ANNUAL REPORT
AS AT AND FOR THE YEAR ENDED
DECEMBER 31, 2022
[THIS PAGE IS INTENTIONALLY BLANK]
FINANCIAL AND OPERATIONAL HIGHLIGHTS
Three months ended
December 31
Year ended
December 31
(CA$ thousands, except as otherwise indicated)
2022
2021
%
2022
2021
%
Shareholders' equity
901,424
722,724
Weighted average shares outstanding (000s)
191,812
195,828
189,134
192,676
FINANCIAL
Petroleum and natural gas sales
Cash provided by operating activities
Adjusted funds from operations (1)
Basic ($/ common share) (1)
Diluted ($/ common share) (1)
Net income and comprehensive income
Basic ($/ common share)
Diluted ($/ common share)
Capital expenditures, net of A&D (1)
Total assets
Bank debt
Net debt (1)
Basic
Diluted
OPERATIONS
Average daily production
Oil (bbls/d) (2)
NGLs (bbls/d)
Gas (mcf/d)
Combined (BOE/d)
Production per million common shares (BOE/d) (1)
Net realized prices, before financial instruments (1)
Oil ($/bbl) (2)
NGLs ($/bbl)
Gas ($/mcf)
Operating netbacks ($/BOE) (1)
Petroleum and natural gas sales
Cost of purchases
Combined net realized price, before financial instruments(1)
Realized gain (loss) on financial instruments
Combined net realized price, after financial instruments (1)
Royalties
Production expense
Transportation expense
Operating netback (1)
Land holdings
Gross acres
Net acres
Reserves – proved plus probable
Crude oil and liquids (mbbls) (2)
Gas (mmcf)
Combined (mBOE)
152,720
120,523
63,742
92,851
0.48
0.47
52,056
68,155
0.36
0.35
54,238
52,996
0.28
0.28
0.28
0.28
68,594
67,118
27
22
36
33
34
2
-
-
2
613,358
306,022
316,763
159,714
326,992
161,394
1.71
1.67
0.85
0.85
158,758
114,256
0.83
0.81
317,540
0.61
0.60
213,511
913,497
901,424
722,724
191,101
195,456
188,800
190,807
1,128,104
913,497
23
1,128,104
11,300
9,789
1,150
883
28,220
11,300
9,789
1,150
883
28,220
6,416
3,478
108,849
28,036
146
107.88
60.54
6.52
59.21
(3.30)
55.91
1.66
57.57
(6.15)
(10.90)
(3.03)
37.49
6,624
3,255
95,616
25,815
136
91.43
50.03
5.46
50.75
17
(0.74)
346
50.01
12
(2.62)
163
47.39
(4.17)
(9.91)
(3.31)
30.00
5,640
4,049
105,280
27,236
143
117.18
67.64
6.63
61.70
(2.16)
59.54
(5.68)
53.86
(6.60)
(10.22)
(3.06)
33.98
4,692
3,154
78,846
20,987
111
81.30
40.03
4.35
41.35
49
(0.83)
160
40.52
47
(2.14)
165
38.38
(3.58)
(9.13)
(3.38)
22.29
795,559
722,281
579,857
558,763
129,479
104,824
1,267,931
895,948
340,801
254,149
795,559
722,281
579,857
558,763
129,479
104,824
1,267,931
895,948
340,801
254,149
94
92
103
101
96
39
36
35
49
23
-65
25
1
2
20
28
34
30
29
44
69
52
40
84
12
-9
52
3
4
24
42
34
-65
25
1
2
-3
7
14
9
7
18
21
19
21
47
10
-8
25
3
4
24
42
34
(1) Refer to advisories regarding non-GAAP and other financial measures.
(2) “Liquids” include field condensate and NGLs; “Oil” includes crude oil and field condensate combined.
KELT EXPLORATION LTD.
1
2022 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, 2022.
Average production for the three months ended December 31, 2022 was 28,036 BOE per day, up 9% compared to
average production of 25,815 BOE per day during the fourth quarter of 2021. Average production for 2022 was 27,236
BOE per day, an increase of 30% from average production of 20,987 BOE per day in 2021. Production for the three
months ended December 31, 2022 was weighted 35% to oil and NGLs and 65% to gas.
Kelt’s petroleum and natural gas sales during the fourth quarter of 2022 increased 27% to $152.7 million, up from
$120.5 million in the same period of the previous year. Petroleum and natural gas sales for the year were $613.4 million,
up 94% from $316.8 million in 2021. Kelt’s net realized average oil price during the fourth quarter of 2022 was $107.88
per barrel, up 18% from $91.43 per barrel in the fourth quarter of 2021. The Company’s net realized average NGLs
price during the fourth quarter of 2022 was $60.54 per barrel, up 21% from $50.03 per barrel in the fourth quarter of
2021. Kelt’s net realized average gas price for the fourth quarter of 2022 was $6.52 per Mcf, up 19% from $5.46 per
Mcf in the fourth quarter of 2021.
For the three months ended December 31, 2022, adjusted funds from operations was $92.9 million ($0.47 per share,
diluted), compared to $68.2 million ($0.35 per share, diluted) in the fourth quarter of 2021. Year over year, adjusted
funds from operations increased 103% to $327.0 million ($1.67 per share, diluted) from $161.4 million ($0.85 per share,
diluted) in 2021. During 2022, Kelt recorded net income of $158.8 million ($0.81 per share, diluted) compared to $114.3
million ($0.60 per share, diluted) in the previous year.
At December 31, 2022, Kelt had net debt of $9.8 million compared to $28.2 million at December 31, 2021. At a net debt
to adjusted funds from operations ratio of 0.03 times, Kelt continues to maintain its strong financial position.
Net capital expenditures incurred during the three months ended December 31, 2022 were $68.6 million, up 2%
compared to net capital expenditures of $67.1 million during the fourth quarter of 2021. During the fourth quarter of
2022, the Company spent $31.6 million on drill and complete operations and $35.9 million on well equipment, facilities
and pipelines.
As at December 31, 2022, Kelt’s net working interest land holdings were 579,857 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 and Charlie Lake plays. At December 31, 2022, Kelt’s net Montney land holdings were 344,274
acres (538 sections) and its Charlie Lake holdings were 88,447 net acres (138 sections).
At Oak, after more than a year of production history from wells that were put on production in late 2021 and early 2022,
Sproule Associates Limited (“Sproule”) has increased their EUR estimates with an improved type-curve forecast on a
Montney horizontal well. At December 31, 2022, Sproule’s estimated EUR per well is 1.3 million BOE, up 34% from
their previous estimate at December 31, 2021 of 968,000 BOE. Kelt recently put on production two additional Montney
wells at Oak that were the first to be drilled in a wine rack methodology. Wine racking wells in the upper Montney will
allow for increased inventory. After just over 90 days, both wells are currently exceeding the latest Sproule type-curve
estimate. Kelt expects to drill five wells and complete six wells at Oak during 2023.
Kelt has arranged for gas produced from its Oak property to be sold at various pricing point hubs including Station 2,
Chicago ACE, Marcellus TZ4-L300 and Sumas. With recent weakness in Station 2 prices and with anticipated further
volatility during the summer relating to industry pipeline and facility maintenance, the Company has temporarily deferred
the drilling of seven wells at Oak that were previously planned for 2023. The Company’s capital expenditure program
remains flexible, and the drilling and completion of these wells could be re-instated with positive movement in Station
2 gas prices.
At Pouce Coupe, Kelt plans to drill and complete four Montney wells in the oil-prone area of the Company’s land base
during 2023. At Pouce Coupe West, Kelt has deferred the drilling of its high deliverability Montney gas wells during the
current environment of weaker western Canadian gas markets. At Spirit River, Progress, Pouce Coupe North and
Wembley, Kelt expects to follow up with the very successful 2022 Charlie Lake drilling program with up to nine additional
Charlie Lake horizontal wells in 2023. Production additions from the drilling program in the Company’s Pouce Coupe/
Progress/Spirit River Division is expected to offset total corporate declines during 2023.
At Wembley/Pipestone, Kelt plans to drill nine wells and complete ten wells during 2023. This program is anticipated to
fulfill the Company’s additional gas processing capacity that is expected to be made available to Kelt in the
Wembley/Pipestone area at a third-party facility in late 2023 or early 2024. Despite incurring all of the capital required
KELT EXPLORATION LTD.
2
2022 ANNUAL REPORT
to complete this program, the Company has not included any production from these wells into its forecasted 2023
production guidance. Upon start-up, these wells are expected to add approximately 6,000 to 7,000 BOE per day of new
production weighted approximately 60% oil and NGLs and 40% gas.
With the recent weakness in natural gas prices, Kelt has revised its 2023 outlook and guidance. After a warm January
2023 in the US Northeast and Midwest that reduced natural gas demand significantly and excess supply in response
to potential LNG exports off the US Gulf Coast being disrupted since June 2022 due to a major facility outage, North
American natural gas prices have declined precipitously. The Company has changed its 2023 forecasted average
natural gas price assumptions as follows: the NYMEX Henry Hub natural gas price is forecasted to average US$3.39
per MMBtu, down 32% from the previous forecast of US$5.00 per MMBtu; the AECO daily index natural gas price is
forecasted to average $2.94 per GJ, down 32% from the previous forecast of $4.30 per GJ; and Kelt’s realized natural
gas price is forecasted to average $3.64 per Mcf, down 31% from the previous forecast of $5.25 per Mcf;. The Company
will continue to monitor commodity prices and expects to provide updated 2023 guidance, if necessary, by mid-year.
Kelt has reduced its 2023 capital expenditure program to $285.0 million, down from $310.0 million in its previous
guidance. Production in 2023 is forecasted to average between 32,000 and 34,000 BOE per day. Built into this forecast
is certain third-party facility downtime expected during 2023 that Kelt has been made aware of. Average oil and NGLs
production guidance of between 11,700 to 12,900 bbls per day remains unchanged from the Company’s previous
guidance. Despite reducing the number of wells to be drilled at Oak in 2023, the loss of potential oil and NGL production
from these wells have been offset by much better performance of its oily Charlie Lake wells than previously forecasted.
Average natural gas production is expected to average between 121.8 and 126.6 MMcf per day in 2023, a reduction of
6.0 MMcf per day (or 1,000 BOE per day) compared to the Company’s previous guidance.
The reduction in forecasted natural gas prices has had the biggest impact to forecasted adjusted funds from operations.
Adjusted funds from operations (“AFFO”) is now forecasted to be $285.0 million in 2023, down by 16% or $53.0 million
from Kelt’s previous forecast. Kelt’s capital expenditures for 2023 will match AFFO at $285.0 million. The Company’s
financial position continues to remain strong as Kelt is forecasting net debt of $14.8 million at the end of 2023 (or less
than 0.1 times estimated 2023 AFFO), giving the Company the ability to act on additional opportunities as they arise.
Kelt expects to report to shareholders its 2023 first quarter results on or about May 4, 2023.
On behalf of the Board of Directors,
[signed]
David J. Wilson
President and Chief Executive Officer
March 3, 2023
KELT EXPLORATION LTD.
3
2022 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”. 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 3, 2023 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, 2022. 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 3, 2023.
GENERAL ADVISORY
This MD&A contains certain specified financial measures consisting of non-GAAP measures, capital management
measures, and supplementary financial measures. These non-GAAP and other financial measures include “adjusted
funds from operations”, “annualized quarterly adjusted funds from operations”, “adjusted funds from operations per
common share”, “petroleum and natural gas sales before marketing revenue” “petroleum and natural gas sales after
cost of purchases”, “operating netback”, “net debt”, “net realized prices” and “net debt to annualized quarterly adjusted
funds from operations ratio” 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 and Other Financial Measures” 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
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.
KELT EXPLORATION LTD.
4
2022 ANNUAL REPORT
References to “liquids” include field condensate and NGLs. References to “gas” include natural gas and sulphur.
FINANCIAL AND OPERATING SUMMARY
(CA$ thousands, except as otherwise indicated)
2022
2021
%
2022
2021
%
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 ($/ common share) (1)
Net income and comprehensive income
Diluted ($/ common share)
Capital expenditures, net of A&D (1)
Bank debt
Net debt (1)
OPERATIONAL PERFORMANCE
Average daily production (BOE/d)
Combined net realized price, before financial
instruments (1)
Combined net realized price, after financial
instruments (1)
Operating netback (1)
152,720
120,523
63,742
92,851
0.47
54,238
0.28
68,594
11,300
9,789
52,056
68,155
0.35
52,996
0.28
67,118
1,150
28,220
27
22
36
34
2
-
2
613,358
306,022
326,992
1.67
316,763
159,714
161,394
0.85
158,758
114,256
0.81
0.60
317,540
213,511
883
-65
11,300
9,789
1,150
28,220
28,036
25,815
9
27,236
20,987
55.91
50.01
57.57
37.49
47.39
30.00
12
21
25
34
59.54
40.52
53.86
33.98
38.38
22.29
340,801
254,149
94
92
103
96
39
35
49
883
-65
30
47
40
52
34
Reserves – proved plus probable (mboe)
340,801
254,149
(1) Refer to advisories regarding non-GAAP and other financial measures.
Kelt’s key financial and operating results in the fourth quarter of 2022 are highlighted by the following:
Production – Fourth quarter 2022 production averaged 28,036 BOE per day (35% oil/NGLs), an increase of 9%
from both the fourth quarter of 2021 and the third quarter of 2022.
Petroleum and natural gas sales – For the three months ended December 31, 2022, petroleum and natural gas
sales was $152.7 million, an increase of 27% from $120.5 million in the fourth quarter of 2021. Kelt’s combined
net realized price before financial instruments of $55.91 per BOE increased 12% from the fourth quarter of 2021.
Operating netback – Kelt’s operating netback of $37.49 per BOE for the quarter ended December 31, 2022
increased by 25% from the fourth quarter of 2021. The increase in the operating netback per BOE was driven by
higher crude oil and natural gas prices in 2022.
Cash provided by operating activities and adjusted funds from operations – Cash provided by operating
activities increased to $63.7 million in the fourth quarter of 2022 compared to $52.1 million in the fourth quarter of
2021. Adjusted funds from operations of $92.9 million during the three months ended December 31, 2022 ($0.47
per share, diluted) increased 36% from the fourth quarter of 2021.
Net income – Kelt reported a net income of $54.2 million ($0.28 per common share, diluted) for the three months
ended December 31, 2022, compared to a net income of $53.0 million ($0.28 per common share, diluted) in the
comparative period in 2021.
Capital investments – During the fourth quarter of 2022, capital expenditures, net of A&D, was $68.6 million and
included the drilling of 3.0 net wells and completion of 6.0 net wells. Facilities, pipeline and well equipment spend
was $35.9 million.
Liquidity – The Company ended the quarter with net debt of $9.8 million.
KELT EXPLORATION LTD.
5
2022 ANNUAL REPORT
Reserves - The Company reported oil and gas reserves as at December 31, 2022:
o Proved developed producing reserves of 61.1 million BOE (32% oil and NGLs), an increase of 39%
from December 31, 2021;
o Total proved reserves of 192.1 million BOE (40% oil and NGLs), an increase of 43% from December
31, 2021; and
o Total proved plus probable reserves of 340.8 million BOE (38% oil and NGLs), an increase of 34%
from December 31, 2021.
PRODUCTION
Kelt Quarterly Production (BOE/D)
18,860
19,592
19,621
61%
18%
21%
66%
15%
19%
62%
15%
23%
25,815
62%
13%
26%
27,413
27,713
25,791
28,036
63%
65%
15%
22%
17%
18%
65%
15%
20%
65%
12%
23%
Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2022
Q3 2022
Q4 2022
Oil Production (BBLS/D)
NGLs Production (BBLS/D)
Natural Gas Production (BOE/D)
(CA$ thousands, except as otherwise indicated)
2022
2021
%
2022
2021
%
Three months ended December 31
Year ended December 31
Average daily production:
Oil (bbls/d) (1)
NGLs (bbls/d)
Gas (mcf/d)
Combined (BOE/d)
Oil and NGLs weighting
6,416
3,478
108,849
28,036
35%
6,624
3,255
95,616
25,815
38%
-3
7
14
9
-8
5,640
4,049
4,692
3,154
105,280
78,846
27,236
20,987
36%
37%
20
28
34
30
-3
(1) “Oil” includes crude oil and field condensate combined
Average production for the three months ended December 31, 2022, increased 9% from the three months ended
December 31, 2021. Average production for the twelve months ended December 31, 2022 increased 30% from the
twelve months ended December 31, 2021. Kelt brought on production 30 gross wells (27.1 net wells) in 2022. The
increase in production from the new wells was partially offset by natural declines, and limitations in the Company’s
natural gas processing takeaway capacity.
Average production for the three months ended December 31, 2022, increased 9% from the third quarter of 2022.
Production increased in the fourth quarter of 2022 due to additional wells being brought on-production, and due to
production in the third quarter of 2022 being constrained due to third party facility turnarounds and production
temporarily shut in due to low AECO and Station 2 natural gas prices.
Oil and NGLs weighting of total production decreased in 2022 to 35% during the fourth quarter and to 36% for the year,
versus the 38% and 37%, respectively, in the comparable periods in 2021.
KELT EXPLORATION LTD.
6
2022 ANNUAL REPORT
PETROLEUM AND NATURAL GAS SALES (“P&NG SALES”)
Kelt Quarterly Petroleum and Natural Gas Sales ($000)
178,938
45%
19%
143,254
152,720
41%
16%
40%
13%
138,446
37%
17%
120,523
40%
12%
46%
45%
33%
39%
42%
59,835
60,644
39%
18%
40%
41%
14%
42%
75,761
38%
15%
45%
Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2022
Q3 2022
Q4 2022
Oil Revenue
NGLs Revenue
Natural Gas Revenue
Marketing Revenue
(CA$ thousands, except as otherwise indicated)
2022
2021
%
2022
2021
%
Three months ended December 31
Year ended December 31
P&NG Sales before royalties and financial instruments:
Oil (5)
NGLs
Gas
63,570
19,375
61,166
55,668
14,983
48,047
P&NG Sales before marketing revenue (4)(6)
144,111
118,698
14
29
27
21
240,913
138,977
99,973
46,083
250,731
125,086
73
117
100
591,617
310,146
91
Marketing revenue (1)
P&NG Sales
Cost of purchases (2)
P&NG Sales after cost of purchases (3)(6)
Combined net realized price ($/BOE) (4)(6)
8,609
1,825
372
21,741
6,617
229
152,720
120,523
27
613,358
316,763
94
(8,509)
(1,765)
382
(21,438)
(6,348)
238
144,211
118,758
55.91
50.01
21
12
591,920
310,415
59.54
40.52
91
47
(1) Marketing revenue includes the sale of third-party volumes related to the Company's oil blending operations and natural gas activities.
(2) Cost of purchases includes costs for the purchase of third-party volumes related to the Company's oil blending operations and natural gas activities.
(3) P&NG sales after cost of purchases includes petroleum and natural gas sales, net of the cost of the third-party volumes purchased.
(4) Combined net realized price ($/BOE) equals P&NG sales after cost of purchases divided by total production.
(5) “Oil” includes crude oil and field condensate.
(6) Refer to advisories regarding Non-GAAP and Other Financial Measures.
Petroleum and natural gas sales for the fourth quarter of 2022 was $152.7 million, an increase of 27% from $120.5
million from the fourth quarter of 2021. Petroleum and natural gas sales for the twelve months ending December 31,
2022 was $613.4 million, an increase of 94% from the comparable period in 2021. The increase in P&NG sales in 2022
from 2021 was due to a significant increase in the average benchmark oil and natural gas prices in 2022, and an
increase in production in 2022.
Petroleum and natural gas sales of $152.7 million in the fourth quarter of 2022 increased 7% from $143.3 million in the
third quarter of 2022. The increase quarter over quarter was primarily due a 9% increase in production which was offset
by a 3% decrease in combined net realized prices.
KELT EXPLORATION LTD.
7
2022 ANNUAL REPORT
E
O
B
$
/
$150
$140
$130
$120
$110
$100
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
Kelt Quarterly Realized Prices (1)
8.50
7.50
6.50
5.50
4.50
3.50
2.50
1.50
0.50
(0.50)
F
C
M
$
/
Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2022
Q3 2022
Q4 2022
Oil
NGLs
Natural gas
(1) Net realized prices are calculated based on Petroleum and Natural Gas Sales, less the cost of purchases of third-party volumes and reflect Kelt’s
realized commodity prices plus the net benefit of oil blending and natural gas marketing activities. Net realized prices exclude both realized and unrealized
gains and losses on risk management contracts. Refer to additional information under the heading of “Non-GAAP and Other Financial Measures”.
Three months ended December 31
Year ended December 31
2022
2021
%
2022
2021
%
Net realized prices (10)
Oil ($/bbl) (9)
NGLs ($/bbl)
Gas ($/Mcf)
Combined ($/BOE)
Average benchmark prices
Oil and NGLs
WTI Cushing Oklahoma (US$/bbl) (1)
Mixed Sweet Blend Edmonton (“MSW”) ($/bbl) (2)
Edmonton Pentane ($/bbl) (3)
Edmonton Butane ($/bbl) (3)
Edmonton Propane ($/bbl) (3)
Edmonton Ethane ($/bbl) (3)
Natural Gas
NYMEX Henry Hub (US$/MMBtu) (6)
AECO 5A (CA$/MMBtu) (4)
Chicago Alliance, into Interstates (CA$/MMBtu) (5)
Dawn (CA$/MMBtu) (5)
Malin (CA$/MMBtu) (5)
Sumas (CA$/MMBtu) (5)
Station 2 (CA$/MMBtu) (7)
Marcellus (TZ4 L300) (CA$/MMBtu) (5)
Average exchange rate (CA$/US$) (8)
107.88
60.54
6.52
55.91
82.77
110.05
115.46
54.90
39.07
14.48
5.55
5.10
7.20
7.05
19.58
19.48
3.18
6.88
91.43
50.03
5.46
50.01
77.43
93.26
100.14
69.98
53.25
12.08
4.74
4.65
5.73
5.85
6.76
6.86
3.68
4.87
1.3582
1.2601
18
21
19
12
7
18
15
-22
-27
20
17
10
26
21
190
184
-14
41
8
117.18
67.64
6.63
59.54
94.80
120.79
121.28
61.67
50.05
15.04
6.38
5.31
7.88
7.88
11.09
10.70
4.44
7.33
81.30
40.03
4.35
40.52
68.03
80.29
85.55
48.49
41.78
9.67
3.82
3.62
5.53
4.54
4.95
4.98
3.29
3.65
1.3019
1.2536
44
69
52
47
39
50
42
27
20
56
67
47
42
74
124
115
35
101
4
(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 (8).
(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 (8).
(5) Source: S&P Global Platts (US$/MMBtu) Daily Midpoint Average converted to CA$/MMBtu using monthly average CA$/US$ exchange rate (8).
(6) Source: S&P Global Platts (US$/MMBtu) Daily Midpoint Average
KELT EXPLORATION LTD.
8
2022 ANNUAL REPORT
(7) Source: S&P Global Platts (CA$/GJ) Daily Midpoint Average converted to CA$/MMBtu
(8) Source: Bank of Canada.
(9) “Oil” includes crude oil and field condensate
(10) Net realized prices are calculated based on Petroleum and Natural Gas Sales, less the cost of purchases of third-party volumes and reflect Kelt’s
realized commodity prices plus the net benefit of oil blending and natural gas marketing activities. Net realized prices exclude both realized and unrealized
gains and losses on risk management contracts. Refer to additional information under the heading of “Non-GAAP and Other Financial Measures”.
Combined Net Realized Price
Kelt’s combined net realized price increased 12% to $55.91 per BOE and 47% to $59.54 per BOE in the three months
and twelve months ended December 31, 2022, respectively, versus the comparable periods in 2021. The increase in
the average realized price was primarily due to an increase in benchmark commodity prices in 2022.
Oil prices
WTI crude oil prices increased 7% for the quarter ended December 31, 2022 and increased 39% for the twelve months
ended December 31, 2022 versus comparable periods in 2021. For the first six months of 2022, crude oil prices
increased due to global sanctions on Russian exports, reduced capital directed towards production growth, and a
reduction of global crude inventories as economies recovered following COVID-19 lockdowns. In the second half of
2022, benchmark crude oil prices decreased as the United States released significant amounts of crude oil from its
strategic petroleum reserves, petroleum demand in China decreased due to COVID-19 lockdowns, and a slowdown in
the global economy from rising interest rates resulted in a lower expectations for crude oil demand.
NGL prices
NGLs prices are impacted both by benchmark WTI prices, as well as localized market supply and demand issues.
For the three months and twelve months ended December 31, 2022, Kelt’s realized NGLs price increased 21% and
69%, respectively, as compared to the same periods in 2021. The increase was primarily due to an increase in
benchmark WTI prices and regional improvements in condensate prices. Butane prices were higher in 2022 compared
to 2021 primarily due to the rise in WTI prices. However, butane prices for the three months ended December 31, 2022
decreased from the comparable period in 2021 due to a spike in prices in the fourth quarter of 2021. Propane prices
increased in 2022 from 2021 due to higher US and Canadian exports resulting in a reduction in domestic storage levels.
Natural gas prices
Kelt’s realized natural gas price increased by 19% to $6.52 per Mcf in the fourth quarter of 2022 and by 52% to $6.63
per Mcf for the twelve months ended December 31, 2022 versus comparable periods in 2021.
Canadian natural gas benchmark prices increased in 2022 due to a combination of increased Alberta demand, lower
than average inventory levels, and high pipeline exports when compared to historical five-year averages.
American benchmark natural gas prices increased in the first six months of 2022 due to higher pipeline and LNG exports
when compared to historical five-year averages. In the second half of 2022, higher US production, and the shut-in of a
US LNG export facility, resulted in a decrease in eastern US benchmark natural gas. Western US benchmark natural
gas prices remained elevated in the fourth quarter of 2022 due a lack of supply, and high demand.
For the twelve months ending December 31, 2022, Kelt sold 71% of its natural gas production at the AECO 5A and
Station 2 indices, with the remainder primarily sold at the Dawn (20%), and Chicago (5%) indices.
RISK MANAGEMENT AND HEDGING ACTIVITIES
The Company may enter into fixed price contracts and derivative financial instruments for commodity prices, currency
exchange and interest rates in order to secure future cash flows or to protect a desired level of capital spending. Fair
value accounting for derivative financial instruments may cause significant fluctuations in the reported amounts of
derivative financial instrument assets and liabilities and the resultant magnitude of unrealized gains and losses.
The table below summarizes realized and unrealized gains (losses) on risk management contracts:
KELT EXPLORATION LTD.
9
2022 ANNUAL REPORT
Three months ended December 31
Year ended December 31
(CA$ thousands, except as otherwise indicated)
Realized gain (loss) on financial derivative contracts
Realized gain (loss) on natural gas embedded derivative
Total realized gain (loss) on derivative financial instruments
2022
155
4,124
4,279
2021
(6,225)
-
(6,225)
Unrealized gain on financial derivative contracts
14,788
17,007
Unrealized gain on natural gas embedded derivative
Total unrealized gain on derivative financial instruments
Gain (loss) on derivative financial instruments
$ per BOE
Commodity price risk
8,389
23,177
27,456
10.65
-
17,007
10,782
4.54
%
102
-
169
-13
-
36
155
135
2022
2021
%
(60,633)
(16,426)
269
4,124
-
(56,509)
(16,426)
15,146
2,770
8,389
-
23,535
2,770
(32,974)
(13,656)
(3.31)
(1.78)
-
244
447
-
750
141
86
Inherent to the business of producing oil and gas, the Company’s net income 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 of March 3, 2023, the following commodity price risk management contracts are outstanding:
Natural gas derivative contracts
Contract Type (2)
Notional Volume
Contract Price $/MMBtu
AECO fixed price swap
5,000 GJ/d
CAD$4.00/GJ
NYMEX-AECO 5A basis swap
20,000 MMBtu/d
NYMEX less USD$1.22
NYMEX-AECO 7A basis swap
10,000 MMBtu/d
NYMEX less USD$0.98
NYMEX-AECO 5A basis swap
10,000 MMBtu/d
Monthly AECO basis calculated at 30%
of the floating monthly NYMEX price
NYMEX-AECO 7A basis swap
25,000 MMBtu/d
NYMEX less USD$1.10
NYMEX-AECO 7A basis swap
35,000 MMBtu/d
NYMEX less USD$1.18
NYMEX-AECO 5A basis swap
15,000 MMBtu/d
NYMEX less USD$1.17
NYMEX-AECO 5A basis swap
30,000 MMBtu/d
NYMEX less USD$1.10
NYMEX-AECO 7A basis swap
5,000 MMBtu/d
NYMEX less USD$1.12
Remaining Term
Apr 23 – Oct 23
Jan 23 – Mar 23
Jan 23 – Mar 23
Apr 23 – Oct 24
Apr 23 – Jul 23
Aug 23 – Oct 23
Apr 23 – Oct 23
Nov 24 – Oct 25
Nov 24 – Oct 25
Crude oil derivative contracts
Contract Type (1)(3)
Notional Volume
Contract Price $/bbl
WTI-MSW basis swap
2,500 bbl/d
WTI less USD$2.70
Remaining Term
Jan 23 – Jun 23
Costless Collars (1)
WTI costless collar
WTI costless collar
Notional Volume
$/bbl
Ceiling Price $/bbl Remaining Term
1,000 bbl/d
1,000 bbl/d
CAD$100
CAD$102
CAD$130
CAD$128
Jan 23 – Mar 23
Jan 23 – Mar 23
Floor Price
(1) West Texas Intermediate (“WTI”)
(2) NYMEX Henry Hub (“NYMEX”)
(3) Mixed Sweet Blend (“MSW”)
In January 2023, the Company unwound 30,000 MMBtu/d of natural gas costless collar derivative contracts for
February and March 2023 for proceeds of $8.06 million and unwound 20,000 MMBtu/d NYMEX fixed price swaps for
February 2023 and 10,000 MMBtu/d NYMEX fixed price swaps for March 2023 for proceeds of $4.65 million.
Commencing in November 2022, the Company entered into a five-month natural gas supply agreement to deliver 7,458
KELT EXPLORATION LTD.
10
2022 ANNUAL REPORT
GJ/d of gas to the Nova Inventory Transfer point. Under the terms of the agreement, the Company receives a price
equal to the Floating Alberta Electric System Operator (“AESO”) Power Pool Price divided by the fixed heat rate of
16.95 GJ/MWH. It was determined that the agreement contained an embedded derivative, with the embedded
derivative gains recorded under “Loss on derivative financial instruments” in the Consolidated Statement of Net Income
and Comprehensive Net income of the consolidated annual financial statements as at December 31, 2022.
Natural gas embedded derivative
Contract Type (1)
Notional Volume Contract Price
Remaining Term
Physical delivery contract
7,458 GJ/d
(1) Alberta Electric System Operator (“AESO”)
Floating AESO power pool price (CAD/MWh) divided
by the Fixed Heat Rate of 16.95 GJ/MWh
Jan 23 – Mar 23
In addition to the derivative contracts above, the Company has the following sales contracts for physical delivery:
Natural gas physical delivery contracts
Contract Type
Notional Volume
Contract Price
Station 2 (physical) fixed price
9,900 GJ/d
CAD$5.78/GJ
Remaining Term
Jan 23
Interest rate risk
The Company is exposed to interest rate risk as changes in market interest rates will impact the Company’s Credit
Facility which is subject to a floating interest rate. Based on bank debt balance as of December 31, 2022 of $11.3
million, an increase (decrease) in the market rate of interest by 25 basis points would have an insignificant impact. As
at March 3, 2023, 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.
As of March 3, 2023, the following foreign exchange risk management contracts are outstanding:
Contract Type
Notional Volume
Contract Price
CAD/USD swap
USD$3.0 million/month
$1.3625 CAD/USD
Remaining Term
Jan 23 – Dec 23
ROYALTIES
(CA$ thousands, except as otherwise indicated)
Royalties
Average royalty rate (1)
$ per BOE
Three months ended December 31
Year ended December 31
2022
15,864
11.0%
6.15
2021
9,901
8.3%
4.17
%
60
33
47
2022
65,567
11.1%
6.60
2021
%
27,414
139
8.8%
3.58
26
84
(1) The average royalty rate is calculated based on total royalties as a percentage of “P&NG Sales, before marketing” which excludes sales related to
the sale of third party production volumes used in oil blending operations (see table under the heading of “Petroleum and Natural Gas Sales”).
Kelt’s average royalty rate was 11.0% during the fourth quarter of 2022, compared to 8.3% during the fourth quarter of
2021. Kelt’s average royalty rate for the twelve months ended December 31, 2022 was 11.1% compared to 8.8% for
the year ended December 31, 2021. A significant portion of the Company’s production in Alberta and British Columbia
is initially subject to low royalty rates of 5% - 6%, prior to any additional credits. In 2022, a number of wells moved off
the initial royalty rate and are now subject to higher royalty rates that are sensitive to commodity prices, resulting in an
increase in the overall royalty rate in 2022. The higher royalty rates in 2022 were partially offset through the Company
recognizing royalty infrastructure credits in British Columbia.
KELT EXPLORATION LTD.
11
2022 ANNUAL REPORT
PRODUCTION EXPENSES
Quarterly Production Expenses
)
0
0
0
$
(
30,000
25,000
20,000
15,000
10,000
5,000
-
12
10
8
6
4
2
0
E
O
B
$
/
Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2022
Q3 2022
Q4 2022
Operating Expenses
Per BOE
(CA$ thousands, except as otherwise indicated)
Production expense
$ per BOE
Three months ended December 31
Year ended December 31
2022
28,116
10.90
2021
23,537
9.91
%
19
10
2022
2021
101,566
69,904
10.22
9.13
%
45
12
Fourth quarter production expenses in 2022 increased 19% compared to the fourth quarter in 2021, and production
expenses for the year ended December 31, 2022 increased 45% from the year ended December 31, 2021. The
increase in the fourth quarter of 2022 was primarily related to higher production in 2022, along with higher electricity
expenses and higher field maintenance costs, partially offset by lower trucking expenses. The increase in production
expenses for the year ended December 31, 2022 compared to the prior year was primarily related to higher overall
production in 2022, higher electricity expense, higher carbon tax expense and higher gas processing fees.
Production expenses per BOE increased 10% in the fourth quarter of 2022, and increased 12% for the year ended
December 31, 2022 versus the comparable periods in 2021. The increase in the production expense per BOE was
primarily due to higher field maintenance costs, higher electricity expense and higher carbon tax expense in 2022.
TRANSPORTATION EXPENSES
Quarterly Transportation Expenses
)
0
0
0
$
(
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
4
3.5
3
2.5
2
1.5
1
0.5
0
E
O
B
$
/
Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2022
Q3 2022
Q4 2022
Transportation Expense
Per BOE
KELT EXPLORATION LTD.
12
2022 ANNUAL REPORT
(CA$ thousands, except as otherwise indicated)
Transportation expense (1)
$ per BOE
Three months ended December 31
Year ended December 31
2022
7,803
3.03
2021
7,872
3.31
%
-1
-8
2022
2021
30,467
25,855
3.06
3.38
%
18
-9
(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 $3.03 per BOE during the fourth quarter of 2022, a decrease of 8% from $3.31 per
BOE in the fourth quarter of 2021. Transportation expenses averaged $3.06 per BOE during the twelve months ending
December 31, 2022, a decrease of 9% from $3.38 per BOE in the twelve months ended December 31, 2021. The
decrease in transportation expense is due to Kelt proportionally increasing its exposure to AECO 5A and Station 2
indices in 2022, resulting in lower transportation costs on a BOE basis.
FINANCING EXPENSES
(CA$ thousands, except as otherwise indicated)
Total interest expense
Accretion of decommissioning obligations
Total financing expense
Interest expense per BOE (1)
Average interest rates:
Bank debt (2) (3)
Three months ended December 31
Year ended December 31
2022
581
721
1,302
0.23
2021
296
561
857
0.12
%
96
29
52
92
2022
1,460
2,451
3,911
0.15
2021
%
440
232
2,003
2,443
22
60
0.06
150
7.8%
4.1%
90
6.6%
4.1%
61
(1) Interest expense used in the calculation of “Interest expense per BOE” includes interest and fees on bank debt.
(2) Average interest rate excludes fees on bank debt which include bank commitment, standby and guarantee letter fees.
Throughout 2022, the Company periodically drew on its credit facility and incurred standby fees, resulting in interest
expense of $1.5 million.
Additional information regarding the credit facility is provided under the heading of “Capital Resources and Liquidity”.
GENERAL AND ADMINISTRATIVE (“G&A”) EXPENSES
The following table summarizes significant components of the Company’s G&A expenses:
(CA$ 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
2022
4,010
1,357
5,367
(1,808)
3,559
2.08
1.38
2021
2,972
1,043
4,015
(1,129)
2,886
1.69
1.22
%
35
30
34
60
23
23
13
2022
12,287
5,521
17,808
(7,506)
10,302
1.79
1.04
2021
9,713
3,745
13,458
(4,207)
9,251
1.76
1.21
%
27
47
32
78
11
2
-14
Net G&A expenses averaged $1.38 per BOE during the fourth quarter of 2022, an increase of 13% compared to $1.22
per BOE during the fourth quarter of 2021. For the twelve months ended December 31, 2022, net G&A expenses
averaged $1.04 per BOE which decreased by 14% compared to $1.21 per BOE during same period in 2021. The
decrease in net G&A expenses per BOE was primarily due to higher overhead recoveries and production increasing at
a higher rate than G&A expense.
KELT EXPLORATION LTD.
13
2022 ANNUAL REPORT
G&A expenses are reported net of overhead recoveries; however, Kelt does not capitalize any direct G&A expenses.
SHARE BASED COMPENSATION (“SBC”)
(CA$ 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
2022
1,679
308
1,987
0.77
2021
793
214
1,007
0.42
%
112
44
97
83
2022
5,902
1,112
7,014
0.71
2021
3,054
1,162
4,216
0.55
%
93
-4
66
29
The increase in SBC expense for the three and twelve months ended December 31, 2022 compared to the same
periods in 2021 is primarily due the higher Black-Scholes value associated with recent options granted.
As at December 31, 2022, stock options and RSUs outstanding represent 5.9% of total shares outstanding (December
31, 2021 – 6.0%).
EXPLORATION AND EVALUATION (“E&E”) EXPENSES
(CA$ thousands, except as otherwise indicated)
Exploration and evaluation expense
$ per BOE
Three months ended December 31
Year ended December 31
2022
14,438
5.60
2021
%
709
0.30
1936
1767
2022
14,484
1.46
2021
%
928
1461
0.12
1117
E&E expense was $14.4 million for the quarter ended December 31, 2022 and $14.5 million in the year ended
December 31, 2022. During the fourth quarter of 2022, the Company expensed $14.2 million of exploratory drilling
costs for two exploration wells. The two exploration wells were determined to be not technically feasible and proved
reserves could not be established after the second well was completed and tested in the fourth quarter of 2022.
DEPLETION, DEPRECIATION AND IMPAIRMENT REVERSAL
Three months ended December 31
Year ended December 31
(CA$ thousands, except as otherwise indicated)
2022
2021
Depletion and depreciation
Impairment reversal
Total
Depletion and depreciation ($/BOE)
Impairment reversal ($/BOE)
28,182
26,936
-
-
28,182
26,936
10.93
11.34
-
-
%
5
-
5
-4
-
2022
2021
116,183
91,251
%
27
-
(70,130)
-100
116,183
21,121
450
11.69
11.91
-2
-
(9.16)
-100
Depletion and depreciation expense of $28.2 million for the quarter ended December 31, 2022 increased by 5% from
$26.9 million in the comparable period in 2021. Depletion and depreciation expense for the year ended December 31,
2022 decreased 27% as compared to the prior year. On a per BOE basis, the depletion and depreciation expense per
BOE decreased slightly in 2022, due to an increase in reserve additions in 2022.
In the second quarter of 2021, an impairment reversal test was performed on the Alberta CGU based on increased
forward commodity price forecasts and an increase in the Company’s market capitalization. It was determined that the
recoverable amount of the Alberta CGU was in excess of its carrying value resulting in an impairment reversal of $70.1
million (before-tax).
Based on its assessment as of December 31, 2022, the Company determined that there were no potential indicators
of impairment for the Alberta CGU and BC CGU and there are no previous impairments available for reversals.
KELT EXPLORATION LTD.
14
2022 ANNUAL REPORT
INCOME TAXES
(CA$ thousands, except as otherwise indicated)
Deferred income tax expense
Net income before taxes
Effective tax rate
Three months ended December 31
Year ended December 31
2022
16,412
70,650
23.2%
2021
%
2022
2021
%
1,932
749
51,441
21,436
140
54,928
29
210,199
135,692
3.5%
560
24.5%
15.8%
55
55
Kelt’s consolidated combined federal and provincial statutory tax rate averaged 23.9% and 23.0% during the three
months ended December 31, 2022 and 2021, respectively. The Company is not expected to have any cash income
taxes payable in 2023.
The Company’s consolidated tax pools are estimated to be approximately $768.4 million as of December 31, 2022, a
decrease of 1% from December 31, 2021 as summarized in the table below.
(CA$ thousands, except as 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
%
2022
66,848
192,737
-
228,487
8
280,308
768,388
2021
73,107
125,246
-9
54
22,538
-100
196,613
240
356,439
774,183
16
-97
-21
-1
(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 2033 to 2041.
ADJUSTED FUNDS FROM OPERATIONS
The following table provides a continuity of income and expenses included in the Company’s calculation of operating
netback and adjusted funds from operations generated during the three months and year ended December 31, 2022
and 2021 respectively.
THREE MONTHS ENDED DECEMBER 31
Amount
$/BOE
(CA$ thousands, except as otherwise indicated)
2022
2021
Petroleum and natural gas sales
Cost of purchases
Realized loss on financial instruments (1)
Royalties
152,720
120,523
(8,509)
4,279
(15,864)
(1,765)
(6,225)
(9,901)
Revenue, after royalties and financial instruments
132,626
102,632
Production expense
Transportation expense
Operating netback (2)
Financing expense (3)
G&A expense
Gain on foreign exchange
Other income/expense (5)
Adjusted funds from operations (2)
Basic ($ per common share) (4)
Diluted ($ per common share) (4)
(28,116)
(23,537)
(7,803)
96,707
(581)
(7,872)
71,223
(296)
(3,559)
(2,886)
219
65
95
19
92,851
68,155
0.48
0.47
0.36
0.35
(1) Includes realized gains (losses) on commodity price and foreign exchange derivatives.
2022
59.21
(3.30)
1.66
(6.15)
51.42
(10.90)
(3.03)
37.49
(0.23)
(1.38)
0.09
0.03
2021
50.75
(0.74)
(2.62)
(4.17)
43.22
(9.91)
(3.31)
30.00
(0.12)
(1.22)
0.04
0.01
36.00
28.71
%
17
346
-163
47
19
10
-8
25
92
13
125
200
25
%
27
382
169
60
29
19
-1
36
96
23
131
242
36
33
34
KELT EXPLORATION LTD.
15
2022 ANNUAL REPORT
(2) Refer to advisories regarding “Non-GAAP and Other Financial Measures”.
(3) Excludes non-cash accretion of decommissioning obligations.
(4) Adjusted funds from operations (2) per common share is calculated on a consistent basis with net income per common share, using basic and diluted
weighted average common shares as determined in accordance with GAAP.
(5) Excludes non cash provisions
YEAR ENDED DECEMBER 31
Amount
$/BOE
(CA$ thousands, except as otherwise indicated)
2022
2021
Petroleum and natural gas sales
Cost of purchases
613,358
316,763
(21,438)
(6,348)
Realized gain (loss) on financial instruments (1)
(56,509)
(16,426)
Royalties
(65,567)
(27,414)
Revenue, after royalties and financial instruments
469,844
266,575
Production expense
Transportation expense
Operating netback (2)
Financing expense (3)
G&A expense
Gain on foreign exchange
Other income/expense (5)
Adjusted funds from operations (2)
Basic ($ per common share) (4)
Diluted ($ per common share) (4)
(101,566)
(69,904)
(30,467)
(25,855)
337,811
170,816
(1,460)
(440)
(10,302)
(9,251)
788
155
15
254
326,992
161,394
1.71
1.67
0.85
0.85
2022
61.70
(2.16)
(5.68)
(6.60)
47.26
(10.22)
(3.06)
33.98
(0.15)
(1.04)
0.08
0.02
32.89
2021
41.35
(0.83)
(2.14)
(3.58)
34.80
(9.13)
(3.38)
22.29
(0.06)
(1.21)
-
0.03
21.05
%
49
160
165
84
36
12
-9
52
150
-14
-
-33
56
%
94
238
244
139
76
45
18
98
232
11
5153
-39
103
101
96
(1) Includes realized gains (losses) on commodity price and foreign exchange derivatives.
(2) Refer to advisories regarding “Non-GAAP and Other Financial Measures”.
(3) Excludes non-cash accretion of decommissioning obligations.
(4) Adjusted funds from operations (2) per common share is calculated on a consistent basis with net income per common share, using basic and diluted
weighted average common shares as determined in accordance with GAAP.
(5) Excludes non cash provisions
During the three months ended December 31, 2022, adjusted funds from operations of $92.9 million ($0.47 per share,
diluted) increased by 36% from $68.2 million ($0.35 per share, diluted) in the fourth quarter of 2021. During the year
ended December 31, 2022, adjusted funds from operations of $327.0 million ($1.67 per share, diluted) increased by
103% from $161.4 million ($0.85 per share, diluted) during the year ended December 31, 2021. The increase in
adjusted funds from operations for both the three and twelve months ended December 31, 2022 compared to the same
periods in 2021 is primarily attributed to an increase in petroleum and natural gas sales of 27% and 94%, respectively.
NET INCOME AND COMPREHENSIVE INCOME
(CA$ thousands, except as otherwise indicated)
Net income and comprehensive income
$ per common share, basic
$ per common share, diluted (1)
$ per BOE
Wtd avg. shares outstanding, basic (000s)
Wtd avg. shares outstanding, diluted (000s) (1)
Three months ended December 31
Year ended December 31
2022
54,238
0.28
0.28
21.05
191,812
195,828
2021
52,996
0.28
0.28
22.33
189,134
192,676
%
2
-
-
-6
1
2
2022
2021
158,758
114,256
0.83
0.81
0.61
0.60
15.96
14.90
191,101
188,800
195,456
190,807
%
39
36
35
7
1
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 net income per common share.
Kelt reported net income of $54.2 million ($0.28 per common share, diluted) for the three months December 31, 2022,
an increase of $1.2 million from $53.0 million ($0.28 per common share, diluted) in the same three month period of
2021. The increase in net income is primarily due to a $24.7 million increase in adjusted funds from operations, and
higher unrealized gains on derivatives of $6.2 million in 2022 which was partially offset by higher deferred income tax
KELT EXPLORATION LTD.
16
2022 ANNUAL REPORT
expense of $14.5 million in 2022, and higher exploration and evaluation expenses of $13.7 million in 2022.
Kelt reported net income of $158.8 million ($0.81 per common share, diluted) for the year ended December 31, 2022,
an increase of $44.5 million from $114.3 million ($0.60 per common share, diluted) in the same period of 2021. The
increase in net income is primarily due to a $165.6 million increase in adjusted funds from operations in 2022 and
higher unrealized gains on derivatives of $20.8 million in 2022, which was partially offset by an impairment reversal
and lower depletion and depreciation in 2021 of $95.1 million, higher deferred income tax expense of $30.0 million in
2022 and higher exploration and evaluation expenses of $13.6 million in 2022.
INVESTING ACTIVITIES
Capital Expenditures before A&D ($000)
$80,051
2%
$29,451
$45,780
44%
1%
39%
60%
2%
25%
73%
54%
$67,025
1%
56%
43%
$83,732
36%
$89,072
39%
$75,262
1%
29%
64%
60%
70%
$68,582
2%
52%
46%
Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2022
Q3 2022
Q4 2022
Drilling and completion of wells ($000)
Facilities, pipeline and well equipment ($000)
Other ($000)
CAPITAL EXPENDITURES
The Company’s capital expenditures, net of acquisitions and dispositions (“A&D”), are summarized in the following
table:
(CA$ thousands, except as otherwise indicated)
2022
2021
%
2022
2021
%
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 (1)
Property acquisitions
Property dispositions
465
531
31,558
35,928
100
559
78
-17
581
28,753
37,562
73
10
-4
37
2
72
1,509
623
1,872
119
191,026
123,508
122,662
95,721
828
1,087
316,648
222,307
-19
424
55
28
-24
42
3,462
252
1274
-188
(2,570)
(9,048)
-72
49
68,582
67,025
62
(50)
36
57
Capital expenditures, net of A&D (1)
68,594
67,118
2
317,540
213,511
(1) Refer to advisories regarding “Non-GAAP and Other Financial Measures”.
Capital expenditures, before A&D, increased 2% in the fourth quarter of 2022 and increased 42% from the year ended
December 31, 2022 versus the comparable period in 2021.
In the fourth quarter of 2022, drilling and completion costs of $31.6 million included the drilling of 3.0 gross and net
KELT EXPLORATION LTD.
17
2022 ANNUAL REPORT
wells and completion of 7 gross wells (6.0 net wells). Kelt’s facility, pipeline and well equipment spending in the fourth
quarter of 2022 of $35.9 million focused on well equipment and facility optimization and upgrade work.
For the twelve months ended December 31, 2022, drilling and completion costs of $191.0 million included the drilling
of 31 gross wells (28.4 net wells) and completion of 35 gross wells (32.1 net wells). The wells drilled included 18 gross
(17 net) Montney wells, 12 gross (10.4 net) Charlie Lake wells, and one exploratory well.
Kelt’s facility, pipeline and well equipment spending in 2022 included $122.7 million focused on well equipment, pipeline
and facility optimization and upgrade work. Kelt added additional gas compression and enlarged its oil facilities at
Pouce Coupe and Spirit River, and built various oil and gas gathering pipelines at Wembley/Pipestone. Capital
expenditures for 2022 also included the purchasing of equipment and pipe in order to facilitate a timely execution of
the Company’s 2023 drilling program.
Gross Wells
Drilling
Completion
Service
Net Wells
Drilling
Completion
Service
LAND HOLDINGS
Three months ended December 31
Year ended December 31
2022
2021
3
7
-
5
3
-
%
-40
133
-
2022
2021
31
35
-
21
23
2
%
48
52
-100
Three months ended December 31
Year ended December 31
2022
2021
3.0
6.0
-
4.7
3.0
-
%
-36
100
-
2022
28.4
32.1
-
2021
20.7
23.0
%
37
40
2.0
-100
The table below sets-out Kelt’s significant Montney land holdings across British Columbia and Alberta as at December
31, 2022.
MONTNEY RIGHTS
British Columbia
Alberta
Total
CHARLIE LAKE RIGHTS
Alberta
Net Acres
Net Sections
193,607
150,667
344,274
88,447
303
235
538
138
CAPITAL RESOURCES AND 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 of December 31, 2022 the Company had a $100.0 million demand and revolving term facility (“the Credit Facility”)
with a syndicate of financial institutions. As at December 31, 2022, $11.3 million was drawn under the Credit Facility,
with outstanding letters of credit of $2.0 million.
The Credit Facility, which is subject to semi-annual redeterminations, may be extended annually at Kelt’s option, subject
to lender approval, with a 364 day term-out period if not renewed. 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. 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 $800 million demand
debenture with a floating charge over all the Company’s assets.
KELT EXPLORATION LTD.
18
2022 ANNUAL REPORT
Bank debt
Accounts payable and accrued liabilities
Cash and cash equivalents
Accounts receivable and accrued sales
Prepaid expenses and deposits
Net debt (1)
Annualized quarterly adjusted funds from operations (1)(2)
Net debt to annualized quarterly adjusted funds from operations ratio (1)
December 31,
December 31,
2022
11,300
83,288
(125)
(81,075)
(3,599)
9,789
371,404
0.0
2021
1,150
72,453
(719)
(42,584)
(2,080)
28,220
272,620
0.1
(1) Refer to advisories regarding Capital Management Measures.
(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 debt to annualized
quarterly adjusted funds from operations ratio, which is a non-GAAP financial measure. Kelt targets a net debt to
annualized quarterly adjusted funds from operations ratio of less than 2.0 times.
The Company may adjust its future capital structure and capital expenditures according to market conditions 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.
The table below outlines a contractual maturity analysis for Kelt’s financial liabilities as at December 31, 2022:
Within 1 Year
1 to 5 Years
More than 5 Years
Accounts payable and accrued liabilities
Derivative financial instruments
Lease liability
Bank debt and estimated interest (1)
Total
83,288
1,414
505
746
85,953
-
-
543
11,300
11,843
-
-
-
-
-
Total
83,288
1,414
1,048
12,046
97,796
(1) Estimated interest for future years related to the Credit Facility was calculated using the weighted average interest rate of 6.6% for the year ended
December 31, 2022, applied to the principal balance outstanding as at that date.
COMMITMENTS
As of December 31, 2022, the Company is committed to future payments under the following agreements:
Firm processing commitments
Firm transportation commitments
2023
18,969
28,887
2024
27,700
28,414
2025
39,754
26,638
2026
39,504
26,997
2027
Thereafter
38,812
261,361
23,404
48,711
Total commitments
47,856
56,114
66,392
66,501
62,216
310,072
In 2022, Kelt entered into two gas processing agreements with third party midstream companies. The third party gas
processing plants are expected to become operational in late 2023 or early 2024 and in the fourth quarter of 2024, with
a total expected increase of approximately $300 million to Kelt’s future payments under these agreements.
SHARE INFORMATION
The Company is authorized to issue an unlimited number of common shares and an unlimited number of preferred
shares. As at December 31, 2022 there were 192.0 million common shares issued and outstanding. There are no
preferred shares issued or outstanding.
At December 31, 2022, officers, directors, and employees have been granted options to purchase 10.5 million common
shares of the Company at an average exercise price of $3.71 per common share. In addition, there are 0.9 million
KELT EXPLORATION LTD.
19
2022 ANNUAL REPORT
RSUs outstanding.
The following table outlines Kelt’s common share trading activity during 2022 and 2021:
SHARE TRADING ACTIVITY (KEL)
YTD 2022
YTD 2021
High ($)
Low ($)
Close ($)
Volume traded (thousands)
Value traded ($ thousands)
Weighted average trading price ($)
RELATED PARTY TRANSACTIONS
8.32
4.67
5.01
125,751
759,986
6.04
5.44
1.74
4.82
156,801
501,057
3.20
The Company has engaged a law firm where the corporate secretary 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, 2022, the Company incurred $0.4 million (December 31, 2021 – $0.2 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, 2022 and
2021.
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,
2022 and at December 31, 2021 were determined using the guidelines and definitions set out under National Instrument
51-101 (“NI 51-101”). The Sproule Report is effective as of December 31, 2022.
At December 31, 2022, Kelt’s proved plus probable reserves were 340.8 million BOE, up 34% from 254.1 million BOE
at December 31, 2021. The Company’s net present value of proved plus probable reserves at December 31, 2022,
discounted at 10% before tax, was $3.4 billion, an increase of 60% from $2.1 billion at December 31, 2021. Sproule’s
forecasted commodity prices for 2023 used to determine the present value of the Company’s reserves at December
31, 2022, are US$86.00 per barrel for WTI oil and CAD$4.11 per GJ for AECO-C gas.
At December 31, 2022, the weighting of proved plus probable reserves was 38% oil/NGLs and 62% natural gas. At
December 31, 2021, the weighting of proved plus probable reserves was 41% oil/NGLs and 59% natural gas.
The following table outlines a summary of the Company’s reserves volumes at December 31, 2022:
SUMMARY OF RESERVE VOLUMES
Proved developed producing
Proved developed non-producing
Proved undeveloped
Total Proved
Probable additional
Total Proved plus Probable
(1) “Liquids” include field condensate and NGLs.
Crude Oil
(mbbls)
Liquids(1)
(mbbls)
Natural Gas
Combined
FDC Costs
(mmcf)
(mBOE)
($ thousands)
10,052
408
20,385
30,845
22,019
52,864
9,783
492
31,135
41,410
35,206
76,616
247,362
7,338
61,062
2,123
-
5,882
464,211
128,888
1,204,243
718,911
192,073
1,210,125
549,020
148,728
834,029
1,267,931
340,801
2,044,154
KELT EXPLORATION LTD.
20
2022 ANNUAL REPORT
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
2022
December 31
2021 % Change
61,062
2,123
128,888
192,073
148,728
340,801
43,854
2,083
88,155
134,092
120,057
254,149
39
2
46
43
24
34
The following table outlines forecasted future prices that Sproule has used in their evaluation of the Company’s reserves
at December 31, 2022:
FUTURE COMMODITY PRICE FORECAST
WTI Cushing
Canadian
NYMEX
AECO-C
USD/CAD
2023
2024
2025
2026
2027
Five year average
Oklahoma
Light Sweet
Henry Hub
Spot
Exchange
US$/bbl
CA$/bbl
US$/MMBtu
CA$/GJ
US$/CA$
86.00
84.00
80.00
81.60
83.23
82.97
110.67
101.25
96.18
98.10
100.06
101.25
5.00
4.50
4.25
4.34
4.42
4.50
4.11
4.12
3.79
3.87
3.94
3.97
0.75
0.80
0.80
0.80
0.80
0.79
The following table summarizes the net present value of the Company’s reserves (before tax) as at December 31,
2022:
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
1,018
44
2,239
3,301
3,120
6,421
945
36
1,493
2,474
2,080
4,554
842
30
1,055
1,927
1,503
3,430
KELT EXPLORATION LTD.
21
2022 ANNUAL REPORT
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 2022
Q3 2022
Q2 2022
Q1 2022
Q4 2021
Q3 2021
Q2 2021
Q1 2021
Petroleum and natural gas sales
152,720
143,254
178,938
138,446
120,523
75,761
60,644
59,835
Cash provided by operating activities
63,742
85,104
91,623
65,553
52,056
46,547
34,529
26,582
Adjusted funds from operations (1)
92,851
65,189
94,783
74,169
68,155
36,336
29,452
27,451
Per share – basic ($/common share) (1)
Per share – diluted ($/common share) (1)
0.48
0.47
0.34
0.33
0.50
0.48
0.39
0.38
0.36
0.35
0.19
0.19
0.16
0.15
0.15
0.14
Net income and comprehensive income
54,238
23,089
70,711
10,720
52,996
3,752
54,654
2,854
Per share – basic ($/common share)
Per share – diluted ($/common share)
0.28
0.28
0.12
0.12
0.37
0.36
0.06
0.06
0.28
0.28
0.02
0.02
0.29
0.29
0.02
0.02
Capital expenditures, net of A&D (1)
68,594
76,181
89,072
83,693
67,118
71,162
45,786
29,446
Total assets
Bank debt
Net debt (1)
1,128,104
1,078,619
1,035,372
967,119
913,497
872,212
842,454
775,033
11,300
-
-
-
1,150
-
-
-
9,789
33,537
23,117
34,685
28,220
28,174
(6,696)
(24,303)
Shareholders’ equity
901,424
845,103
818,734
739,673
722,724
668,561
663,284
607,285
Average daily production (BOE/d)
28,036
25,791
27,713
27,413
25,815
19,621
19,592
18,860
Combined net realized price ($/BOE) (1)(2)
Operating netback ($/BOE) (1)
57.57
37.49
48.97
28.19
58.50
38.52
49.96
31.26
47.39
30.00
38.33
21.10
31.49
17.68
33.07
17.67
Operating netback % of combined net realized
price (2)
65%
58%
66%
63%
63%
55%
56%
53%
(1) Refer to advisories regarding “Non-GAAP and Other Financial Measures”.
(2) In this table, combined net realized prices are after financial instruments.
Following the unprecedented reduction in global crude oil demand as a result of the COVID-19 pandemic, global crude
oil prices steadily increased in 2021 due to increasing demand, OPEC+ production curtailments, and lower levels of
capital investment in both OPEC+ and non-OPEC nations. In 2022, crude oil prices remained strong and were impacted
by a number of factors including the Russian and Ukrainian conflict, the US releasing crude oil from its strategic
reserves, continued COVID-19 lockdowns in China, and rising lending rates impacting global demand of crude oil.
North American benchmark natural gas prices increased in the first nine months of 2022 due to record LNG exports,
inventory levels remaining below average storage levels and increasing North American demand. However increasing
US and Canadian production in 2022, and the shut-in of a US LNG export facility in June 2022 resulted in rising North
American inventory levels, and a decrease in eastern North American benchmark natural gas prices in the fourth
quarter. Western US benchmark natural gas prices remained elevated in the fourth quarter of 2022 due high demand.
Kelt’s business objective is for long-term profitable growth by implementing a full cycle exploration and development
program. Over the past eight quarters, Kelt has focused its cash provided from operating activities on its development
capital program which has resulted in higher average daily production and adjusted funds from operations.
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
KELT EXPLORATION LTD.
22
2022 ANNUAL REPORT
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)
2022
613,358
306,022
326,992
1.71
1.67
2021
316,763
159,714
161,394
0.85
0.85
2020
207,156
59,279
58,832
0.31
0.31
Net income (loss) and comprehensive income (loss)
158,758
114,256
(324,807)
Per share – basic ($/common share)
Per share – diluted ($/common share)
Capital expenditures, net of A&D (1)
Total assets
Bank debt
Net debt (1)
Shareholders’ equity
Average daily production (BOE/d)
Combined net realized price ($/BOE) (1)(2)
Operating netback ($/BOE) (1)
Operating netback as a % of combined net realized price (2)
(1) Refer to advisories regarding “Non-GAAP and Other Financial Measures”.
(2) In this table, average realized prices are after financial instruments.
OUTLOOK AND GUIDANCE
0.83
0.81
317,540
1,128,104
11,300
9,789
901,424
27,236
53.86
33.98
63%
0.61
0.60
213,511
913,497
1,150
28,220
722,724
20,987
38.38
22.29
58%
(1.73)
(1.73)
(353,957)
759,987
-
(27,655)
603,684
24,992
22.72
8.41
37%
The table below compares the Company’s previously forecasted assumptions and expected financial and operating
results for 2022 to actual 2022 results:
(CA$ millions, except as otherwise indicated)
2022 Actuals
2022 Budget
% Change
Average Production
Oil and NGLs (bbls/d)
Gas (MMcf/d)
Combined (BOE/d)
Forecasted Average Commodity Prices
WTI oil price (US$/bbl)
Canadian Light Sweet ($/bbl)
NYMEX natural gas price (US$/MMBtu)
AECO natural gas price ($/GJ)
Average Exchange Rate (US$/CA$)
9,689
105.3
9,900 – 10,500
105.6 – 108.0
27,236
27,500 – 28,500
-2 to -8
0 to -3
-1 to -4
94.80
120.79
6.38
5.04
0.7681
94.50
120.00
6.40
4.90
0.7692
-
1
-
-3
-
KELT EXPLORATION LTD.
23
2022 ANNUAL REPORT
(CA$ millions, except as otherwise indicated)
2022 Actuals
Guidance
% Change
2022 Updated
Capital Expenditures
Drilling & Completions
Equipment, Facilities & Pipeline Infrastructure
Land, Seismic & Asset Acquisitions, net of Property Dispositions
Capital Expenditures, net of A&D (1)
Petroleum and natural gas sales
Adjusted funds from operations (1)
Per common share, diluted (1)
Net debt (surplus), at year end (1)
Weighted average common shares outstanding (millions) (1)
(1) Refer to advisories regarding “Non-GAAP and Other Financial Measures”.
191.0
122.7
3.9
317.5
613.4
327.0
1.67
9.8
191.1
183.0
112.0
5.0
300.0
617.0
325.0
1.66
(5.0)
191.1
4
10
-23
6
-1
1
1
-
-
Kelt’s financial results for the year ended December 31, 2022 was largely within its previous guidance, apart from
capital expenditures net of A&D and net debt. Capital expenditures net of A&D was $317.5 million in 2022, 6% higher
than the forecasted amount of $300.0 million, resulting in net debt as of December 31, 2022 of $9.8 million compared
to the previous guidance of a $5.0 million net surplus. Capital expenditures, net of A&D increased primarily due to the
advance purchasing of equipment and pipe to facilitate the execution of the Company’s 2023 drilling program, and
higher than forecasted drilling, completion, and facility infrastructure costs.
2023 BUDGET
The Company’s Board of Directors has approved a revision to the Company’s 2023 budget due to 32% reduction of
the forecasted 2023 NYMEX and AECO 5A natural gas benchmark prices. As a result of the decrease in forecasted
natural gas prices, the Company’s 2023 capital expenditure budget has been reduced to $285.0 million in 2023, a
decrease of 8% from the previous capital expenditure budget of $310.0 million. The number of expected drills and
completes for the year has been reduced, with the Company now forecasting to drill 27 gross wells (26.0 net wells) and
completing 29 gross wells (28.0 net wells). The Company’s financial position is expected to remain strong with
forecasted net debt of $14.8 million at the end of 2023, or less than 0.1 times estimated 2023 adjusted funds from
operations.
Forecasted average production for 2023 is estimated to be approximately 32,000 – 34,000 BOE per day, a decrease
of 3% from the previous 2023 forecasted production budget, and an increase of 17% to 25% from the fourth quarter of
2022. Kelt’s forecasted 2023 production is expected to be weighted approximately 37% oil and NGLs and 63% natural
gas.
Forecasted WTI crude oil price for 2023 remains at US$78.00 per barrel, representing a decrease of 18% from 2022
prices. Canadian Light Sweet is forecasted to average $99.73 per barrel in 2023, a decrease of 17% over 2022 prices.
Natural gas prices are forecast to average $2.94 per GJ for AECO and US$3.39 per MMbtu for NYMEX in 2023, a
decrease of 32% from previously forecasted prices, and a decrease of 42% and 47%, respectively over 2022 prices.
Using the revised commodity price forecasts for 2023, Kelt is forecasting 2023 adjusted funds from operations of $285.0
million ($1.44 per common share, diluted), down 16% from its previous forecast. Kelt estimates a net debt of $14.8
million at the end of December 31, 2023.
A 10% increase/decrease in the Company’s forecasted oil/NGLs price for 2023 would increase/decrease forecasted
adjusted funds from operations by approximately $24.6 million. A 10% increase/decrease in the Company’s average
gas price forecasted for 2023 would increase/decrease adjusted funds from operations by approximately $13.5 million.
The table below outlines the Company’s updated forecast for 2023 with a comparison to the previously announced
guidance included in Kelt’s press release dated November 10, 2022 and comparison to 2022 actuals:
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
(CA$ millions, except as otherwise indicated)
2023 Budget
(Nov 10, 2022)
Current
Previous 2023
Guidance
Average Production
Oil and NGLs (bbls/d)
Gas (mmcf/d)
Combined (BOE/d)
Forecasted Average Commodity Prices
WTI oil price (US$/bbl)
Canadian Light Sweet ($/bbl)
NYMEX natural gas price (US$/MMBtu)
AECO natural gas price ($/GJ)
11,700 – 12,900
11,700 – 12,900
121.8 – 126.6
127.8 – 132.6
32,000 – 34,000
33,000 – 35,000
78.00
99.73
3.39
2.94
78.00
99.90
5.00
4.30
Average Exchange Rate (US$/CA$)
0.7513
0.7407
Capital Expenditures
Drilling & completions
Equipment, Facilities & Pipeline Infrastructure
Land, Seismic & Asset Acquisitions, net of
Property Dispositions
Capital Expenditures, net of A&D (1)
Petroleum and natural gas sales
Adjusted funds from operations (1)
Per common share, diluted (1)
Net debt (1)
Weighted average common shares outstanding
(millions) (1)
195.0
70.0
20.0
285.0
530.1
285.0
1.44
14.8
220.0
70.0
20.0
310.0
607.0
338.0
1.71
(28.0)
%
Change
to
Current
2023
Budget
-
-5
-3
-
-
-32
-32
1
-11
-
-
-8
-13
-16
-16
153
Current
2023
Budget
%
Change
to 2022
Actuals
2022
Actuals
9,689
21 – 33
105.3
16 – 20
27,236
17 – 25
94.80
120.79
6.38
5.04
0.7681
191.0
122.7
3.9
317.5
613.4
327.0
1.67
9.8
-18
-17
-47
-42
-2
2
-43
419
-10
-14
-13
-14
51
192.3
192.2
-
191.1
1
(1) Refer to advisories regarding “Non-GAAP and Other Financial Measures”.
Kelt expects to maintain 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 economic environment changes.
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. See the “Advisory
regarding forward-looking statements” section below for additional information.
SIGNIFICANT JUDGMENTS AND ESTIMATES
The significant accounting policies applied by the Company are disclosed in note 2 of the consolidated annual financial
statements as at and for the year ended December 31, 2022. 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
KELT EXPLORATION LTD.
25
2022 ANNUAL REPORT
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 net carrying value of property, plant, and equipment (“PP&E”) is depleted using total proved reserves and future
development costs, as determined by the Company’s independent qualified reserve evaluators, in accordance with the
Canadian Oil and Gas Evaluation Handbook (“COGEH”).
Reserves (proved and probable) are also 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. The reserve estimates are based on production forecasts, future production costs, forecasted commodity
prices and future development costs. 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
(“E&E”) to PP&E.
Although 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.
Exploration and evaluation assets
Judgment is required to determine the level at which E&E is assessed for impairment. For the Company, 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 and could be impacted by a shift in demand as global energy markets transition to a lower carbon-
based economy. Refer to additional information regarding E&E assets in note 5 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, 2022, 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 6 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, 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.
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
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
future value of the decommissioning obligation can fluctuate in response to many factors including changes to 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 may be adjusted in
response to revisions in reserves or changes in laws and regulations and could be impacted by the rate the markets
transition to a lower carbon-based economy. 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 8 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 between six and ten years, 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.
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 2033 to 2041.
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 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. These assumptions used by the Company are
discussed in note 10 of the consolidated annual financial statements.
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
Derivative financial instruments
The Company applies judgement in assessing and determining when an embedded derivative exists within a host
contract, if the embedded derivative is closely related to the host contract, and the inputs used to fair value an
embedded derivative if it is not closely related to the host contract, which would include forecasted benchmark
commodity prices.
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, 2022 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.
There were no significant changes to the Company’s internal controls over financial reporting during the interim period
from October 1, 2022 to December 31, 2022 and year ended December 31, 2022. The CEO and the CFO have
evaluated the effectiveness of Kelt’s internal controls over financial reporting as at December 31, 2022 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:
Reservoir quality and the uncertainty of reserves estimates;
Volatility in the prevailing prices of crude oil, NGLs and natural gas;
Inflation and its impact on the cost of services and capital projects;
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 emissions;
KELT EXPLORATION LTD.
28
2022 ANNUAL REPORT
Shifts in demand as global energy markets transition to a lower carbon-based economy.
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;
Access to labor, equipment and services 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;
Increasing carbon tax and changing royalty regimes. The Company incurred $2.1 million in carbon tax expense
in 2022 ($0.2 million in 2021). The federal carbon tax rate is expected to rise from $50 per tonne as of April
2022, to $170 per tonne in 2030.
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.
Indigenous Claims
Kelt continues to monitor the impact of the recent Supreme Court of British Columbia judgement (the “Judgment”) with
respect to a claim brought forth by the Blueberry River First Nation (“Blueberry”) against the province of British Columbia
regarding the cumulative impact of industrial development within the Blueberry treaty claim area. The Judgement found
that the province of British Columbia breached the Treaty 8 rights of the Blueberry by allowing extensive industrial
development on the Blueberry’s traditional territory without first assessing the cumulative impacts of this development
on the ability of the members of the Blueberry to exercise their Treaty 8 rights to hunt, fish, and trap on their traditional
territory. Following the judgment, the Government of British Columbia reduced development in the Blueberry treaty
claim area resulting in fewer new drilling development permits being issued since July 2021.
On January 18, 2023 the Government of British Columbia and the Blueberry announced an agreement which provides
a partnership pathway approach to land, water and resource management in the Blueberry traditional territory. The
agreement will include new areas which are protected from industrial development (including oil and gas development)
and includes new constraints on developments in other areas while a long-term cumulative effects management regime
is implemented.
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
On January 20, 2023 the Government of British Columbia and four of the Treaty 8 First Nations (Fort Nelson, Saulteau,
Halfway River and Doig River First Nations) announced that a consensus was obtained on a collaborative approach to
land and resource planning within the traditional territories of the four Treaty 8 First Nations. The initiatives set out in
the consensus document include new land-use plans and protection measures, additional measures for shared
decision making and a new revenue sharing approach.
The Company does not currently expect that there will be a significant impact to Kelt’s 2023 guidance as a result of the
new agreements between the Blueberry, the four Treaty 8 First Nations and the Government of British Columbia. Kelt
has received drilling development permits in recent months, however Kelt awaits additional information on these
agreements to assess the what the impact will be on additional drilling development permits in 2023, and what the long
term impact will be on the overall development of oil and gas resources in British Columbia.
Royalty Risks
On October 7, 2021 the Province of British Columbia announced it was launching a comprehensive review of its royalty
system. Any future changes to the British Columbia royalty system may have an impact on the Company’s future cash
flows.
On May 19, 2022 the Province of British Columbia announced a new oil and natural gas royalty framework which
includes a capital recovery concept for drill and complete costs and a removal previous incentive programs for deep
wells and marginal wells. The new framework will be in place for September 2024. During the transition period new
wells will pay 5% royalties for a 12 month period after which royalties will be calculated using the prevailing rates.
Existing wells will operate under the existing royalty framework until September 2024. Additional details of the new
royalty framework are required for Kelt to quantify the potential impact on future crown royalties.
COVID-19 Related Risks
The COVID-19 pandemic remains a risk and continues to cast some uncertainty on the global economy due to risks
surrounding the emergence of new COVID-19 variants and the impact, if any, on commodity prices and equity markets.
Environmental Risks
All phases of the oil and natural gas business present environmental risks and hazards and are subject to environmental
regulation pursuant to a variety of international conventions and federal, provincial and municipal laws and regulations.
Environmental legislation provides for, among other things, restrictions and prohibitions on spills, releases or emissions
of various substances produced in association with oil and gas operations. The legislation also requires that wells and
facility sites be operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities.
Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines
and penalties, some of which may be material. Environmental legislation is evolving in a manner expected to result in
stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and
operating costs. The discharge of oil, natural gas or other pollutants into the air, soil or water may give rise to liabilities
to governments and third parties and may require Kelt to incur costs to remedy such discharge. Kelt employs an
environmental management system to manage these risks through a set of processes and practices to collect, monitor
and report on the environmental impact of its operations.
The Company maintains current insurance coverage for comprehensive and general liability as well as limited pollution
liability. The amount and terms of this insurance are reviewed on an ongoing basis and adjusted as necessary to reflect
current corporate requirements, as well as industry standards and government regulations. Without such insurance,
and if the Company becomes subject to environmental liabilities, the payment of such liabilities could be reduce or
exceed the funds the Company has available and result in financial distress. No assurance can be given that the
application of environmental laws to the business and operations of Kelt will not result in a curtailment of production or
a material increase in the costs of production, development or exploration activities or otherwise adversely affect Kelt’s
financial condition, results of operations or prospects.
Climate Change Risks
Climate change policy is evolving at regional, national and international levels, and political and economic events may
significantly affect the scope and timing of climate change measures that are ultimately put in place. The federal and
KELT EXPLORATION LTD.
30
2022 ANNUAL REPORT
provincial governments have implemented legislation aimed at incentivizing the use of alternatives fuels and reducing
carbon emissions. This legislation along with taxes placed on carbon emissions may have the effect of decreasing the
demand for oil and natural gas products and at the same time, increasing the Corporation’s operating expenses, each
of which may have a material adverse effect on the Corporation’s profitability and financial condition. Further, the
imposition of carbon taxes puts the Corporation at a disadvantage with the Corporation’s counterparts who operate in
jurisdictions where there are less costly carbon regulations. Currently enacted carbon pricing costs are included in the
Company’s report on its oil and gas reserves.
Adverse impacts to the Corporation’s business as a result of comprehensive carbon emission legislation or regulation
applied to the Corporation’s business in Alberta or any jurisdiction in which the Corporation operates, may include, but
are not limited to: (i) increased compliance costs; (ii) permitting delays; (iii) substantial costs to reduce emissions or
generate or purchase emission credits or allowances; and (iv) reduced demand for crude oil and certain refined
products. Emission allowances or offset credits may not be available for acquisition or may not be available on an
economic basis. Required emission reductions may not be technically or economically feasible to implement, in whole
or in part, and failure to meet such emission reduction requirements or other compliance mechanisms may have a
material adverse effect on the Corporation’s business resulting in, among other things, fines, permitting delays,
penalties and the suspensions of operations.
In addition to climate policy risk, the industry faces physical risks attributable to a changing climate. Climate change is
expected to increase the frequency of severe weather conditions, including high winds, heavy rainfall, extreme
temperatures, flooding and wildfires, which may result in damage to the Corporation’s assets, disruptions in operations
or transportation interruptions which may lead to increased capital expenditures or reduced revenues. Further
information is available on the Company’s ESG report which can be found on the Company’s website.
Cybersecurity
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. To manage this risk,
the Company maintains a system of internal controls and purchases insurance coverage against general risks
associated with cybersecurity.
Risk Mitigation
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.
A more detailed description of the Company’s risks is included in the Annual Information Form as at December 31,
2022, dated March 3, 2023 which can be found at www.sedar.com.
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 2023. 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
KELT EXPLORATION LTD.
31
2022 ANNUAL REPORT
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.
NON-GAAP AND OTHER FINANCIAL MEASURES
This MD&A contains certain non-GAAP financial measures and other specified financial measures, as described below,
which do not have standardized meanings prescribed by GAAP and do not have standardized meanings under the
applicable securities legislation. As these non-GAAP, and other specified financial measures 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
P&NG sales before marketing revenue and P&NG sales after cost of purchases
Throughout this MD&A, reference is made to “P&NG sales”, “P&NG sales before marketing revenue”, and “P&NG sales
after cost of purchases”. P&NG sales is as reported in the consolidated financial statements in accordance with GAAP
and is before realized gains or losses on financial instruments. P&NG sales before marketing revenue includes P&NG
sales (in accordance with GAAP) prior to third party revenue related to the Company’s oil blending and third-party
natural gas sales. P&NG sales after cost of purchases includes P&NG sales (in accordance with GAAP), net of the
KELT EXPLORATION LTD.
32
2022 ANNUAL REPORT
cost of third-party volumes purchases. P&NG sales before marketing revenue, and P&NG sales after cost of purchases
are used by management to assess the Company’s revenue from its core operations, which the Company believes
may be a better indicator of historical and future performance.
See the “Petroleum and Natural Gas Sales” section of this MD&A which provides a reconciliation of P&NG sales before
marketing revenue, and “P&NG sales after cost of purchases to P&NG sales.
Net realized price
Net realized price is a non-GAAP measure and is calculated by dividing the Company’s P&NG sales after cost of
purchases by the Company’s production and reflects Kelt’s realized selling prices plus the net benefit of oil blending
and third-party natural gas sales. In addition to using its own production, the Company may purchase butane and crude
oil from third 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 P&NG sales as reported in the Consolidated
Statement of Net Income and Comprehensive Income 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, and excludes
the sale of third party marketing volumes, management believes that disclosing its net realized prices based on P&NG
sales after cost of purchases is more appropriate and useful, because the cost of third-party volumes purchased to
generate the incremental marketing revenue has been deducted. Net realized prices referenced throughout this MD&A
are before financial instruments, except as otherwise indicated as being after financial instruments.
See the “Petroleum and Natural Gas Sales” section of this MD&A which provides a reconciliation of the net realized
price to P&NG sales, which is a GAAP measure.
Operating netback
Operating netback is a non-GAAP measure 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 also presents operating netbacks on a per BOE basis which allows
management to better analyze performance against prior periods, on a comparable basis, and is a key industry
performance measure of operational efficiency.
See the “Adjusted Funds from Operations” section of this MD&A which provides a reconciliation of the operating
netback from P&NG sales, which is a GAAP measure.
Capital expenditures
“Capital expenditures, before A&D” and “Capital expenditures, net of A&D” are measures the Company uses to monitor
its investment in exploration and evaluation, investment in property plant and equipment, and net investment in
acquisition and disposition activities. The most directly comparable GAAP measure is “Cash used in investing
activities”, and is calculated as follows:
(CA$ thousands, except as otherwise indicated)
Cash used in investing activities
Change in non-cash investing working capital
Capital expenditures, net of A&D
Property acquisitions (1)
Property dispositions (1)
Three months ended
December 31
Year ended
December 31
2022
95,916
(27,322)
68,594
(12)
-
2021
74,421
(7,303)
67,118
(36)
(57)
2022
2021
328,945
(11,405)
191,540
21,971
317,540
213,511
(933)
41
(252)
9,048
Capital expenditures, before A&D
68,582
67,025
316,648
222,307
(1) Property acquisitions and property dispositions for the year ended December 31, 2022 includes $2.5 million of non-cash consideration. Property
acquisitions and property dispositions for the year ended December 31, 2021 includes $0.2 million of non-cash consideration.
KELT EXPLORATION LTD.
33
2022 ANNUAL REPORT
CAPITAL MANAGEMENT MEASURES
Adjusted funds from operations and annualized quarterly adjusted funds from operations
Management considers adjusted funds from operations and annualized quarterly adjusted funds from operations key
capital management measures as it demonstrates the Company’s ability to meet its financial obligations and cash flow
available to fund its capital program. Adjusted funds from operations and annualized quarterly adjusted funds from
operations are not standardized measures and therefore may not be comparable with the calculation of similar
measures by other entities.
Adjusted funds from operations and annualized quarterly adjusted funds from operations is calculated as follows:
(CA$ thousands, except as otherwise indicated)
Cash provided by operating activities
Change in non-cash working capital
Funds from operations
Settlement of decommissioning obligations
Adjusted funds from operations
Three months ended
December 31
Year ended
December 31
2022
63,742
28,742
92,484
367
92,851
2021
52,056
15,058
67,114
1,041
68,155
2022
2021
306,022
159,714
17,770
(1,903)
323,792
157,811
3,200
3,583
326,992
161,394
Annualized quarterly adjusted funds from operations
371,404
272,620
Net debt and net debt to annualized quarterly adjusted funds from operations ratio
Management considers net debt and a net debt to annualized quarterly adjusted funds from operations ratio as key
capital management measures to assess the Company’s liquidity at a point in time and to monitor its capital structure
and short-term financing requirements. The “net debt to annualized quarterly adjusted funds from operations ratio” is
also indicative of the “net debt to cash flow ratio” 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).
“Net debt” is equal to bank debt, accounts payable and accrued liabilities, net of cash and cash equivalents, accounts
receivables and accrued sales and prepaid expenses and deposits. The Company believes that using a “Net debt” non-
GAAP measure, which excludes non-cash derivative financial instruments, non-cash lease liabilities, and non-cash
decommissioning obligations, provides investors with more useful information to understand the Company’s cash
liquidity risk.
See the “Capital Resources and Liquidity” section of this MD&A for calculation of the Net debt and net debt to annualized
quarterly adjusted funds from operations ratio.
SUPPLEMENTARY FINANCIAL MEASURES
“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.
P&NG sales, cost of purchases, realized gain (loss) on financial instruments, royalties, revenue after royalties and
financial instruments, production expenses, transportation expenses, financing expenses, G&A expenses, realized gain
(loss) on financial instruments, gain (loss) on derivative financial instruments, realized loss (gain) on foreign exchange,
other income/expense, stock option expense, expiry of mineral leases, depletion and depreciation, impairment
(reversal) on a $/BOE basis is calculated by dividing the amounts by the Company’s total production over the period.
Adjusted funds from operations per share (basic and diluted), and net income (loss) and comprehensive income (loss)
per share (basic and diluted) is calculated by dividing the amounts by the basic weighted average common shares
outstanding.
“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
KELT EXPLORATION LTD.
34
2022 ANNUAL REPORT
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.
ADDITIONAL INFORMATION
Additional information relating to Kelt, including the Company’s Annual Information Form (“AIF”) dated March 3, 2023
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.
35
2022 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 3, 2023
[signed]
Sadiq H. Lalani
Vice President and Chief Financial Officer
March 3, 2023
KELT EXPLORATION LTD.
36
2022 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 subsidiaries (together, the Company) as at
December 31, 2022 and 2021, and its financial performance and its cash flows for the years then ended in
accordance with International Financial Reporting Standards as issued by the International Accounting
Standards Board (IFRS).
What we have audited
The Company’s consolidated financial statements comprise:
the consolidated statement of financial position as at December 31, 2022 and 2021;
the consolidated statement of net income and comprehensive net income for the years then ended;
the consolidated statement of changes in shareholders’ equity for the years then ended;
the consolidated statement 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.
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.
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, 2022. These matters were
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
proved reserves on net development and
production (D&P) assets
Refer to note 2(c) – Significant judgments and
estimates, note 3 – Significant accounting
policies and note 6 – Property, plant and
equipment to the consolidated financial
statements.
The Company has $997.2 million of D&P as at
December 31, 2022 and depletion and
depreciation (D&D) expense was $116.1 million
for the year then ended. D&P assets are depleted
using the unit-of-production method based on the
ratio of production in the year to the related
proved reserves, taking into account future
development costs necessary to bring those
reserves into production.
Significant assumptions used by management to
determine the proved reserves of the Company’s
D&P assets include production forecasts, future
production costs, forecasted commodity prices and
future development costs. Proved reserves are
determined by independent qualified reserve
evaluators (management’s experts).
We determined that this is a key audit matter due
to i) the judgments made by management,
including the use of management’s experts, when
estimating the proved reserves; and ii) a high
degree of auditor judgment, subjectivity, and effort
Our approach to addressing the matter included
the following procedures, among others:
● Tested how management determined the
proved reserves, which included the following:
The work of management’s experts was
used in performing the procedures to
evaluate the reasonableness of the proved
reserves. As a basis for using this work,
the competence, capabilities, and
objectivity of management’s experts was
evaluated, the work performed was
understood and the appropriateness of the
work as audit evidence was evaluated.
The procedures performed also included
evaluation of the methods and
assumptions used by management’s
experts, tests of the data used by
management’s experts and an evaluation
of their findings.
Evaluated the reasonableness of
significant assumptions used, including
production forecasts, future production
costs and future development costs by
considering the current and past
performance and whether these
assumptions were consistent with
evidence obtained in other areas of the
audit, as applicable.
Evaluated the reasonableness of
forecasted commodity prices by comparing
them to third party industry forecasts.
Key audit matter
How our audit addressed the key audit matter
in performing procedures relating to the significant
assumptions.
● Recalculated the unit-of-production rates used
to calculate D&D expense.
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 Scott Don Althen.
Chartered Professional Accountants
Calgary, Alberta
March 2, 2023
KELT EXPLORATION LTD.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT DECEMBER 31, 2022 AND DECEMBER 31, 2021
(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
Derivative financial instruments
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
Decommissioning obligations
Lease liability
Total current liabilities
Bank debt
Decommissioning obligations
Lease liability
Deferred income tax liability
Total liabilities
SHAREHOLDERS' EQUITY
Shareholders' capital
Contributed surplus and reserve
Deficit
Total shareholders' equity
Total liabilities and shareholders' equity
Commitments
[Notes]
December 31, 2022 December 31, 2021
125
81,075
3,599
26,751
111,550
2,427
-
16,843
997,284
1,128,104
83,288
1,414
2,187
505
87,394
11,300
86,445
543
40,998
226,680
1,162,650
(15,460)
(245,766)
901,424
1,128,104
719
42,584
2,080
5,338
50,721
-
10,443
29,529
822,804
913,497
72,453
1,109
2,396
609
76,567
1,150
112,657
399
-
190,773
1,144,596
(17,348)
(404,524)
722,724
913,497
[11]
[11]
[11]
[12]
[5]
[6]
[11]
[11]
[8]
[9]
[7]
[8]
[9]
[12]
[10]
[15]
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.
42
2022 ANNUAL REPORT
KELT EXPLORATION LTD.
CONSOLIDATED STATEMENT OF NET INCOME AND COMPREHENSIVE NET INCOME
FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021
(CA$ thousands, except per share amounts)
[Notes]
Revenue
Petroleum and natural gas sales
[13]
Royalties
Expenses
Production
Transportation
Cost of purchases
Financing
General and administrative
Share based compensation
Exploration and evaluation
Depletion and depreciation
Impairment reversal
Loss on derivative financial instruments
Foreign exchange gain
Gain (loss) on sale of assets
Other
Net income before taxes
Deferred income tax expense
Net income and comprehensive income
Net income per common share
Basic
Diluted
[14]
[16]
[10]
[5]
[6]
[6]
[11]
[4]
[12]
[10]
[10]
Year ended December 31
2022
2021
613,358
(65,567)
547,791
101,566
30,467
21,438
3,911
10,302
7,014
14,484
116,183
-
305,365
(32,974)
788
(196)
155
210,199
(51,441)
158,758
0.83
0.81
316,763
(27,414)
289,349
69,904
25,855
6,348
2,443
9,251
4,216
928
91,251
(70,130)
140,066
(13,656)
17
794
(746)
135,692
(21,436)
114,256
0.61
0.60
The accompanying notes form an integral part of these consolidated financial statements.
KELT EXPLORATION LTD.
43
2022 ANNUAL REPORT
KELT EXPLORATION LTD.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
AS AT AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021
(CA$ thousands)
Balance at December 31, 2020
Net income and comprehensive income
Exercise of stock options
Vesting of restricted share units
Share based compensation
Balance at December 31, 2021
Net income and comprehensive income
Exercise of stock options
Vesting of restricted share units
Share based compensation
Shareholders’ capital
[Notes]
Number of
Shares (000s)
Amount
($ thousands)
Contributed
surplus and
reserve
188,580
1,141,517
(19,053)
-
291
293
-
-
768
2,311
-
-
(200)
(2,311)
4,216
189,164
1,144,596
(17,348)
-
2,802
48
-
-
17,896
158
-
-
(4,968)
(158)
7,014
[10]
[10]
[10]
[10]
[10]
[10]
Retained
earnings (deficit)
(518,780)
114,256
-
-
-
(404,524)
158,758
-
-
-
Total
shareholders’
equity
603,684
114,256
568
-
4,216
722,724
158,758
12,928
-
7,014
Balance at December 31, 2022
192,014
1,162,650
(15,460)
(245,766)
901,424
The accompanying notes form an integral part of these consolidated financial statements.
KELT EXPLORATION LTD.
44
2022 ANNUAL REPORT
KELT EXPLORATION LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021
(CA$ thousands)
Operating activities
[Notes]
Year ended December 31
2022
2021
Net income and comprehensive income
158,758
114,256
Items not affecting cash:
Accretion
Share based compensation
Exploration and evaluation
Depletion and depreciation
Impairment reversal
Unrealized gain on derivative financial instruments
(Gain) loss on sale of assets
Deferred income tax expense
Other
Settlement of decommissioning obligations
Change in non-cash operating working capital
Cash provided by operating activities
Financing activities
Increase in bank debt
Proceeds on exercise of stock options
Repayment of lease liability principle
Cash provided by financing activities
Investing activities
Exploration and evaluation assets
Property, plant and equipment
Property acquisitions
Property dispositions
Change in non-cash investing working capital
Cash used in 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
[14]
[10]
[5]
[6]
[6]
[11]
[4]
[12]
[8]
[17]
[7]
[10]
[9]
[5]
[6]
[4]
[4]
[17]
2,451
7,014
14,484
116,183
-
(23,535)
196
51,441
-
(3,200)
(17,770)
306,022
10,150
12,928
(749)
22,329
(7,061)
(309,587)
(933)
41
(11,405)
(328,945)
2,003
4,216
928
91,251
(70,130)
(2,770)
(794)
21,436
998
(3,583)
1,903
159,714
1,150
568
(745)
973
(4,202)
(218,105)
(52)
8,848
21,971
(191,540)
-
2
(594)
(30,851)
719
125
31,570
719
The accompanying notes form an integral part of these consolidated financial statements.
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
KELT EXPLORATION LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(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. BASIS OF PRESENTATION
The Company’s Board of Directors approved and authorized these consolidated annual financial statements on March
2, 2023 for issue on March 3, 2023.
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.
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 11 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 net carrying value of property, plant, and equipment (“PP&E”) is depleted using total proved reserves and future
development costs, as determined by the Company’s independent qualified reserve evaluators, in accordance with the
Canadian Oil and Gas Evaluation Handbook (“COGEH”).
Reserves (proved and probable) are also 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. The reserve estimates are based on production forecasts, future production costs, forecasted commodity
prices and future development costs. 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
(“E&E”) to PP&E.
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2022 ANNUAL REPORT
Although 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.
Exploration and evaluation assets
Judgment is required to determine the level at which E&E is assessed for impairment. 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 and could be impacted by a shift in demand as global energy markets transition to a lower carbon-based
economy. Refer to additional information regarding E&E assets in note 5 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, 2022, 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 6 of these 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, 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.
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
future value of the decommissioning obligation can fluctuate in response to many factors including changes to legal
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2022 ANNUAL REPORT
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 may be adjusted in
response to revisions in reserves or changes in laws and regulations and could be impacted by the rate the markets
transition to a lower carbon-based economy. 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 8 of these 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 between six and ten years, 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:
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 2033 to 2041.
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 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. These assumptions are disclosed in note 10 of
these financial statements.
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.
Derivative financial instruments
The Company applies judgement in assessing and determining when an embedded derivative exists within a host
contract, if the embedded derivative is closely related to the host contract, and the inputs used to fair value an
embedded derivative if it is not closely related to the host contract, which would include forecasted benchmark
commodity prices.
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3. SIGNIFICANT 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 Net Income and Comprehensive Net Income.
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 Net Income and Comprehensive Net Income.
Transaction costs associated with the acquisition are expensed when incurred.
Principles of consolidation
As at December 31, 2022, 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.
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
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.
Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are
expensed in the Consolidated Statement of Net Income and Comprehensive Net Income. 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.
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2022 ANNUAL REPORT
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.
Embedded derivatives are separated from the host contract and accounted for separately if the economic
characteristics and risks of the host contract and the embedded derivative are not closely related. Gains and losses on
re-measurement of embedded derivatives are included in profit or loss in the period in which they arise.
The Company enters into physical commodity contracts, that are entered into and are held for the purpose of receipt
or delivery of non-financial items, in accordance with the Company’s expected sale requirements. As such, these
contracts are not considered to be derivative financial instruments and have not been recorded at fair value on the
statement of financial position, unless the Company determines that an embedded derivative exists within the contract
that needs to be separated out from its host contract. Realized gains or losses from physically settled commodities
sales contracts are recognized in petroleum and natural gas sales as the contracts are settled. Embedded derivatives
that are separated out from its host contracts 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 3 fair value hierarchy estimates).
Exploration and evaluation assets and property, plant and equipment
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.
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.
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2022 ANNUAL REPORT
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 Net Income and Comprehensive Net
Income.
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
Net Income and Comprehensive Net Income. 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 an 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.
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.
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2022 ANNUAL REPORT
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. The timing of when the global energy markets transition to a lower
carbon-based economy is highly uncertain and may impact the FVLCD.
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 Net Income and Comprehensive Net
Income. 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. 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
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2022 ANNUAL REPORT
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 estimated
of the expenditures 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 Net Income (Loss) and
Comprehensive Net 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.
Income taxes
Total income tax expense is composed of both current and deferred income taxes.
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 for 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 Net Income and Comprehensive Net Income 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
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2022 ANNUAL REPORT
realized simultaneously. Deferred tax assets and liabilities are recorded on a non-discounted basis.
Revenue recognition
Revenue is recognized 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
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.
Per share amounts
Basic net income per common share is calculated by dividing net income (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 net income 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
KELT EXPLORATION LTD.
54
2022 ANNUAL REPORT
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. Government grants primarily related to income will be
presented in the Consolidated Statement of Net Income 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.
4. 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, 2022 and the prior year ended December 31, 2021:
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
Carrying value of net (assets) liabilities disposed
Consideration
Cash consideration, after closing adjustments (1)
Non-cash consideration
Total consideration
Gain (loss) on sale of assets
December 31, 2022 December 31, 2021
2,479
2,273
(1,290)
3,462
(933)
(2,529)
(3,462)
242
96
(86)
252
(52)
(200)
(252)
December 31, 2022 December 31, 2021
(2,513)
(331)
78
(2,766)
41
2,529
2,570
(196)
(1,427)
(10,808)
3,981
(8,254)
8,848
200
9,048
794
(1) The amounts reported in the table above were estimated based on information available at the time of preparation of these 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.
In the third quarter of 2022, the Company closed a non-cash swap transaction for exploration and evaluation assets
with a cost basis of $2.5 million and disposed and acquired some additional non-core assets.
In the third quarter of 2021, the Company disposed of non-core assets for net proceeds of $8.9 million after closing
adjustments. The non-core assets had a net carrying value of $8.7 million (property plant and equipment costs of $21.7
million, accumulated depletion and depreciation of $10.9 million, exploration and evaluation costs of $1.4 million and
abandonment obligations of $3.5 million), resulting in a gain on sale of $0.2 million.
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
5. EXPLORATION AND EVALUATION ASSETS
The following table reconciles movements of exploration and evaluation assets:
Balance, beginning of year
Additions
Property acquisitions [note 4]
Property dispositions [note 4]
Transfers to property, plant and equipment
Exploration and evaluation expense
Balance, end of year
December 31, 2022 December 31, 2021
29,529
7,061
2,479
(2,513)
(5,229)
(14,484)
16,843
53,449
4,202
242
(1,427)
(26,009)
(928)
29,529
During the fourth quarter of 2022, the Company expensed approximately $14.2 million of exploratory drilling costs for
two exploration wells.
The Company concluded that there are no indicators of potential impairment of its E&E assets at December 31, 2022.
6. PROPERTY, PLANT AND EQUIPMENT
Net carrying value
Development and production assets
Right-of-use assets
Corporate assets
Total net carrying value of property, plant and equipment
December 31, 2022 December 31, 2021
995,464
1,189
631
997,284
821,017
1,009
778
822,804
The following table reconciles movements of property, plant and equipment during the year:
Property, plant and equipment, at cost
D&P Assets
Balance at December 31, 2020
Additions
Property acquisitions [note 4]
Property dispositions [note 4]
Provision
Change in decommissioning obligations
Transfers from E&E
Balance at December 31, 2021
Additions
Property acquisitions [note 4]
Property dispositions [note 4]
Change in decommissioning obligations
Transfers from E&E
1,251,898
217,018
96
(21,692)
(1,000)
3,468
26,009
1,475,797
308,759
2,273
(331)
(26,884)
5,229
Corporate
Assets
ROU Assets
Total PP&E
5,238
1,087
2,503
289
1,259,639
218,394
-
-
-
-
-
-
-
-
-
-
96
(21,692)
(1,000)
3,468
26,009
6,325
828
2,792
789
1,484,914
310,376
-
-
-
-
-
-
-
-
2,273
(331)
(26,884)
5,229
Balance at December 31, 2022
1,764,843
7,153
3,581
1,775,577
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
Accumulated depletion, depreciation and
impairment
D&P Assets
Corporate
Assets
ROU Assets
Total PP&E
Balance at December 31, 2020
Depletion and depreciation expense
Impairment reversal
Dispositions [note 4]
Balance at December 31, 2021
Depletion and depreciation expense
Balance at December 31, 2022
645,566
90,228
(70,130)
(10,884)
654,780
114,599
769,379
5,047
500
-
-
5,547
975
6,522
1,260
523
-
-
1,783
609
2,392
651,873
91,251
(70,130)
(10,884)
662,110
116,183
778,293
Future development capital expenditures required to develop proved reserves in the amount of $1,210.1 million
(December 31, 2021 – $754.6 million) are included in the depletion calculation for development and production assets.
Based on its assessment as of December 31, 2022, the Company determined that there were no indicators of
impairment for the Alberta CGU and BC CGU and there are no previous impairments available for reversals.
7. BANK DEBT
The Company has a $100.0 million demand and revolving term facility (“the Credit Facility”) with a syndicate of financial
institutions. As at December 31, 2022, $11.3 million was drawn under the Credit Facility, with outstanding letters of
credit of $2.0 million. The Credit Facility may be extended annually at Kelt’s option and subject to lender approval, with
a 364 day term-out period if not renewed.
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 on or before June 30 and November
30 of each year. 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 $800.0 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 175 basis points to 575 basis points depending upon
the Company’s Net Debt to Cash Flow ratio of between less than 0.5 times to greater than five times. Under the Credit
Facility, borrowings by bankers’ acceptances are also available. Stamping fees fluctuate based on a pricing grid and
range from 2.75% to 6.75%, depending upon the Company’s Net Debt to Cash Flow ratio of between less than 0.5
times to greater than five times.
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
8. 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:
December 31, 2022 December 31, 2021
Balance, beginning of year
Obligations incurred
Obligations acquired
Obligations disposed
Obligations settled
Changes in discount rate
Changes in inflation rate
Revisions to estimates (1)
Accretion expense
Balance, end of year
Decommissioning obligations – current
Decommissioning obligations – non-current
Key assumptions
Risk free rate
Inflation rate
115,053
2,708
1,290
(78)
(3,200)
(42,428)
8,724
4,112
2,451
88,632
2,187
86,445
3.3%
2.0%
117,060
2,395
86
(3,981)
(3,583)
(26,279)
16,569
10,783
2,003
115,053
2,396
112,657
1.7%
1.7%
(1) Relates to changes in cost estimates of future obligations, changes in anticipated settlement dates, and an increase of 10% in 2022 to the underlying
cost estimates.
The underlying cost estimates are derived from a combination of published industry benchmarks as well as site specific
information. As at December 31, 2022 the undiscounted amount of the estimated cash flows required to settle the
obligation is $126.4 million (December 31, 2021 – $115.1 million) and is expected to be incurred over the next 50 years.
Based on an inflation rate of 2.0%, the undiscounted amount of the estimated future cash flows required to settle the
obligation is $247.0 million at December 31, 2022 (December 31, 2021 – $191.6 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 Net Income and Comprehensive Net Income (note 14).
9. LEASE LIABILITY
Balance, beginning of year
Additions
Interest expense
Lease payments
Balance, end of year
Lease liability – current
Lease liability – non-current
December 31, 2022 December 31, 2021
1,008
789
46
(795)
1,048
505
543
1,464
289
67
(812)
1,008
609
399
The Company has lease liabilities for commercial office space and vehicle leases. The weighted average discount rate
for new leases entered in the period ended December 31, 2022 was 9.0% (December 31, 2021 – 5.9%). Payments
under the Company’s short-term leases were $9.4 million for the year ended December 31, 2022 (December 31, 2021
– $5.0 million), which primarily related to short term drilling rig rentals.
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
10. SHARE CAPITAL
Authorized
The Company is authorized to issue an unlimited number of common shares and an unlimited number of preferred
shares, each without par value.
Issued and outstanding
The following table summarizes the change in common shares issued and outstanding. There are no preferred shares
issued or outstanding as of December 31, 2022 (December 31, 2021 – nil).
Balance at December 31, 2020
Issued on exercise of stock options
Transfer from contributed surplus on exercise of stock options
Released upon vesting of restricted share units
Balance at December 31, 2021
Issued on exercise of stock options
Transfer from contributed surplus on exercise of stock options
Released upon vesting of restricted share units
Balance at December 31, 2022
Stock options
Number of
Shares (000s)
Amount
($ thousands)
188,580
1,141,517
291
-
293
189,164
2,802
-
48
568
200
2,311
1,144,596
12,928
4,968
158
192,014
1,162,650
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, 2020
Granted
Exercised (1)
Forfeited
Expired
Balance at December 31, 2021
Granted
Exercised (1)
Forfeited
Expired
Balance at December 31, 2022
Number of
Options (000s)
Average
Exercise
Price ($/share)
9,967
2,642
(291)
(137)
(1,658)
10,523
3,528
(2,802)
(333)
(384)
10,532
3.88
2.79
1.95
4.66
4.72
3.52
5.40
4.61
4.55
6.77
3.71
(1) The average share price on the date stock options were exercised during the year ended December 31, 2022 was $6.94 per common share ($3.87
per common share on average during the year ended December 31, 2021).
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
The total fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing
model with weighted average assumptions as follows:
Risk free interest rate
Expected life (years)
Expected volatility (1)
Expected dividend yield
Expected forfeiture rate
Fair value of options granted during the year ($/share)
Year ended December 31
2022
2.00%
3.5
76.1%
0.0%
4.8%
2.87
2021
0.60%
3.6
79.5%
0.0%
5.2%
1.51
(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, 2022:
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)
5,371
4,814
347
10,532
2.5
3.2
0.8
2.8
2.14
5.17
7.76
3.71
3,037
1,429
307
4,773
2.11
4.76
7.88
3.28
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 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, 2020
Granted
Released upon vesting
Forfeited
Balance at December 31, 2021
Granted
Released upon vesting
Forfeited
Balance at December 31, 2022
Number of
RSUs (000s)
346
709
(293)
(3)
759
200
(48)
(38)
873
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
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
Total share based compensation expense
Per share amounts
Year ended December 31
2022
5,902
1,112
7,014
2021
3,054
1,162
4,216
The table below summarizes the weighted average number of common shares outstanding used in the calculation of
basic and diluted net income 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
2022
191,101
4,355
195,456
2021
188,800
2,007
190,807
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 net income per common share. For
the year ended December 31, 2022 and December 31, 2021, the company included the effect of stock options and
RSUs in calculating the diluted net income per common share, however, the effect was negligible.
11. 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, and bank debt.
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. Net
income, 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 objective of the Company’s 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 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.
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
As at December 31, 2022, the following commodity price risk management contracts are outstanding:
Natural gas derivative contracts
Contract Type (2)
Notional Volume
Contract Price $/MMBtu
NYMEX fixed price swap
20,000 MMBtu/d
CAD$10.12
NYMEX fixed price swap
10,000 MMBtu/d
CAD$10.15
AECO 5A fixed price swap
5,000 GJ/d
CAD$4.00/GJ
NYMEX-AECO 5A basis swap
20,000 MMBtu/d
NYMEX less USD$1.22
NYMEX-AECO 7A basis swap
10,000 MMBtu/d
NYMEX less USD$0.98
NYMEX-AECO 5A basis swap
10,000 MMBtu/d
Monthly AECO basis calculated at
30% of the floating monthly NYMEX
price
Remaining Term
Jan 23 – Feb 23
Mar 23
Apr 23 – Oct 23
Jan 23 – Mar 23
Jan 23 – Mar 23
Apr 23 – Oct 24
NYMEX-AECO 5A basis swap
30,000 MMBtu/d
NYMEX less USD$1.10
Nov 24 – Oct 25
Natural Gas Costless
Collars (2)
Notional Volume
Floor Price
$/MMBtu
Ceiling Price
$/MMBTU
Remaining Term
NYMEX costless collar
10,000 MMBtu/d
CAD$9.00
CAD$16.40
Jan 23 – Mar 23
NYMEX costless collar
10,000 MMBtu/d
CAD$9.00
CAD$18.15
Jan 23 – Mar 23
NYMEX costless collar
10,000 MMBtu/d
CAD$9.50
CAD$17.00
Jan 23 – Mar 23
Crude oil derivative contracts
Contract Type (1)(3)
Notional Volume
Contract Price $/bbl
WTI-MSW basis swap
2,500 bbl/d
WTI less USD$2.70
Remaining Term
Jan 23 – Jun 23
Crude Oil Costless Collars (1)
Notional Volume
$/bbl
WTI costless collar
WTI costless collar
1,000 bbl/d
1,000 bbl/d
CAD$100
CAD$102
Floor Price
Ceiling Price
$/bbl
CAD$130
CAD$128
Remaining Term
Jan 23 – Mar 23
Jan 23 – Mar 23
(1) West Texas Intermediate (“WTI”)
(2) NYMEX Henry Hub (“NYMEX”)
(3) Mixed Sweet Blend (“MSW”)
Subsequent to December 31, 2022, the Company unwound its 30,000 MMBtu/d of natural gas costless collar derivative
contracts for February and March 2023 for proceeds of $8.06 million and unwound its 20,000 MMBtu/d NYMEX fixed
price swaps for February 2023 and 10,000 MMBtu/d NYMEX fixed price swaps for March 2023 for proceeds of $4.65
million.
Natural gas embedded derivative
Contract Type (1)
Notional Volume
Contract Price
Remaining Term
Physical delivery contract
7,458 GJ/d
(1) Alberta Electric System Operator (“AESO”)
Floating AESO power pool price
(CAD/MWh) divided by the Fixed
Heat Rate of 16.95 GJ/MWh
Jan 23 – Mar 23
Commencing in November 2022, the Company entered into a five-month natural gas supply agreement to deliver 7,458
GJ/d of gas to the Nova Inventory Transfer point. Under the terms of the agreement, the Company receives a price
equal to the Floating AESO Power Pool Price divided by the fixed heat rate of 16.95 GJ/MWh. It was determined that
the agreement contained an embedded derivative, with the embedded derivative gains reported under “Loss on
KELT EXPLORATION LTD.
62
2022 ANNUAL REPORT
derivative financial instruments” in the Consolidated Statement of Net Income and Comprehensive Net Income as of
December 31, 2022.
The fair value of the embedded derivative as at December 31, 2022 is calculated by the difference between the
forecasted Floating AESO Power Pool Price divided by the fixed heat rate of 16.95 GJ/MWh, less the forecasted AECO
5A price, for the remaining term of the contract.
Subsequent to December 31, 2022, the Company entered into the following commodity price risk management
contracts:
Natural gas derivative contracts
Contract Type (1)
Notional Volume
Contract Price $/MMBtu
NYMEX-AECO 7A basis swap
25,000 MMBtu/d
NYMEX less USD$1.10
NYMEX-AECO 7A basis swap
35,000 MMBtu/d
NYMEX less USD$1.18
NYMEX-AECO 5A basis swap
15,000 MMBtu/d
NYMEX less USD$1.17
NYMEX-AECO 7A basis swap
5,000 MMBtu/d
NYMEX less USD$1.12
Remaining Term
Apr 23 – Jul 23
Aug 23 – Oct 23
Apr 23 – Oct 23
Nov 24 – Oct 25
(1) NYMEX Henry Hub (“NYMEX”)
Interest rate risk
The Company is exposed to interest rate risk as changes in market interest rates will impact the Company’s Credit
Facility which is subject to a floating interest rate. Based on bank debt balance as of December 31, 2022 of $11.3
million, an increase (decrease) in the market rate of interest by 25 basis points would have an insignificant impact. As
at December 31, 2022, 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.
As at December 31, 2022, the following foreign exchange risk management contracts are outstanding:
Contract Type
Notional Volume
Contract Price
CAD/USD swap
USD$3.0 million/month
$1.3625 CAD/USD
Remaining Term
Jan 23 – Dec 23
Gains and losses on risk management contracts
The table below summarizes realized and unrealized gains (losses) on risk management contracts:
Realized loss on financial derivative contracts
Realized gain on natural gas embedded derivative
Total realized loss on derivative financial instruments
Unrealized gain on financial derivative contracts
Unrealized gain on natural gas embedded derivative
Total unrealized gain on derivative financial instruments
Loss on derivative financial instruments
Fair value measurements
Year ended December 31
2022
(60,633)
4,124
(56,509)
15,146
8,389
23,535
(32,974)
2021
(16,426)
-
(16,426)
2,770
-
2,770
(13,656)
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. Assessment of the significance of a particular input to the fair value measurement requires
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
judgment and may affect the placement within the fair value hierarchy. 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.
The Company’s financial derivative contracts and natural gas embedded derivative are classified as Level 2 and
investment in securities are classified as Level 3.
The fair value of cash and cash equivalents, accounts receivable and accrued sales, deposits, accounts payable and
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 financial assets and liabilities, excluding working capital, is attributable to the following fair value
hierarchy levels at December 31, 2022:
Balance as at December 31, 2022
Gross
Netting(1)
Net CV
Level 1
Level 2
Level 3
Carrying Value (“CV”)
Fair Value
Financial assets
Derivative financial instrument
Natural gas embedded derivative
20,789
8,389
Financial liabilities
Derivative financial instrument
1,414
-
-
-
20,789
8,389
1,414
-
-
-
20,789
8,389
1,414
-
-
-
Balance as at December 31, 2021
Gross
Netting(1)
Net CV
Level 1
Level 2
Level 3
Carrying Value (“CV”)
Fair Value
Financial assets
Derivative financial instrument
5,338
Financial liabilities
Derivative financial instrument
1,109
-
-
5,338
1,109
-
-
5,338
1,109
-
-
(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.
Credit risk
As at December 31, 2022, 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.
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
The composition of the Company’s accounts receivable is set out in the following table:
Accounts receivable and accrued sales
December 31, 2022 December 31, 2021
Joint venture partners
Oil and gas marketers
GST input tax credits
Risk management contracts
Other
ECL provision
Total
11,080
59,271
2,879
1,669
7,160
(984)
81,075
2,789
38,534
1,740
-
138
(617)
42,584
During the year ended December 31, 2022, sales to four oil and gas marketers accounted for approximately 81% of
total sales. During the period ended December 31, 2021, sales to five oil and gas marketers accounted for
approximately 96% of total sales. Kelt has mitigated some of its credit risk 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, 2022, the collection risk on outstanding accounts receivable balances is
considered low as less than 1.0% of the accounts receivable balance is outstanding for more than 90 days (December
31, 2021 – 1.0%).
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, 2022 include accounts payable, derivative financial instruments,
lease liabilities and bank debt. 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 sales. 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 sales.
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.
The table below outlines a contractual maturity analysis for Kelt’s financial liabilities as at December 31, 2022:
Within 1 Year
1 to 5 Years More than 5 Years
Accounts payable and accrued liabilities
Derivative financial instruments
Lease liability
Bank debt and estimated interest (1)
Total
83,288
1,414
505
746
85,953
-
-
543
11,300
11,843
-
-
-
-
-
Total
83,288
1,414
1,048
12,046
97,796
(1) Estimated interest for future years related to the Credit Facility was calculated using the weighted average interest rate of 6.6% for the year ended
December 31, 2022, applied to the principal balance outstanding as at that date.
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
Capital management
The Company’s capital structure is comprised of shareholders’ capital, bank debt and working capital. The Company’s
objective when managing its capital structure is to maintain financial flexibility in order to meet financial obligations, as
well as finance future capital expenditures relating to exploration, development and acquisition activities.
The Company may increase or decrease capital expenditures including acquisitions and dispositions, issue new
shares, issue new debt or repay existing debt, if any, according to market conditions in order to maintain its financial
flexibility.
Adjusted funds from operations and annualized quarterly adjusted funds from operations
Management considers adjusted funds from operations and annualized quarterly adjusted funds from operations key
capital management measures that demonstrate the Company’s ability to meet its financial obligations and cash flow
available to fund its capital program. Adjusted funds from operations and annualized quarterly adjusted funds from
operations are not standardized measures and therefore may not be comparable with the calculation of similar
measures by other entities.
Adjusted funds from operations and annualized quarterly adjusted funds from operations is calculated as follows:
Cash provided by operating activities
Change in non-cash working capital
Settlement of decommissioning obligations
Adjusted funds from operations
Three months ended
December 31
Year ended
December 31
2022
63,742
28,742
367
92,851
2021
52,056
15,058
1,041
68,155
2022
2021
306,022
159,714
17,770
3,200
(1,903)
3,583
326,992
161,394
Annualized quarterly adjusted funds from operations
371,404
272,620
Net debt and net debt to annualized quarterly adjusted funds from operations ratio
Management considers net debt and a net debt to annualized quarterly adjusted funds from operations ratio as key
capital management measures to assess the Company’s liquidity at a point in time and to monitor its capital structure
and short-term financing requirements. The Company targets a net debt to annualized quarterly adjusted funds from
operations ratio of less than 2.0 times. Net debt and a net debt to annualized quarterly adjusted funds from operations
ratio are not standardized measures and therefore may not be comparable with the calculation of similar measures by
other entities.
Net debt and net debt to annualized quarterly adjusted funds from operations ratio is calculated as follows:
Bank debt
Accounts payable and accrued liabilities
Cash and cash equivalents
Accounts receivable and accrued sales
Prepaid expenses and deposits
Net debt
Annualized quarterly adjusted funds from operations
Net debt to annualized quarterly adjusted funds from operations ratio
December 31,
2022
December 31,
2021
11,300
83,288
(125)
(81,075)
(3,599)
9,789
371,404
0.0
1,150
72,453
(719)
(42,584)
(2,080)
28,220
272,620
0.1
As more particularly described in note 7, there are no financial covenants under the Credit Facility agreement and Kelt
is in compliance with all other covenants.
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
12. INCOME TAXES
Kelt was not required to pay income taxes in the current or prior year. Tax pools and losses available to reduce taxable
income as of December 31, 2022 are estimated to be approximately $768.4 million (December 31, 2021 – $774.2
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 Net Income and Comprehensive Net Income:
Net income before income taxes
Canadian statutory tax rate
Expected income tax expense
Increase (decrease) resulting from:
Non-deductible expenses (1)
Amortization of common control reserve
Unrecognized deferred tax assets
Deferred income tax expense
Year ended December 31
2022
210,199
23.7%
49,819
1,622
-
-
51,441
2021
135,692
23.1%
31,293
976
(329)
(10,504)
21,436
(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
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 8.0% 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
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
Share and debt issue costs
Reserve from common control transaction
Non-capital losses (2)
Net deferred tax asset (liability)
Balance at
December 31, 2021
Recognized in
profit and CI(1)
Recognized in
balance sheet
Balance at
December 31, 2022
(973)
(101,641)
26,714
186
54
(1)
86,104
10,443
(5,413)
(21,097)
(6,128)
8
(54)
1
(18,758)
(51,441)
-
-
-
-
-
-
-
-
(6,386)
(122,738)
20,586
194
-
-
67,346
(40,998)
Balance at
December 31, 2020
Recognized in
profit and CI(1)
Recognized in
balance sheet
Balance at
December 31, 2021
(336)
(59,382)
27,177
286
134
(330)
64,330
31,879
(637)
(42,259)
(463)
(100)
(80)
329
21,774
(21,436)
-
-
-
-
-
-
-
-
(973)
(101,641)
26,714
186
54
(1)
86,104
10,443
(1) Comprehensive income has been abbreviated as “CI”.
(2) The Company’s non-capital losses expire in years 2033 to 2041.
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
The amount and timing of reversals of temporary differences will be dependent upon a number of factors, including the
future capital expenditures and the Company’s future operating results.
13. PETROLEUM AND NATURAL GAS SALES
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.
Sales are typically collected on the 25th day of the month following the prior month’s production, with sales 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 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, 2022, transportation costs incurred in relation to these contracts was $12.4 million (December 31, 2021
– $9.9 million).
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, 2022 December 31, 2021
240,195
718
99,973
249,125
1,606
21,741
613,358
138,255
722
46,083
123,728
1,358
6,617
316,763
Included in accounts receivable at December 31, 2022 is $59.3 million (December 31, 2021 - $38.5 million) of accrued
oil and gas sales related to December 2022 production.
14. FINANCING EXPENSES
Total interest expense
Accretion of decommissioning obligations [note 8]
Total financing expense
15. COMMITMENTS
Year ended December 31
2022
1,460
2,451
3,911
2021
440
2,003
2,443
As of December 31, 2022, the Company is committed to future payments under the following agreements:
Firm processing commitments
Firm transportation commitments
2023
18,969
28,887
2024
27,700
28,414
2025
2026
2027 Thereafter
39,754
26,638
39,504
26,997
38,812
261,361
23,404
48,711
Total annual commitments
47,856
56,114
66,392
66,501
62,216
310,072
In 2022 Kelt entered into two gas processing agreements with third party midstream companies. The gas processing
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
plants are expected to become operational in late 2023 or early 2024 and in the fourth quarter of 2024, with a total
expected increase of approximately $300 million to Kelt’s future payments under these agreements.
16. 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
2022
12,287
5,521
17,808
(7,506)
10,302
2021
9,713
3,745
13,458
(4,207)
9,251
(1) Refer to additional information regarding salaries and benefits paid to key management personnel in note 18 of these financial statements.
(2) 2021 salaries and benefits include $0.5 million received as part of the Canada Emergency Wage Subsidy program.
17. 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
2022
(38,491)
(1,519)
10,835
(29,175)
(17,770)
(11,405)
(29,175)
2021
(21,630)
9,616
35,888
23,874
1,903
21,971
23,874
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
Taxes (1)
Year ended December 31
2022
1,068
-
2021
116
-
(1) Kelt was not required to pay cash income taxes as the Company had sufficient income tax deductions available to shelter taxable income (note 12).
KELT EXPLORATION LTD.
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2022 ANNUAL REPORT
18. RELATED PARTY TRANSACTIONS
The Company has engaged a law firm where the corporate secretary 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, 2022, the Company incurred $0.4 million (December 31, 2021 – $0.2 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:
Salaries, bonuses and other benefits
Share based compensation
Total compensation
Year ended December 31
2022
2,685
5,728
8,413
2021
2,086
2,959
5,045
During the year ended December 31, 2022, key management personnel were granted 1,636,500 stock options with an
exercise price of $5.34 per share and 155,00 RSUs. During the year ended December 31, 2021, key management
personnel were granted 1,219,000 stock options with an exercise price of $2.74 per share.
KELT EXPLORATION LTD.
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2022 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.
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2022 ANNUAL REPORT
CORPORATE INFORMATION
BOARD OF DIRECTORS
Geri L. Greenall 2, 3, 6, 7
Independent
William C. Guinan 1, 5
Independent
Michael R. Shea 3, 4, 6
Independent
Neil G. Sinclair 2, 4, 5, 6
Independent
Janet E. Vellutini 2, 3, 4
Independent
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
OFFICERS
David J. Wilson
President & Chief Executive Officer
Sadiq H. Lalani
Vice President & Chief Financial Officer
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
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.
72
2022 ANNUAL REPORT
SUITE 300, EAST TOWER
311 SIXTH AVENUE SOUTH WEST
CALGARY, ALBERTA T2P 3H2