assets, and
exploratory drilling costs for projects in which the technical feasibility or commercial viability has yet to be determined.
At the time sufficient information becomes available to determine whether the project is technically feasible or
commercially viable, the costs are either transferred to property, plant, and equipment or charged to exploration and
evaluation expense.
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2020 ANNUAL REPORT
The following table reconciles movements of exploration and evaluation assets:
Balance, beginning of year
Additions
Property acquisitions [note 5]
Property dispositions [note 5]
Transfers to property, plant and equipment
Exploration and evaluation expense
Balance, end of year
December 31, 2020 December 31, 2019
73,891
2,853
2,113
(20,321)
(1,868)
(3,219)
53,449
119,282
9,001
6,969
(2,900)
(53,406)
(5,055)
73,891
The Company concluded that there are no indicators of potential impairment of its E&E assets at December 31, 2020.
7. PROPERTY, PLANT AND EQUIPMENT
Net carrying value
December 31, 2020 December 31, 2019
Development and production (“D&P”) assets
Right-of-use (“ROU”) assets
Corporate assets
Total net carrying value of property, plant and equipment
606,332
1,243
191
607,766
1,467,577
2,338
496
1,470,411
The following table reconciles movements of property, plant and equipment (“PP&E”) during the year:
Property, plant and equipment, at cost
D&P Assets
Corporate
Assets
Balance at December 31, 2018
Initial adoption of IFRS 16
Additions
Property acquisitions [note 5]
Property dispositions [note 5]
Decommissioning costs
Transfers from E&E
Balance at December 31, 2019
Additions
Property acquisitions [note 5]
Property dispositions [note 5]
Decommissioning costs
Transfers from E&E
1,878,643
-
307,554
828
28
14,971
53,406
2,255,430
148,798
1,245
(1,154,435)
(1,008)
1,868
4,029
-
771
-
-
-
-
4,800
438
-
-
-
-
ROU Assets
Total PP&E
-
1,882,672
2,666
953
-
(118)
-
-
3,501
884
-
2,666
309,278
828
(90)
14,971
53,406
2,263,731
150,120
1,245
(1,882)
(1,156,317)
-
-
(1,008)
1,868
Balance at December 31, 2020
1,251,898
5,238
2,503
1,259,639
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2020 ANNUAL REPORT
Accumulated depletion, depreciation and
impairment
D&P Assets
Corporate
Assets
ROU Assets
Total PP&E
Balance at December 31, 2018
Depletion and depreciation expense
Dispositions
Balance at December 31, 2019
Depletion and depreciation expense
Impairment
Dispositions [note 5]
Balance at December 31, 2020
633,465
154,388
-
787,853
110,904
336,500
(589,691)
645,566
3,518
786
-
4,304
743
-
-
5,047
-
1,222
(59)
1,163
976
-
(879)
1,260
636,983
156,396
(59)
793,320
112,623
336,500
(590,570)
651,873
Future capital costs required to develop proved reserves in the amount of $536.7 million (December 31, 2019 –
$1,378.9 million) are included in the depletion calculation for development and production assets.
As at December 31, 2020 Kelt assessed its CGU’s for indicators of impairment or impairment reversals as compared
to its last impairment taken in the first quarter of 2020. Based on a recovery of commodity prices since March 31, 2020
and an increase in reserves for the year ended December 31, 2020 compared to December 31, 2019, the Company
determined that there were potential indicators of impairment reversals for the Alberta CGU. For the BC CGU, Kelt
determined that there were no potential indicators of impairment as at December 31, 2020.
Recoverable amounts for the Alberta CGU as of December 31, 2020 were estimated based on FVLCD methodology
which is calculated using the present value of the CGUs’ expected future cash flows (after-tax). The cash flow
information was derived from a report on the Company’s oil and gas reserves which was prepared by an independent
qualified reserve evaluator, Sproule Associates Limited (“Sproule”) as of December 31, 2020. The projected cash flows
used in the FVLCD calculation reflect market assessments of key assumptions as at December 31, 2020, including
forecasts of commodity prices, inflation rates, and foreign exchange rates (Level 3 fair value inputs). Cash flow forecasts
were based on Sproule’s December 31, 2020 evaluation of the Company’s reserves to determine production profiles
and volumes, operating costs, royalties, maintenance and future development capital expenditures. Future cash flow
estimates were discounted using after-tax risk-adjusted discount rates. The after-tax discount rate applied in the
impairment calculation as at December 31, 2020 was 16.0% and was based on the risks specific to the assets in the
CGU. As at December 31, 2020, the net carrying amount of PP&E, less decommissioning obligations, for the Alberta
CGU was $446.8 million.
Based on the results of the impairment test as at December 31, 2020 and continued economic uncertainty with the
COVID-19 pandemic, no impairment or impairment reversals were recorded for the Alberta CGU.
The recoverable amounts estimated pursuant to FVLCD calculations are sensitive to the discount rate and future
commodity price assumptions. As at December 31, 2020, holding all other variables in the FVLCD calculation constant:
o
o
if the discount rate increased (decreased) by 1%, the FVLCD of the Alberta CGU would decrease by
$28.7 million and increase by $31.3 million; and
if the forecast combined average realized price decreased (increased) by 5%, the FVLCD of the Alberta
CGU would decrease by $75.1 million and increase by $75.1 million.
Forecast future prices used in the impairment evaluation as at December 31, 2020 reflect the benchmark prices set-
forth in the tables below, adjusted for basis differentials to determine local reference prices, transportation costs and
tariffs, heat content and quality.
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2020 ANNUAL REPORT
As at December 31, 2020
WTI Cushing Oklahoma (US$/bbl)
Canadian Light Sweet 40 API ($/bbl)
NYMEX Henry Hub (US$/MMBtu)
AECO-C Spot ($/MMBtu)
(1) Prices escalate between 1.7%-2.5% in years 2026 to 2030
As at December 31, 2019
WTI Cushing Oklahoma (US$/bbl)
Canadian Light Sweet 40 API ($/bbl)
NYMEX Henry Hub (US$/MMBtu)
AECO-C Spot ($/MMBtu)
Exchange rate (CA$/US$)
(1) Prices escalate at 2-3% after 2024
2021
46.00
54.55
3.00
2.86
2020
60.25
71.58
2.57
2.05
2022
48.00
57.14
3.00
2.78
2021
63.11
75.33
2.79
2.32
2023
53.00
63.64
3.00
2.69
2022
66.02
77.51
2.99
2.60
2024
54.06
64.91
3.06
2.75
2023
67.64
79.77
3.15
2.74
2025(1)
55.14
66.21
3.12
2.80
2024(1)
69.16
81.60
3.22
2.82
1.3158
1.2987
1.2500
1.2500
1.2500
In the first quarter of 2020, as a result of the COVID-19 pandemic and a resulting collapse in global crude oil prices, an
impairment test was conducted over all Kelt's CGUs. Based on the impairment test performed on the Alberta CGU, it
was determined that the carrying value was in excess of the recoverable amount resulting in an impairment loss of
$77.1 million (before-tax). The impairment was primarily a result of a decrease in forecast crude oil prices as at March
31, 2020 compared to forecast prices as at December 31, 2019.
Recoverable amounts for each CGU as of March 31, 2020 were estimated based on FVLCD methodology which is
calculated using the present value of the CGUs’ expected future cash flows (after-tax). The cash flow information was
derived from a report on the Company’s oil and gas reserves which was prepared by an independent qualified reserve
evaluator, Sproule Associates Limited (“Sproule”) as of December 31, 2019, with the information rolled forward to March
31, 2020. The projected cash flows used in the FVLCD calculation reflect market assessments of key assumptions as
at March 31, 2020, including long-term forecasts of commodity prices, inflation rates, and foreign exchange rates (Level
3 fair value inputs). Cash flow forecasts were based on Sproule’s December 31, 2019 evaluation of the Company’s
reserves to determine production profiles and volumes, operating costs, maintenance and future development capital
expenditures. Future development capital was moved forward one year from the December 31, 2019 Sproule reserve
evaluation due to deferrals of the Company’s capital program as of March 31, 2020. The decrease in commodity prices
from December 31, 2019 resulted in the removal of wells which were previously economic in the December 31, 2019
Sproule report. Future cash flow estimates were discounted using after-tax risk-adjusted discount rates. The after-tax
discount rate applied in the impairment calculation as at March 31, 2020 was 12.0% and was based on the risks specific
to the assets in the CGUs. As at March 31, 2020, the net carrying amount of PP&E, less decommissioning obligations,
for the Alberta CGU was $463.5 million subsequent to the impairment taken.
As at March 31, 2020, holding all other variables in the FVLCD calculation constant:
o
o
if the discount rate increased (decreased) by 1%, the impairment of the Alberta CGU would decrease by
$28.5 million and increase by $31.3 million; and
if the forecast combined average realized price decreased (increased) by 5%, the impairment of the
Alberta CGU would decrease by $51.4 million and increase by $63.4 million.
Forecast future prices used in the impairment evaluation as at March 31, 2020 reflect the benchmark prices set-forth
in the tables below, adjusted for basis differentials to determine local reference prices, transportation costs and tariffs,
heat content and quality.
KELT EXPLORATION LTD.
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2020 ANNUAL REPORT
As at March 31, 2020
WTI Cushing Oklahoma (US$/bbl)
Canadian Light Sweet 40 API ($/bbl)
NYMEX Henry Hub (US$/MMBtu)
AECO-C Spot ($/MMBtu)
2020
30.00
29.72
2.08
1.78
2021
41.18
47.20
2.54
2.22
2022
49.88
59.66
2.79
2.42
2023
55.87
67.00
2.92
2.54
2024(1)
57.98
69.92
2.99
2.61
(1) Prices escalate between 1.8%-3.1% in years 2025 to 2030
On August 21, 2020, the Company completed the disposition of the Inga Assets, which comprised the majority of the
Company’s BC CGU assets. In the second quarter of 2020, the BC CGU was impaired by $259.4 million (before-tax)
based on the transaction value contained in the Inga Asset Disposition purchase and sale agreement.
8. BANK DEBT
The Company has a $20.0 million demand revolving credit facility (“the Credit Facility”) with a Canadian chartered bank.
There are no borrowings under the Credit Facility at December 31, 2020 other than outstanding letters of credit of $1.2
million. Repayments of principal are not required provided that the borrowings under the facility do not exceed the
authorized borrowing amount. The credit facility is subject to semi-annual redeterminations. There are no financial
covenants under the Credit Facility and Kelt is in compliance with all other covenants. Covenants include industry
standard positive and negative covenants including reporting requirements, permitted indebtedness, permitted risk
management activities, permitted encumbrances and other standard business operating covenants. Security is
provided for by a demand debenture with a floating charge over all assets in the amount of $100.0 million.
Interest is payable monthly for borrowings through direct advances. Interest rates fluctuate based on the prime rate
plus the applicable margin. The applicable margin ranges from 25 basis points to 400 basis points depending upon the
Company’s Net Debt to Cash Flow ratio of between less than 0.25 times to greater than three times. Under the Credit
Facility, borrowings through the use of bankers’ acceptances are also available. Stamping fees fluctuate based on a
pricing grid and range from 1.25% to 5.25%, depending upon the Company’s Net Debt to Cash Flow ratio of between
less than 0.25 times to greater than three times.
As at December 31, 2019, the Company had a revolving committed term credit facility with a syndicate of financial
institutions, with an authorized amount of $350.0 million, of which $300.0 million was drawn against the term credit
facility. The 2019 credit facility was subject to semi-annual borrowing base reviews, occurring approximately in April
and October of each year. Interest on the 2019 credit facility was payable monthly for borrowings through direct
advances. Interest rates fluctuated based on a pricing grid which ranged from bank prime plus 0.5% to bank prime plus
2.5%, depending upon the Company’s debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”)
ratio of between less than 0.5 times to greater than three times. Under the Credit Facility, borrowings through the use
of bankers’ acceptances were also available. Stamping fees fluctuated based on a pricing grid and range from 1.5% to
3.5%, depending upon the Company’s debt to EBITDA ratio of between less than 0.5 times to greater than three times.
The following table summarizes the changes in the value of the Credit Facility during the year ended December 31,
2020 and 2019:
Balance, beginning of year
Net drawdown of bank debt
Repayment of bank debt
Decrease in unamortized financing fees
Increase in prepaid interest on banker acceptances
Bank debt movement
Balance, end of year
December 31, 2020 December 31, 2019
300,000
15,000
(315,000)
-
-
(300,000)
-
168,881
130,000
-
95
1,024
131,119
300,000
KELT EXPLORATION LTD.
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2020 ANNUAL REPORT
9. CONVERTIBLE DEBENTURES
Balance at December 31, 2018
Accretion of discount
Balance at December 31, 2019
Accretion of discount
Loss on redemption
Redemption of convertible debentures
Balance at December 31, 2020
Number of
convertible
debentures
89,910
-
89,910
-
-
Liability
component
($ thousands)
Equity
Component
($ thousands)
78,390
4,399
82,789
3,640
3,481
12,843
-
12,843
-
-
-
(89,910)
(89,910)
-
-
12,843
On October 3, 2020, Kelt redeemed the $89.9 million outstanding principal amount of the convertible unsecured
subordinated debentures. As a result of the redemption, the carrying value of the convertible debentures was increased
to the redemption value of $89.9 million, with a $3.5 million loss being recorded in the third quarter of 2020.
In connection with the redemption of the Debentures, the Debentures were delisted from trading on the Toronto Stock
Exchange effective October 5, 2020.
Accretion of the liability component and interest paid on the Debentures are included in financing expenses in the
Consolidated Statement of Profit (Loss) and Comprehensive Income (Loss) (note 17).
10. DECOMMISSIONING OBLIGATIONS
Decommissioning obligations arise as a result of the Company’s net ownership interests in petroleum and natural gas
assets including well sites, processing facilities and infrastructure. The following table provides a reconciliation of the
carrying amount of the obligation associated with the retirement of oil and gas properties:
Balance, beginning of year
Obligations incurred
Obligations acquired [note 5]
Obligations disposed [note 5]
Obligations settled
Changes in discount rate
Changes in inflation rate
Revisions to estimates
Accretion expense
Balance, end of year
Decommissioning obligations – current
Decommissioning obligations – non-current
Key assumptions
Risk free rate
Inflation rate
December 31, 2020 December 31, 2019
160,023
1,265
1,015
(42,917)
(1,945)
35,862
(36,101)
(2,034)
1,892
117,060
2,169
114,891
1.2%
1.2%
144,667
4,995
614
(889)
(2,334)
21,373
(12,868)
1,471
2,994
160,023
2,094
157,929
1.8%
1.8%
The underlying cost estimates are derived from a combination of published industry benchmarks as well as site specific
information. As at December 31, 2020 the undiscounted amount of the estimated cash flows required to settle the
obligation is $117.1 million (December 31, 2019 – $160.0 million) and is expected to be incurred over the next 50 years.
KELT EXPLORATION LTD.
64
2020 ANNUAL REPORT
Based on an inflation rate of 1.2%, the undiscounted amount of the estimated future cash flows required to settle the
obligation is $174.8 million at December 31, 2020 (December 31, 2019 – $291.2 million). The inflated future cost
estimates are discounted based on a risk-free rate to determine the carrying amounts presented in the table above.
Accretion of the decommissioning obligation due to the passage of time is presented within financing expenses in the
Consolidated Statement of Profit (Loss) and Comprehensive Income (Loss) (note 17).
11. FINANCING LIABILITY
Balance, beginning of year
Additions
Payments
Interest expense
Liabilities disposed [note 5]
Balance, end of year
Financing liability – current
Financing liability – non-current
December 31, 2020 December 31, 2019
771
28,727
(1,903)
1,200
(28,795)
-
-
-
-
810
(143)
104
-
771
771
-
As part of the Inga Assets Disposition, the purchaser acquired $28.8 million of third party financing obligations related
to a natural gas pipeline and a field compressor.
12. LEASE LIABILITY
Balance, beginning of year
Additions
Liabilities disposed [note 5]
Interest expense
Lease payments
Balance, end of year
Lease liability – current
Lease liability – non-current
December 31, 2020 December 31, 2019
2,668
884
(1,018)
148
(1,218)
1,464
684
780
2,888
953
(59)
165
(1,279)
2,668
1,055
1,613
The Company has lease liabilities commercial office space and vehicle leases. The weighted average discount rate for
new leases entered in the period ended December 31, 2020 was 4.8% (December 31, 2019 – 5.9%). Payments under
the Company’s short-term leases were $4.0 million for the year ended December 31, 2020 (December 31, 2019 – $10.5
million), which primarily related to short term drilling rig leases.
As part of the Inga Assets Disposition, the purchaser acquired $0.9 million of lease liabilities related to office space,
field equipment, vehicle leases and a surface lease.
13. SHARE CAPITAL
Authorized
The Company is authorized to issue an unlimited number of common shares and an unlimited number of preferred
shares, each without par value.
Issued and outstanding
The following table summarizes the change in common shares issued and outstanding. There are no preferred shares
issued or outstanding as of December 31, 2020 (December 31, 2019 – nil).
KELT EXPLORATION LTD.
65
2020 ANNUAL REPORT
Balance at December 31, 2018
Issued for cash through common share offerings
Deferred premium on flow-through shares
Issued for cash on exercise of stock options
Transfer from contributed surplus on exercise of stock options
Released upon vesting of restricted share units
Share issue costs, net of deferred taxes ($12)
Balance at December 31, 2019
Issued for cash on exercise of stock options
Transfer from contributed surplus on exercise of stock options
Released upon vesting of restricted share units
Share issue costs, net of deferred taxes
Balance at December 31, 2020
Flow-through common shares
Number of
Shares (000s)
184,003
3,450
-
4
-
329
-
Amount
($ thousands)
1,119,232
17,423
(1,346)
13
5
1,828
(34)
187,786
1,137,121
277
-
517
-
274
123
3,997
2
188,580
1,141,517
Canadian tax legislation permits entities meeting specified criteria to issue flow-through common shares securities
(“FTS”) to investors whereby the deductions for tax purposes related to eligible expenditures may be claimed by the
investors rather than by the entity. As of December 31, 2020, all eligible expenditures for the Company’s flow through
shares issued in 2019 have been incurred, with no additional FTS being issued in 2020.
Stock options
Kelt has an Incentive Stock Option Plan (the “Option Plan”) that provides for granting of stock options to directors,
officers, employees and certain consultants. The stock options granted pursuant to the Option Plan are to be settled
through the issuance of new common shares of the Company which typically vest in equal tranches over a three year
period and have a maximum term of five years to expiry.
The following table summarizes the change in stock options outstanding:
Balance at December 31, 2018
Granted
Exercised (1)
Forfeited
Expired
Balance at December 31, 2019
Granted
Exercised (1)
Forfeited
Expired
Balance at December 31, 2020
Number of
Options (000s)
Average Exercise
Price ($/share)
9,803
2,305
(4)
(227)
(1,862)
10,015
2,725
(277)
(1,267)
(1,229)
9,967
6.20
2.92
3.25
5.66
9.96
4.76
1.03
0.99
4.44
4.77
3.88
(1) The average share price on the date stock options were exercised during the year ended December 31, 2020 was $1.64 per common share ($5.27
per common share on average during the year ended December 31, 2019).
The total fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing
model with weighted average assumptions as follows:
KELT EXPLORATION LTD.
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2020 ANNUAL REPORT
Risk free interest rate
Expected life (years)
Expected volatility (1)
Expected dividend yield
Expected forfeiture rate
Fair value of options granted during the year ($/share)
Year ended December 31
2020
0.52%
3.5
67.7%
0.0%
4.4%
0.48
2019
1.3%
3.5
48.7%
0.0%
4.5%
1.06
(1) The expected volatility for options granted is estimated based on Kelt’s historical volatility over the expected life.
The following table summarizes information regarding stock options outstanding at December 31, 2020:
Range of
exercise prices
per common share
$0.00 to $3.50
$3.51 to $6.50
$6.51 to $9.50
Total
Restricted share units
Number of
options
outstanding
(000s)
Weighted
average
remaining
term (years)
Weighted average
exercise price for
options outstanding
($/share)
Number of
options
exercisable
(000s)
Weighted average
exercise price for
options exercisable
($/share)
4,132
5,245
590
9,967
4.0
1.7
2.0
2.7
1.76
5.14
7.62
3.88
596
4,516
476
5,588
2.76
5.20
7.54
5.14
Kelt has a restricted share unit plan that provides for granting of restricted share units (“RSUs”) to officers, employees
and certain consultants. The RSUs granted under the RSU Plan are to be settled through the issuance of new common
shares upon vesting. RSUs typically vest in two equal tranches with the first half vesting after two years and the second
half after three years.
The following table summarizes the change in RSUs outstanding:
Balance at December 31, 2018
Granted
Released upon vesting
Forfeited
Balance at December 31, 2019
Granted
Released upon vesting
Forfeited
Balance at December 31, 2020
Number of
RSUs (000s)
1,097
144
(329)
(47)
865
10
(517)
(12)
346
The total fair value associated with stock options and RSUs is recognized over the service period using graded vesting,
resulting in share based compensation expense as follows:
Stock options
Restricted share units
Share base compensation expense
Year ended December 31
2020
2,945
2,208
5,153
2019
4,152
2,707
6,859
KELT EXPLORATION LTD.
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2020 ANNUAL REPORT
Per share amounts
The table below summarizes the weighted average number of common shares outstanding used in the calculation of
basic and diluted profit (loss) per common share:
(000s of common shares)
Weighted average common shares outstanding, basic
Effect of dilution from stock options and RSUs
Weighted average common shares outstanding, diluted
Year ended December 31
2020
188,093
-
188,093
2019
184,302
644
184,946
The Company uses the treasury stock method to determine the dilutive effect of stock options and RSUs. Under this
method, only “in-the-money” dilutive instruments impact the calculation of diluted profit per common share. For the year
ended December 31, 2020, the effect of stock options and RSUs were anti-dilutive therefore excluded in calculating
the diluted weighted average common shares outstanding.
14. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Financial instruments of the Company include cash and cash equivalents, investment in securities, accounts receivable
and accrued sales, deposits, accounts payable and accrued liabilities, derivative financial instruments, convertible
debentures, financing liabilities and bank debt (when an outstanding balance is drawn on the Credit Facility). The
Company is exposed to financial risks arising from its financial assets and liabilities that include credit and liquidity risk
in addition to the market risks associated with commodity prices, and interest and foreign exchange rates. Profit (loss),
cash flows and the fair value of financial assets and liabilities may fluctuate due to movement in market prices or as a
result of the Company’s exposure to credit and liquidity risks.
The Company uses derivative financial instruments in order to manage market risks. The objective of risk management
is to manage and control market risk exposures within acceptable limits, while maximizing long-term returns. All such
transactions are conducted in accordance with the Company’s established risk management policies that permit
management to enter into commodity price agreements, provided that:
the contracts are not entered into for speculative purposes;
i)
ii) the total notional quantity hedged, at the time of entering into the contract, does not exceed 65% of average
daily production; and
iii) the contracted term does not exceed 36 months.
Commodity price risk
Inherent to the business of producing oil and gas, the Company’s cash provided by operating activities is subject to
commodity price risk. Commodity price risk is the risk that future cash flows will fluctuate as a result of changes in
commodity prices. Commodity prices are impacted by world economic events that dictate the levels of supply and
demand as well as the currency exchange rate relationship between the Canadian and U.S. dollar.
As at December 31, 2020, the following commodity price risk management contracts are outstanding:
Contract Type(1)(2)
Notional Volume
Contract Price
Remaining Term
Crude oil derivative contracts
WTI fixed price swap
WTI fixed price swap
Natural gas derivative contracts
1,500 bbl/d
1,500 bbl/d
CAD$56.17/bbl
CAD$58.52/bbl
Jan – Mar 2021
Apr – June 2021
NYMEX fixed price swap
10,000 MMBtu/d
CAD$4.00/MMBtu
Jan – Oct 2021
AECO 5A fixed price swap
5,000 GJ/d
CAD$2.70/GJ
Jan – Oct 2021
(1) West Texas Intermediate (“WTI”)
(2) NYMEX Henry Hub (“NYMEX”)
KELT EXPLORATION LTD.
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2020 ANNUAL REPORT
Subsequent to December 31, 2020, the Company entered into the following commodity price risk management
contracts:
Contract Type(1)(2)
Crude oil derivative contracts
WTI fixed price swap
WTI-MSW basis swap
(1) West Texas Intermediate (“WTI”)
(2) Mixed Sweet Blend (“MSW”)
Interest rate risk
Notional Volume
Contract Price
Remaining Term
1,500 bbl/d
1,500 bbl/d
CAD$70.00/bbl
Jul – Sept 2021
WTI less USD$4.55/bbl
Apr – Sept 2021
The Company has historically been exposed to interest rate risk to the extent that changes in market interest rates will
impact the Company’s Credit Facility which is subject to a floating interest rate. At the end of the third quarter, the
Company has no amounts drawn on its Credit Facility, therefore there would be no effect on the Company’s interest
rate risk if the market interest rate increased or decreased.
During the third quarter of 2020, the Company paid $0.3 million to unwind all outstanding interest rate swaps. As at
December 31, 2020, there are no interest rate risk management contracts outstanding.
Foreign exchange risk
Kelt is exposed to fluctuations of the Canadian to U.S. dollar exchange rate given realized pricing is directly influenced
by U.S. dollar denominated benchmark pricing and from exposure from certain U.S. dollar denominated natural gas
marketing arrangements.
During the third quarter of 2020, the Company received $0.4 million for unwinding its foreign exchange risk
management contract. As at December 31, 2020, there are no foreign exchange risk management contracts
outstanding.
Gains and losses on risk management contracts
The table below summarizes realized and unrealized gains (losses) on risk management contracts:
Realized gain (loss)
Unrealized gain (loss)
Gain (loss) on derivative financial instruments
Fair value measurements
Year ended December 31
2020
9,913
3,767
13,680
2019
(912)
(4,902)
(5,814)
The Company classifies fair value measurements using a fair value hierarchy that reflects the significance of the inputs
used in making the measurements. The Company maximizes the use of observable inputs when preparing calculations
of fair value, where possible. The fair value hierarchy has the following levels:
•
•
•
Level 1 - Values are based on unadjusted quoted prices available in active markets for identical assets or liabilities
as of the reporting date.
Level 2 - Values are based on inputs, including quoted forward prices for commodities, time value and volatility
factors, which can be substantially observed or corroborated in the marketplace. Prices in Level 2 are either directly
or indirectly observable as of the reporting date.
Level 3 - Values are based on prices or valuation techniques that are not based on observable market data.
Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect
the placement within the fair value hierarchy.
The fair value of cash and cash equivalents, accounts receivable and accrued sales, deposits, accounts payable and
KELT EXPLORATION LTD.
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2020 ANNUAL REPORT
accrued liabilities approximate their carrying value due to the short term to maturity of these instruments. Bank debt
bears interest at a floating market rate and accordingly the fair market value of bank debt approximates the carrying
amount. The fair value of the convertible debentures is estimated using quoted market prices on the TSX as of the
Consolidated Statement of Financial Position date.
The fair value of financial assets and liabilities, excluding working capital, is attributable to the following fair value
hierarchy levels at December 31, 2020:
Balance as at December 31, 2020
Gross
Netting(1)
Net CV
Level 1
Level 2
Level 3
Carrying Value (“CV”)
Fair Value
Financial assets
Derivative financial instrument
2,673
Financial liabilities
Derivative financial instrument
1,214
-
-
2,673
1,214
-
-
2,673
1,214
-
-
Balance as at December 31, 2019
Gross
Netting(1)
Net CV
Level 1
Level 2
Level 3
Carrying Value (“CV”)
Fair Value
Financial assets
Investment in securities
5,600
Financial liabilities
Derivative financial instrument
Convertible debentures (2)
2,305
82,789
-
-
-
5,600
2,305
-
-
82,789
102,497
-
5,600
2,305
-
-
-
(1) Financial assets and liabilities are only offset if the Company has the current legal right to offset and intends to settle on a net basis or settle the asset
and liability simultaneously. Kelt offsets derivative contracts assets and liabilities when the counterparty, commodity, currency and timing of settlement
are the same.
(2) The fair value of the convertible debentures of $102.5 million as at December 31, 2019, is based on the closing market price of $114.00 per Debenture,
being the price at which the Debentures last traded in the quarter, and represents the market value of the entire instrument.
The estimated fair value of the Company’s investments in securities is based on equity issuances and other indications
of value (level three fair value hierarchy inputs). During the third quarter of 2020, the Company wrote off its investment
in a private corporation due to reduced economics for the construction of a proposed downstream facility. The
impairment resulted in an unrealized loss on Kelt’s investment in securities of $5.6 million.
Credit risk
As at December 31, 2020, the carrying amount of cash and cash equivalents, accounts receivable and accrued sales,
and deposits, represent the Company’s maximum credit exposure. Cash and cash equivalents are held on deposit with
a Canadian chartered bank. The Company’s credit risk exposure arises primarily from receivables from oil and gas
marketers and joint venture partners.
The composition of the Company’s accounts receivable is set out in the following table:
Accounts receivable and accrued sales
December 31, 2020 December 31, 2019
Joint venture partners
Oil and gas marketers
GST input tax credits
Interest receivable
Risk management contracts
Other
ECL provision
Accounts receivable and accrued sales
3,510
16,650
1,011
104
86
346
(753)
20,954
3,067
37,548
4,802
-
189
113
(747)
44,972
During the year ended December 31, 2020, sales to four oil and gas marketers each individually represented more
KELT EXPLORATION LTD.
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2020 ANNUAL REPORT
than 10% of total sales. Sales to these marketers account for approximately 31%, 24%, 15% and 12% of total sales,
respectively. During the comparative period ended December 31, 2019, sales to three oil and gas marketers accounted
for approximately 38%, 20% and 19% of total sales, respectively. Kelt has mitigated some of its credit risk through
parental guarantees (with terms up to five years) and through the majority of its sales to oil and gas marketers which
have been rated investment-grade by an independent ratings agency.
The oil and gas industry has a pre-arranged monthly clearing day for payment of revenues from all buyers of oil and
natural gas; this occurs on the 25th day following the month of sale. As a result, the Company’s production revenues
are current. All other accounts receivable are generally contractually due within 30-90 days.
The balance of accounts receivable outstanding for more than 90 days relates primarily to receivables from the
Company’s joint venture partners. Credit risk related to joint venture receivables is mitigated by obtaining partner
approval of significant capital expenditures prior to expenditure and in certain circumstances may require cash deposits
in advance of incurring financial obligations on behalf of joint venture partners. The Company has the ability to withhold
production from joint venture partners in the event of non-payment or may be able to register security on the assets of
joint venture partners. As of December 31, 2020, the collection risk on outstanding accounts receivable balances is
considered low as only 5.0% of the total accounts receivable balance is outstanding for more than 90 days (December
31, 2019 – 5.1%).
Liquidity risk
The Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they are due. The
Company’s financial liabilities as at December 31, 2020 include accounts payable, derivative financial instruments and
lease liabilities. The Company manages liquidity risk with its budgeting process which sets out expected debt levels,
capital expenditures and funds flow from operations. In addition, risk management contracts such as derivative financial
instruments may be used to protect future revenue. The Board of Directors approves an annual capital expenditure
budget, which is regularly monitored and updated as necessary in response to changing capital requirements and
expected revenues.
The capital intensive nature of Kelt’s operations may create a working capital deficiency position during periods with
high levels of capital investment. However, the Company targets to maintain sufficient unused bank credit lines or other
liquidity to satisfy such working capital deficiencies. Kelt plans to finance its 2021 capital program using cash on hand
as of December 31, 2020 and funds from operations.
In 2020 Kelt sold its Inga Assets for cash proceeds of $510.0 million before closing adjustments. Proceeds of the
disposition were used to repay the Company’s outstanding bank debt, and outstanding convertible debentures resulting
in a working capital surplus of $26.3 million at December 31, 2020, and nil amounts drawn on the Company’s credit
facility. The working capital surplus will allow Kelt to enter 2021 in a strong financial position.
The table below outlines a contractual maturity analysis for Kelt’s financial liabilities as at December 31, 2020:
Accounts payable and accrued liabilities
Derivative financial instruments
Lease liability
Total
Capital management
Within 1 Year
1 to 5 Years More than 5 Years
36,565
1,214
684
38,463
-
-
780
780
-
-
-
-
Total
36,565
1,214
1,464
39,243
The Company’s capital structure is comprised of shareholders’ capital and working capital. Kelt’s objective when
managing its capital structure is to maintain financial flexibility in order to meet financial obligations, as well as to finance
future capital expenditures relating to exploration, development and acquisition activities.
Following the repayment of the bank debt, disposition of the financing obligations and redemption of the convertible
debentures, Kelt is without any long-term bank or financial obligations resulting in a positive working capital surplus of
$26.3 million as at December 31, 2020.
At December 31, 2020, the Company has a $20.0 million demand credit facility for the purpose of short-term working
KELT EXPLORATION LTD.
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2020 ANNUAL REPORT
capital management, hedging and letters of credit. Based on current commodity prices and the uncertain impacts of
COVID-19, Kelt does not anticipate using bank debt to fund capital expenditures until market conditions improve.
Bank debt
Working capital deficiency (surplus)
Net bank debt (1)
Annualized quarterly adjusted funds from operations (2)(3)
Net bank debt to annualized quarterly adjusted funds from operations ratio (2)
December 31,
2020
December 31,
2019
-
(26,261)
(26,261)
43,032
(0.6)
300,000
28,080
328,080
186,620
1.8
(1) “Net bank debt” is equal to “Bank debt, net of working capital” determined in accordance with GAAP.
(2) Adjusted funds from operations is a non-GAAP financial measure which is calculated as cash provided by operating activities before changes in non-
cash operating working capital, and adding back (if applicable): transaction costs and settlement of decommissioning obligations.
(3) Adjusted funds from operations are annualized based on the most recent quarter’s adjusted funds from operations.
The Company monitors its capital structure and short-term financing requirements using a net bank debt to annualized
quarterly adjusted funds from operations ratio, which is a non-GAAP financial measure. Kelt targets a net bank debt to
annualized quarterly adjusted funds from operations ratio of less than 2.0 times. The Company may adjust its future
capital structure according to market conditions in order to maintain flexibility to achieve its objectives. To adjust its
capital structure, the Company may increase or decrease capital expenditures including acquisitions and dispositions,
issue new shares, issue new debt or repay existing debt.
As more particularly described in note 8, Kelt is subject to certain non-financial covenants under the Credit Facility
agreement. As at December 31, 2020, the Company is in compliance with all covenants as no bank debt has been
drawn against its Credit Facility. The Company is not subject to any other externally imposed capital requirements.
15. INCOME TAXES
Kelt was not required to pay income taxes in the current or prior year as the Company had sufficient income tax
deductions available to shelter taxable income. Tax deductions available as of December 31, 2020 are estimated to be
approximately $717.6 million (December 31, 2019 – $1,184.7 million).
The following table reconciles income taxes calculated at the weighted average Canadian statutory rate with the actual
provision for deferred income taxes per the Consolidated Statement of Profit (Loss) and Comprehensive Income (Loss):
Year ended December 31
Profit (Loss) before income taxes
Canadian statutory tax rate
Expected income tax expense (recovery)
Increase (decrease) resulting from:
Non-deductible expenses (1)
Amortization of common control reserve
Qualifying expenditures on flow-through shares
Premium on flow-through shares
Permanent differences
Unrecognized deferred tax assets
Change in tax rates
Other
Deferred income tax expense (recovery)
2020
(413,115)
26.0%
(107,457)
1,243
(1,384)
4,704
(323)
3,295
10,505
1,071
38
(88,308)
2019
9,407
26.8%
2,522
1,833
(1,528)
-
-
-
-
(113)
121
2,835
(1) Non-deductible expenses primarily include share based compensation.
The Canadian statutory tax rate per the rate reconciliation above represents the weighted average combined federal
KELT EXPLORATION LTD.
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2020 ANNUAL REPORT
and provincial corporate tax rate. The federal corporate tax rate is 15.0% and the annual average provincial tax rate in
Alberta and British Columbia is 9.0% and 12.0% respectively.
The movement in deferred income tax assets and liabilities, without taking into consideration the offsetting balances
within the same tax jurisdiction are as follows:
Deferred income tax asset (liability)
Derivative financial instruments
PP&E and E&E
Decommissioning obligations
Lease liability
Convertible debentures
Share and debt issue costs
Reserve from common control transaction
Non-capital losses (2)
Net deferred tax asset (liability)
Deferred income tax asset (liability)
Derivative financial instruments
PP&E and E&E
Decommissioning obligations
Lease liability
Convertible debentures
Share and debt issue costs
Reserve from common control transaction
Non-capital losses (2)
Net deferred tax asset (liability)
Balance at
December 31, 2019
Recognized in
profit and CI(1)
Recognized in
balance sheet
Balance at
December 31, 2020
611
(202,485)
38,688
660
(1,538)
271
(1,734)
109,098
(56,429)
(947)
143,103
(11,511)
(374)
1,538
(137)
1,404
(44,768)
88,308
-
-
-
-
-
-
-
-
-
(336)
(59,382)
27,177
286
-
134
(330)
64,330
31,879
Balance at
December 31, 2018
Recognized in
profit and CI(1)
Recognized in
balance sheet
Balance at
December 31, 2019
(701)
(178,034)
39,061
-
(2,726)
633
(3,501)
91,662
(53,606)
1,312
(24,451)
(373)
660
1,188
(374)
1,767
17,436
(2,835)
-
-
-
-
-
12
-
-
12
611
(202,485)
38,688
660
(1,538)
271
(1,734)
109,098
(56,429)
(1) Comprehensive income has been abbreviated as “CI”.
(2) The Company’s non-capital losses expire in years 2039 to 2040.
The amount and timing of reversals of temporary differences will be dependent upon a number of factors, including the
nature and timing of future capital expenditures and the Company’s future operating results.
16. REVENUE
Kelt sells its oil, natural gas, and NGLs production under variable price contracts. The transaction price is based on a
benchmark commodity price, adjusted for quality, location or other factors, whereby each component of the pricing
formula (apart from the benchmark commodity price) can be either fixed or variable, depending on the contract terms.
Revenues are typically collected on the 25th day of the month following the prior month’s production, with revenue
being recorded once the product is delivered to a contractually agreed upon delivery point.
Kelt generates oil treating, gas processing, and other services income from fees charged to third parties provided at
facilities where Kelt has an ownership interest. Kelt generates marketing revenue from the sales of third party volumes
related to the Company's oil blending operations, with the production being sold under the same terms of the Company’s
variable oil price contracts discussed above.
Where Kelt is the principal to transportation arrangements, gas production sales includes revenue for variable priced
contracts after the point where title is transferred to a third party. The transaction price for these contracts is based on
benchmark commodity prices at a location that is different from the price at which title transfer takes place. For the year
end December 31, 2020, transportation costs incurred in relation to these contracts was $16.7 million (December 31,
KELT EXPLORATION LTD.
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2020 ANNUAL REPORT
2019 – $22.5 million).
Kelt has a number of variable priced long-term commodity sales contracts where the volumes under these contracts
for future periods have not yet been fulfilled resulting in unsatisfied performance obligations as at the reporting date.
These contracts have varying durations, with the longest individual commodity sales contract ending in October 2023.
The following table presents Kelt’s production disaggregated by sales source:
Oil production
Oil treating and other
NGLs production
Gas production
Gas processing and other
Marketing revenue
Total petroleum and natural gas sales
December 31, 2020 December 31, 2019
104,560
756
22,904
70,807
1,125
7,004
207,156
226,327
548
33,796
108,990
1,419
23,276
394,356
Included in accounts receivable at December 31, 2020 is $16.7 million (December 31, 2019 - $37.5 million) of accrued
oil and gas sales related to December 2020 production.
17. FINANCING EXPENSES
The following table summarizes significant components of the Company’s financing expenses:
Interest on bank debt [note 8]
Bank fees
Interest on convertible debentures [note 9]
Interest on finance lease [note 12]
Interest on finance liability [note 11]
Accretion of convertible debentures [note 9]
Accretion of decommissioning obligations [note 10]
Financing expense
18. COMMITMENTS
Year ended December 31
2020
7,047
713
3,399
148
1,200
3,640
1,892
18,039
2019
9,833
782
4,496
165
104
4,399
2,994
22,773
As of December 31, 2020, the Company is committed to future payments under the following agreements:
Firm processing commitments
Firm transportation commitments (1)
2021
11,549
20,670
2022
11,557
19,247
2023
11,566
14,922
2024
11,607
13,451
2025 Thereafter
9,455
12,250
34,776
22,101
Total commitments
32,219
30,804
26,488
25,058
21,705
56,877
(1) A portion of Kelt’s commitments on the Alliance pipeline is denominated in US dollars. The volumes committed vary over the term of the contract,
which is effective until October 31, 2023, respectively. Amounts are translated to Canadian dollars at the spot rate on December 31, 2020 of
CA$/US$1.2732.
Following the closing of the sale of the Inga Assets, approximately $278.1 million of Kelt’s processing and transportation
commitments were acquired by the purchaser including a take-or-pay firm processing commitment for 75 MMcf/d raw
gas under a 10-year term and a firm transportation commitment on the North Montney Mainline under a 20-year term.
KELT EXPLORATION LTD.
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2020 ANNUAL REPORT
19. GENERAL AND ADMINISTRATIVE (“G&A”) EXPENSES
The following table summarizes significant components of the Company’s G&A expenses:
Salaries and benefits (1) (2)
Other G&A expenses
G&A expenses before recoveries
Overhead recoveries
G&A expense
Year ended December 31
2020
7,154
4,586
11,740
(4,418)
7,322
2019
10,340
4,949
15,289
(6,400)
8,889
(1) Refer to additional information regarding salaries and benefits paid to key management personnel in note 21 of these financial statements.
(2) 2020 salaries and benefits include $1.5 million received as part of the Canada Emergency Wage Subsidy program.
20. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in non-cash working capital
Accounts receivable and accrued sales
Prepaid expenses and deposits
Accounts payable and accrued liabilities
Change in non-cash working capital
Relating to:
Operating activities
Investing activities
Change in non-cash working capital
Year ended December 31
2020
24,018
(9,470)
(39,507)
(24,959)
2,392
(27,351)
(24,959)
2019
1,208
(558)
(7,458)
(6,808)
(17,699)
10,891
(6,808)
During the reporting period, the Company made the following cash outlays in respect of interest and taxes:
Cash outlays in respect of interest and taxes
Interest and standby fees on bank debt
Interest on convertible debentures (1)
Taxes (2)
Year ended December 31
2020
7,352
3,744
-
2019
9,180
4,496
-
(1) Interest on the Debentures was paid on May 31st and early on October 3rd upon redemption of convertible debentures (note 9).
(2) Kelt was not required to pay cash income taxes as the Company had sufficient income tax deductions available to shelter taxable income (note 15).
21. RELATED PARTY TRANSACTIONS
The Company has engaged a law firm where a director of Kelt is a partner, and Kelt has engaged the services of a
registrar and transfer agent where an officer of Kelt is a director of the company. During the year ended December 31,
2020, the Company incurred $0.8 million (2019 – $0.5 million) in disbursements to related parties.
Key management personnel are those persons having authority and responsibility for planning, directing and controlling
the activities of the Company. The following table summarizes compensation paid or payable to officers and directors
of the Company:
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2020 ANNUAL REPORT
Salaries, bonuses and other benefits
Share based compensation
Total compensation
Year ended December 31
2020
1,831
594
2,425
2019
2,260
1,230
3,490
During the year ended December 31, 2020, key management personnel were granted 1,209,000 stock options with an
exercise price of $0.99 per share. During the year ended December 31, 2019, key management personnel were granted
50,000 RSUs and 930,000 stock options with an exercise price of $2.84 per share.
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2020 ANNUAL REPORT
ABBREVIATIONS
bbls
barrels
mbbls
thousand barrels
bbls/d
barrels per day
CONVERSION OF UNITS
Imperial = Metric
1 acre = 0.4 hectares
2.5 acres = 1 hectare
BOE
barrels of oil equivalent
1 bbl = 0.159 cubic metres
mBOE
thousand barrels of oil equivalent
6.29 bbls = 1 cubic metre
BOE/d
barrels of oil equivalent per day
1 foot = 0.3048 metres
mcf
thousand cubic feet
mmcf
million cubic feet
bcf
billion cubic feet
mmcf/d
million cubic feet per day
MMBtu
million British Thermal Units
GJ
gigajoules
AECO
NIT
Alberta Energy Company “C” Meter Station of
the NOVA Pipeline System
NOVA Inventory Transfer (“AB-NIT”), being the
reference price at the AECO Hub
3.281 feet = 1 metre
1 mcf = 28.2 cubic metres
0.035 mcf = 1 cubic metre
1 mile = 1.61 kilometres
0.62 miles = 1 kilometre
1 MMBtu = 1.054 GJ
0.949 MMBtu = 1 GJ
Natural gas is equated to oil on the basis of
6 mcf = 1 BOE
WTI
West Texas Intermediate
Sulphur is equated to gas on the basis of
1LT = 10 mcf (1 BOE = 0.6 LT)
MSW
Mixed Sweet Blend Edmonton
NYMEX
New York Mercantile Exchange
Station 2
Spectra Energy receipt location
NGX
API
Natural Gas Exchange Inc. (Canada)
American Petroleum Institute
MD&A
Management’s Discussion and Analysis
Q1
Q2
Q3
Q4
First quarter ended March 31st
Second quarter ended June 30th
Third quarter ended September 30th
Fourth quarter ended December 31st
YTD
Year to date
BT
AT
1P
2P
Before income taxes
After income taxes
Proved reserves
Proved plus probable reserves
KELT EXPLORATION LTD.
77
2020 ANNUAL REPORT
CORPORATE INFORMATION
BOARD OF DIRECTORS
OFFICERS
Robert J. Dales 2, 3, 4, 7
President, Valhalla Ventures Inc.
David J. Wilson
President & Chief Executive Officer
Geri L. Greenall 2, 3, 6
Chief Financial Officer, Spartan Delta Corp.
Sadiq H. Lalani
Vice President & Chief Financial Officer
William C. Guinan 1, 5
Independent Businessman
Michael R. Shea 3, 4, 6
Independent Businessman
Neil G. Sinclair 2, 4, 5, 6
President, Sinson Investments Ltd.
David J. Wilson 5
President & Chief Executive Officer,
Kelt Exploration Ltd.
1 chairman of the board
2 member of the audit committee
3 member of the reserves committee
4 member of the compensation committee
5 member of the health, safety and environment committee
6 member of the nominating committee
7 lead director
HEAD OFFICE
Suite 300, East Tower, 311 Sixth Avenue S.W.
Calgary, Alberta T2P 3H2
Phone: 403.294.0154
Fax: 403.291.0155
www.keltexploration.com
REGISTRAR AND TRANSFER AGENT
Odyssey Trust Company
350-300 5th Avenue S.W.
Calgary, Alberta T2P 3C4
LEGAL COUNSEL
Borden Ladner Gervais LLP
Centennial Place, East Tower,
Suite 1900, 520 Fourth Avenue S.W.
Calgary, Alberta T2P 0R3
Douglas J. Errico
Senior Vice President, Land and Corporate
Development
Alan G. Franks
Vice President, Production
Bruce D. Gigg
Vice President, Engineering
David A. Gillis
Vice President, Finance
Douglas O. MacArthur
Vice President, Operations
Patrick W.G. Miles
Vice President, Exploration
Carol Van Brunschot
Vice President, Marketing
Louise K. Lee
Corporate Secretary
AUDITORS
PricewaterhouseCoopers LLP
Suite 3100, 111 Fifth Avenue S.W.
Calgary, Alberta T2P 5L3
EVALUATION ENGINEERS
Sproule Associates Limited
Suite 900, 140 Fourth Avenue S.W.
Calgary, Alberta T2P 3N3
STOCK EXCHANGE LISTING
Toronto Stock Exchange
Common shares “KEL”
KELT EXPLORATION LTD.
78
MANAGEMENT’S DISCUSSION & ANALYSIS
SUITE 300, EAST TOWER
311 SIXTH AVENUE SOUTH WEST
CALGARY, ALBERTA T2P 3H2