Kelt Exploration
Annual Report 2023

Plain-text annual report

ANNUAL REPORT AS AT AND FOR THE YEAR ENDED DECEMBER 31, 2023 [THIS PAGE IS INTENTIONALLY BLANK] FINANCIAL AND OPERATIONAL HIGHLIGHTS Three months ended December 31 Year ended December 31 (CA$ thousands, except as otherwise indicated) 2023 2022 % 2023 2022 % 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) Shareholders' equity Return on average capital employed (%) (1)(3) Weighted average shares outstanding (000s) 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) 129,000 152,720 62,477 66,618 0.34 0.33 63,742 92,851 0.48 0.47 23,729 54,238 0.12 0.12 0.28 0.28 62,695 68,594 -16 -2 -28 -29 -30 -56 -57 -57 -9 495,580 283,224 613,358 306,022 276,200 326,992 1.43 1.40 1.71 1.67 85,974 158,758 0.45 0.44 0.83 0.81 282,646 317,540 1,260,292 1,128,104 -19 -7 -16 -16 -16 -46 -46 -46 -11 12 - 11,300 -100 12,997 9,789 1,003,663 901,424 12 25 194,359 199,223 191,812 195,828 1 2 193,116 197,063 191,101 195,456 8,832 3,422 6,416 3,478 120,541 108,849 32,344 28,036 166 146 95.68 49.79 2.75 43.35 (1.66) 41.69 0.09 41.78 (6.03) (8.62) (3.64) 23.49 107.88 60.54 6.52 59.21 (3.30) 55.91 1.66 57.57 (6.15) (10.90) (3.03) 37.49 38 -2 11 15 14 -11 -18 -58 -27 -50 -25 -95 -27 -2 -21 20 -37 33 11 -52 1 1 41 -7 7 12 10 -16 -27 -54 -28 -31 -28 -18 -20 -4 14 -24 - - 15 25 21 7,979 3,759 5,640 4,049 112,634 105,280 30,510 27,236 158 143 97.90 49.27 3.08 44.51 (1.50) 43.01 1.35 44.36 (5.31) (9.83) (3.48) 25.74 117.18 67.64 6.63 61.70 (2.16) 59.54 53.86 (6.60) (10.22) (3.06) 33.98 796,519 581,553 795,559 579,857 149,163 129,479 1,583,515 1,267,931 413,082 340,801 (5.68) 124 (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. (3) The three-year average ROACE at Dec 31, 2023 was 19%. Refer to additional information under “Non-GAAP and Other Financial Measures”. KELT EXPLORATION LTD. 1 2023 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, 2023. Average production for the three months ended December 31, 2023 was 32,344 BOE per day, up 15% compared to average production of 28,036 BOE per day during the fourth quarter of 2022. Average production for 2023 was 30,510 BOE per day, an increase of 12% from an average production of 27,236 BOE per day in 2022. Production for the three months ended December 31, 2023 was weighted 38% to oil and NGLs and 62% to gas. Petroleum and natural gas sales during the fourth quarter of 2023 decreased 16% to $129.0 million, down from $152.7 million in the same period of the previous year. Petroleum and natural gas sales for the year were $495.6 million, down 19% from $613.4 million in 2022. Kelt’s net realized average oil price during the fourth quarter of 2023 was $95.68 per barrel, down 11% from $107.88 per barrel in the fourth quarter of 2022. The Company’s net realized average NGLs price during the fourth quarter of 2023 was $49.79 per barrel, down 18% from $60.54 per barrel in the fourth quarter of 2022. Kelt’s net realized average gas price for the fourth quarter of 2023 was $2.75 per Mcf, down 58% from $6.52 per Mcf in the fourth quarter of 2022. For the three months ended December 31, 2023, adjusted funds from operations was $66.6 million ($0.33 per share, diluted), compared to $92.9 million ($0.47 per share, diluted) in the fourth quarter of 2022. Year over year, adjusted funds from operations decreased 16% to $276.2 million ($1.40 per share, diluted) from $327.0 million ($1.67 per share, diluted) in 2022. During 2023, Kelt recorded net income of $86.0 million ($0.44 per share, diluted) compared to $158.8 million ($0.81 per share, diluted) in the previous year. Kelt’s return on average capital employed (“ROACE”) was 12% in 2023 and 25% in 2022. The three year average ROACE was 19%, showing a significant return on capital employed as the Company transitions from exploration and resource delineation to development and multi-well pad drilling. At December 31, 2023, Kelt had net debt of $13.0 million compared to $9.8 million at December 31, 2022. At a net debt to adjusted funds from operations ratio of 0.05 times, Kelt continues to maintain its strong financial position. Capital expenditures, net of A&D incurred during the three months ended December 31, 2023 were $62.7 million, down 9% compared to net capital expenditures of $68.6 million during the fourth quarter of 2022. During the fourth quarter of 2023, the Company spent $26.6 million on drill and complete operations and $35.9 million on well equipment, facilities and pipelines. Kelt expects to report to shareholders its 2024 first quarter results on or about May 9, 2024. On behalf of the Board of Directors, [signed] David J. Wilson President and Chief Executive Officer March 7, 2024 KELT EXPLORATION LTD. 2 2023 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.sedarplus.ca. (1) Wembley/Pipestone in Alberta; This Management’s Discussion and Analysis (“MD&A”) is dated March 7, 2024 and should be read in conjunction with the Company’s consolidated financial statements and related notes as at and for the year ended December 31, 2023. The accompanying financial statements have been prepared in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board (“IFRS Accounting Standards”). The Company’s Board of Directors approved and authorized the consolidated financial statements on March 7, 2024. 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”, “adjusted funds from operations per common share”, “petroleum and natural gas sales after cost of purchases”, “operating income”, “operating netback”, “capital expenditures, before A&D”, “capital expenditures, after A&D”, “net debt (surplus)”, “net realized prices”, “adjusted funds from operations”, “net debt (surplus) to adjusted funds from operations ratio”, “net asset value”, “adjusted earnings before interest and taxes”, “average capital employed”, and “return on average capital employed” 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. KELT EXPLORATION LTD. 3 2023 ANNUAL REPORT References to “oil” in this MD&A include crude oil and field condensate. References to “natural gas liquids” or “NGLs” include pentane, butane, propane, and ethane. References to “gas” include natural gas and sulphur. FINANCIAL AND OPERATING SUMMARY (CA$ thousands, except as otherwise indicated) 2023 2022 % 2023 2022 % 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) Return on average capital employed (%) (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) 129,000 152,720 62,477 66,618 0.33 63,742 92,851 0.47 23,729 54,238 0.12 0.28 62,695 68,594 -16 -2 -28 -30 -56 -57 -9 495,580 613,358 283,224 306,022 276,200 326,992 1.40 1.67 85,974 158,758 0.44 0.81 282,646 317,540 -19 -7 -16 -16 -46 -46 -11 - 11,300 -100 - 11,300 -100 12,997 9,789 33 12,997 12 9,789 25 33 -52 32,344 28,036 41.69 41.78 23.49 55.91 57.57 37.49 15 -25 -27 -37 21 30,510 27,236 43.01 44.36 25.74 59.54 53.86 33.98 413,082 340,801 12 -28 -18 -24 21 Reserves – proved plus probable (MBOE) 413,082 340,801 (1) Refer to advisories regarding non-GAAP and other financial measures. Kelt’s key financial and operating results in the fourth quarter of 2023 are highlighted by the following:  Production – Fourth quarter 2023 production averaged 32,344 BOE per day (38% oil/NGLs), an increase of 15% from the fourth quarter of 2022 and an increase of 15% from the third quarter of 2023. The increase was driven by a successful drilling program and additional natural gas processing capacity that became available at the end of 2023.  Petroleum and natural gas sales – For the three months ended December 31, 2023, petroleum and natural gas sales was $129.0 million, a decrease of 16% from $152.7 million in the fourth quarter of 2022. Kelt’s combined net realized price, before financial instruments of $41.69 per BOE decreased 25% from the fourth quarter of 2022.  Operating netback – Kelt’s operating netback of $23.49 for the quarter ended December 31, 2023 decreased by 37% from the fourth quarter of 2022. The decrease in the operating netback was driven by a decrease in net realized crude oil and natural gas prices in 2023.  Cash provided by operating activities and adjusted funds from operations – Cash provided by operating activities decreased to $62.5 million in the fourth quarter of 2023 compared to $63.7 million in the fourth quarter of 2022. Adjusted funds from operations of $66.6 million during the three months ended December 31, 2023 ($0.33 per share, diluted) decreased 28% from the fourth quarter of 2022 primarily due to a decrease in petroleum and natural gas sales.  Net income – Kelt reported net income of $23.7 million ($0.12 per common share, diluted) for the three months ended December 31, 2023, compared to net income of $54.2 million ($0.28 per common share, diluted) in the comparative period in 2022. The decrease in net income was primarily due to a decrease in the gain on derivative financial instruments and a decrease in petroleum and natural gas sales, driven by lower realized prices in the fourth quarter of 2023. This was partially offset by a decrease in exploration and evaluation expenses in 2023. KELT EXPLORATION LTD. 4 2023 ANNUAL REPORT  Capital investments – During the fourth quarter of 2023, capital expenditures, net of A&D, was $62.7 million and included the drilling of 4.0 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 a working capital deficit of $13.0 million, and no borrowings on its credit facility of $100.0 million, other than letters of credit of $2.6 million.  Reserves - The Company increases oil and gas reserves as at December 31, 2023: o Proved developed producing reserves of 71.1 million BOE (35% oil and NGLs), an increase of 16% from December 31, 2022; o Total proved reserves of 256.6 million BOE (38% oil and NGLs), an increase of 34% from December 31, 2022; and o Total proved plus probable reserves of 413.1 million BOE (36% oil and NGLs), an increase of 21% from December 31, 2022. PRODUCTION Kelt Quarterly Production (BOE/D) 27,413 27,713 25,791 28,036 63% 65% 15% 22% 17% 18% 65% 15% 20% 65% 12% 23% 31,833 61% 15% 24% 29,705 28,179 60% 12% 27% 62% 12% 25% 32,344 62% 11% 27% Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Oil Production (BBLS/D) NGLs Production (BBLS/D) Natural Gas Production (BOE/D) (CA$ thousands, except as otherwise indicated) 2023 2022 % 2023 2022 % 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 8,832 3,422 6,416 3,478 120,541 108,849 32,344 38% 28,036 35% 38 -2 11 15 9 7,979 3,759 5,640 4,049 112,634 105,280 30,510 27,236 38% 36% 41 -7 7 12 6 (1) “Oil” includes crude oil and field condensate combined Average production for the three months ended December 31, 2023, increased 15% from the three months ended December 31, 2022. In December 2023, the Company’s natural gas processing capacity at Wembley/Pipestone increased by 22 MMcf/d following the completion of a third-party plant expansion. Average production for the year ended December 31, 2023 increased 12% from the year ended December 31, 2022. In 2023, Kelt brought 27 gross wells (25.6 net wells) on production. Oil and NGLs weighting of total production increased in 2023 to 38% in the fourth quarter and year ended December 31, 2023, versus the 35% and 36%, respectively, in the comparable periods in 2022. The increase in the oil and NGLs weighting was due to Kelt’s emphasis on drilling oilier wells in the Montney and Charlie Lake plays in 2023. KELT EXPLORATION LTD. 5 2023 ANNUAL REPORT PETROLEUM AND NATURAL GAS SALES (“P&NG SALES”) Kelt Quarterly Petroleum and Natural Gas Sales ($000) 178,938 45% 19% 138,446 37% 17% 143,254 152,720 139,571 41% 16% 40% 13% 30% 17% 110,061 116,948 23% 12% 24% 13% 129,000 24% 12% 45% 33% 39% 42% 50% 63% 59% 60% Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Oil Sales NGLs Sales Natural Gas Sales Marketing Revenue (CA$ thousands, except as otherwise indicated) 2023 2022 % 2023 2022 % Three months ended December 31 Year ended December 31 P&NG Sales: Oil (5) NGLs Gas Marketing revenue (1) P&NG Sales Cost of purchases (2) P&NG Sales after cost of purchases (3)(4)(6) Combined net realized price ($/BOE) (4)(6) 77,652 15,677 30,637 5,034 63,570 19,375 61,166 8,609 129,000 152,720 (4,952) (8,509) 124,048 144,211 41.69 55.91 22 -19 -50 -42 -16 -42 -14 -25 284,867 240,913 67,598 99,973 126,299 250,731 16,816 21,741 495,580 613,358 (16,565) (21,438) 479,015 591,920 43.01 59.54 18 -32 -50 -23 -19 -23 -19 -28 (1) Marketing revenue includes the sale of third-party volumes related to the Company's oil blending operations and natural gas activities. (2) Cost of purchases includes costs for the purchase of third-party volumes related to the Company's oil blending operations and natural gas activities. (3) P&NG sales after cost of purchases includes petroleum and natural gas sales, net of the cost of the third-party volumes purchased. (4) Combined net realized price ($/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 2023 was $129.0 million, down 16% from $152.7 million in the fourth quarter of 2022. Petroleum and natural gas sales for the year ending December 31, 2023 was $495.6 million, down 19% from the comparable period in 2022. The decrease in P&NG sales from 2022 was primarily due to a decrease in benchmark crude oil, NGLs and natural gas prices. The decrease in benchmark prices was offset by higher production in 2023 and a higher oil weighting resulting in an overall increase in oil sales in 2023. KELT EXPLORATION LTD. 6 2023 ANNUAL REPORT L B B $ / $140 $120 $100 $80 $60 $40 $20 $0 Kelt Quarterly Realized Prices (1) 8.00 6.00 4.00 2.00 - F C M $ / Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 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 2023 2022 % 2023 2022 % 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) 95.68 49.79 2.75 41.69 78.42 99.77 104.11 47.95 28.17 6.37 2.74 2.30 3.08 3.11 4.95 4.38 2.05 2.20 107.88 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 1.3615 1.3582 -11 -18 -58 -25 -5 -9 -10 -13 -28 -56 -51 -55 -57 -56 -75 -78 -36 -68 - 97.90 49.27 3.08 43.01 117.18 67.64 6.63 59.54 77.63 94.80 100.40 120.79 102.75 121.28 45.55 29.58 7.33 2.53 2.64 3.10 3.15 6.33 5.68 2.25 2.12 61.67 50.05 15.04 6.38 5.31 7.88 7.88 11.09 10.70 4.44 7.33 1.3495 1.3019 -16 -27 -54 -28 -18 -17 -15 -26 -41 -51 -60 -50 -61 -60 -43 -47 -49 -71 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$/MMBtu) Daily Midpoint Average (7) Source: S&P Global Platts (CA$/GJ) Daily Midpoint Average converted to CA$/MMBtu (8) Source: Bank of Canada. (9) “Oil” includes crude oil and field condensate KELT EXPLORATION LTD. 7 2023 ANNUAL REPORT (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 derivative financial instruments. Refer to additional information under the heading of “Non-GAAP and Other Financial Measures”. Combined Net Realized Price Kelt’s combined net realized price decreased 25% to $41.69 per BOE and 28% to $43.01 per BOE in the three months and twelve months ended December 31, 2023, respectively, versus the comparable periods in 2022. The decrease in the average realized price was due to a decrease in benchmark commodity prices in 2023. Oil prices Benchmark WTI crude oil prices decreased 5% for the quarter ended December 31, 2023 and decreased 18% for the year ended December 31, 2023 versus the comparable periods in 2022. Benchmark crude oil prices decreased in 2023 due to global crude oil being well supplied, demand growth in China was lower than expectations. Higher crude oil supply in 2023 was partially offset by a series of OPEC+ production curtailments. NGL prices NGLs prices are impacted both by benchmark WTI prices and localized market supply and demand issues. For the three months and year ended December 31, 2023, realized NGL prices decreased by 18% and 27%, respectively, as compared to the same period in 2022. The decrease in both the benchmark WTI price and the Canadian benchmark condensate price resulted in an overall decrease in pentane and butane prices in 2023. The decrease in propane prices was primarily a result of an increase in North American propane production, combined with lower propane export volumes, resulting in an increase in North American propane inventories in 2023. Ethane prices are closely tied to the natural gas benchmark price, with the decrease in ethane prices in 2023 in-line with the decrease in the benchmark natural gas price. Natural gas prices Realized natural gas prices decreased by 58% to $2.75 per Mcf in the fourth quarter of 2023 and by 54% to $3.08 per Mcf for the year ended December 31, 2023 versus comparable periods in 2022. Benchmark natural gas prices decreased in 2023 primarily due to higher North American natural gas production, and higher than average natural gas storage levels throughout 2023. For the year ending December 31, 2023, Kelt sold 64% of its natural gas production at the AECO 5A and Station 2 indices compared to approximately 71% for the year ending December 31, 2022. RISK MANAGEMENT AND HEDGING ACTIVITIES The Company may enter into fixed price contracts and derivative financial instruments for commodity prices, currency exchange and interest rates in order to secure future cash flows or to protect a desired level of capital spending. Fair value accounting for derivative financial instruments may cause significant fluctuations in the reported amounts of derivative financial instrument assets and liabilities and the resultant magnitude of unrealized gains and losses. The table below summarizes realized and unrealized gains (losses) on derivative financial instrument contracts: (CA$ thousands, except as otherwise indicated) Realized gain (loss) Unrealized gain (loss) Gain (loss) on derivative financial instruments $ per BOE Three months ended December 31 Year ended December 31 2023 259 838 1,097 0.37 2022 4,279 23,177 27,456 10.65 % -94 -96 -96 -97 2023 2022 % 15,057 (56,509) 127 (23,805) 23,535 -201 (8,748) (32,974) (0.79) (3.31) -73 -76 The realized gain of $15.1 million recognized for the year ended December 31, 2023 was primarily due to the unwinding of the natural gas costless collars and swaps at the beginning of the year that resulted in total cash proceeds of $12.7 million. The unrealized loss of $23.8 million for the year ended December 31, 2023 reflects the changes of the fair value of outstanding contracts between December 31, 2023 and December 31, 2022. KELT EXPLORATION LTD. 8 2023 ANNUAL REPORT 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. As of March 7, 2024, the following commodity price derivative financial instrument contracts are outstanding: Natural gas derivative financial instrument contracts Contract Type (1) Notional Volume Contract Price $/MMBtu Remaining Term NYMEX-AECO 7A basis swap 10,000 MMBtu/d Monthly AECO basis calculated at 30% of the floating monthly NYMEX price NYMEX-AECO 7A basis swap 10,000 MMBtu/d NYMEX less USD$1.06 NYMEX-AECO 5A basis swap 30,000 MMBtu/d NYMEX less USD$1.10 NYMEX-AECO 7A basis swap 10,000 MMBtu/d NYMEX less USD$1.06 Jan 24 – Oct 24 Jan 24 – Oct 24 Nov 24 – Oct 25 Nov 24 – Mar 25 (1) NYMEX Henry Hub (“NYMEX”) Crude oil derivative financial instrument contracts Contract Type (1) Notional Volume Contract Price Remaining Term WTI fixed price swap WTI fixed price swap WTI fixed price swap WTI fixed price swap 500 bbl/d 500 bbl/d 500 bbl/d 500 bbl/d CAD$115.00/bbl Jan 24 – Mar 24 CAD$102.70/bbl Apr 24 – Jun 24 CAD$103.50/bbl Apr 24 – Jun 24 CAD$105.50/bbl Jul 24 – Sep 24 Sold call option (2) 500 bbl/d CAD$102.70/bbl Sold call option (2) 500 bbl/d CAD$103.50/bbl Sold call option (2) 500 bbl/d CAD$105.50/bbl (1) West Texas Intermediate (“WTI”) (2) The sold call options were entered into at the same time as the WTI fixed price swaps. Option exercise/expiration date – Jun 28, 2024 Term if exercised: Jul 24 – Sept 24 Option exercise/expiration date – Jun 28, 2024 Term if exercised: Jul 24 – Sept 24 Option exercise/expiration date – Sep 30, 2024 Term if exercised: Oct 24 – Dec 24 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 AECO-Station 2 basis differential 5,000 GJ/d AECO 7A less CAD$0.15/GJ Remaining Term Nov 24 – Mar 25 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. As at March 7, 2024, there are no interest rate derivative financial instrument 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. KELT EXPLORATION LTD. 9 2023 ANNUAL REPORT As of March 7, 2024, the following foreign exchange derivative financial instrument contracts are outstanding: Contract Type Notional Volume Contract/Exercise Price Remaining Term CAD/USD swap USD$500,000/month $1.3700 CAD/USD CAD/USD swap USD$2.0 million/month $1.3790 CAD/USD Jan 24 – Dec 24 Jul 24 – Dec 24 CAD/USD swap USD$1.0 million/month $1.3620 CAD/USD Jan 25 – Dec 25 Sold call option USD$1.0 million/month $1.3800 CAD/USD Sold call option USD$1.0 million/month $1.3750 CAD/USD Option exercise date – Dec 24 Term if exercised: Jan 25 – Jun 25 Option exercise date – Dec 24 Term if exercised: Jan 25 – Dec 25 ROYALTIES (CA$ thousands, except as otherwise indicated) Royalties Average royalty rate (1) $ per BOE Three months ended December 31 Year ended December 31 2023 17,938 14.5% 6.03 2022 15,864 11.0% 6.15 % 13 32 -2 2023 2022 59,170 12.4% 5.31 65,567 11.1% 6.60 % -10 12 -20 (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 14.5% during the fourth quarter of 2023, compared to 11.0% during the fourth quarter of 2022. Kelt’s average royalty rate for the year ended December 31, 2023 was 12.4% compared to 11.1% for the year ended December 31, 2022. The royalty rate in 2023 is overall higher than in 2022 due to wells moving off an initial low royalty rate of 5-6% and moving to a higher royalty rate that is sensitive to commodity prices. In both 2023 and 2022 the Company’s royalties in British Columbia were reduced through royalty infrastructure credits (2023 - $3.3 million, 2022 - $6.8 million). PRODUCTION EXPENSES Quarterly Production Expenses ) 0 0 0 $ ( 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 12.00 10.00 8.00 6.00 4.00 2.00 0.00 E O B $ / Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Operating Expenses Per BOE (CA$ thousands, except as otherwise indicated) Production expense $ per BOE Three months ended December 31 Year ended December 31 2023 25,662 8.62 2022 28,116 % -9 2023 2022 109,422 101,566 10.90 -21 9.83 10.22 % 8 -4 Production expenses were $25.7 million during the fourth quarter of 2023, down 9% compared to the fourth quarter in 2022. Production expenses on a per BOE basis decreased from $10.90 per BOE during the fourth quarter of 2022 to $8.62 per BOE in the fourth quarter of 2023, with the decrease primarily due to lower electricity costs and lower field KELT EXPLORATION LTD. 10 2023 ANNUAL REPORT maintenance costs. Production expenses for the year ended December 31, 2023 increased 8% from the year ended December 31, 2022. Production expenses averaged $9.83 per BOE during the year ended December 31, 2023, down from $10.22 per BOE for the year ended December 31, 2022. The decrease in production expense per BOE costs in 2023 was primarily due to operating expense credits from third-party facilities and lower electricity expenses, which was partially offset by higher trucking costs, and higher carbon taxes. TRANSPORTATION EXPENSES Quarterly Transportation Expenses ) 0 0 0 $ ( 12,000 10,000 8,000 6,000 4,000 2,000 0 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 E O B $ / Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Transportation Expense Per BOE (CA$ thousands, except as otherwise indicated) Transportation expense (1) $ per BOE Three months ended December 31 Year ended December 31 2023 10,830 3.64 2022 7,803 3.03 % 39 20 2023 2022 38,808 30,467 3.48 3.06 % 27 14 (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 $3.64 per BOE during the fourth quarter of 2023, an increase of 20% from $3.03 per BOE in the fourth quarter of 2022. Transportation expenses averaged $3.48 per BOE during the year ending December 31, 2023, an increase of 14% from $3.06 per BOE in the year ending December 31, 2022. The increase in transportation expenses was primarily related to additional oil transportation costs due to higher volumes. FINANCING EXPENSES (CA$ thousands, except as otherwise indicated) Total interest expense Accretion of decommissioning obligations Financing expense Interest expense per BOE (1) Three months ended December 31 Year ended December 31 2023 344 741 1,085 0.12 2022 581 721 1,302 0.23 % -41 3 -17 -48 2023 1,310 2,880 4,190 0.12 2022 1,460 2,451 3,911 % -10 18 7 0.15 -20 (1) Interest expense used in the calculation of “Interest expense per BOE” includes interest and fees on bank debt. Throughout 2023, the Company periodically drew on its credit facility and incurred standby fees, resulting in interest expense of $1.3 million. Additional information regarding the credit facility is provided under the heading of “Capital Resources and Liquidity”. KELT EXPLORATION LTD. 11 2023 ANNUAL REPORT GENERAL AND ADMINISTRATIVE (“G&A”) EXPENSES The following table summarizes significant components of the Company’s G&A expenses: (CA$ thousands, except as otherwise indicated) Salaries and benefits Other G&A expenses Gross G&A expenses Overhead recoveries Net G&A expenses Gross G&A ($ per BOE) Net G&A ($ per BOE) Three months ended December 31 Year ended December 31 2023 3,743 1,061 4,804 (1,756) 3,048 1.61 1.02 2022 4,010 1,357 5,367 (1,808) 3,559 2.08 1.38 % -7 -22 -10 -3 -14 -23 -26 2023 2022 13,349 12,287 5,292 5,521 18,641 17,808 (8,257) (7,506) 10,384 10,302 1.67 0.93 1.79 1.04 % 9 -4 5 10 1 -7 -11 G&A expenses are reported net of overhead recoveries. Net G&A expenses averaged $1.02 per BOE during the fourth quarter of 2023, a decrease of 26% compared to $1.38 per BOE during the fourth quarter of 2022. For the year ended December 31, 2023, net G&A expenses averaged $0.93 per BOE which decreased by 11% compared to $1.04 per BOE during the comparative period in 2022. The decrease in net G&A expenses per BOE was primarily due to higher overhead recoveries and production increasing at a higher rate than G&A expense. SHARE BASED COMPENSATION (“SBC”) (CA$ 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 2023 1,389 763 2,152 0.72 2022 1,679 308 1,987 0.77 % -17 148 8 -6 2023 5,359 2,503 7,862 0.71 2022 5,902 1,112 7,014 0.71 % -9 125 12 - The increase in SBC expense for the three and year ended December 31, 2023 compared to the same periods in 2022 is primarily due to more RSUs being granted compared to stock options in 2023. As at December 31, 2023, stock options and RSUs outstanding represent 5.9% of total shares outstanding (December 31, 2022 – 5.9%). EXPLORATION AND EVALUATION (“E&E”) EXPENSES (CA$ thousands, except as otherwise indicated) Exploration and evaluation expense $ per BOE 2023 100 0.03 2022 14,438 5.60 % -99 -99 2023 1,413 0.13 2022 14,484 1.46 % -90 -91 Three months ended December 31 Year ended December 31 E&E expenses were $1.4 million in the year ended December 31, 2023 as compared to $14.5 million for the year ended December 31, 2023. During the fourth quarter of 2022, the Company expensed $14.2 million of exploratory drilling costs for two exploration wells. KELT EXPLORATION LTD. 12 2023 ANNUAL REPORT DEPLETION AND DEPRECIATION (CA$ thousands, except as otherwise indicated) Depletion and depreciation $ per BOE Three months ended December 31 Year ended December 31 2023 32,839 11.04 2022 28,182 10.93 % 17 1 2023 2022 125,813 116,183 11.30 11.69 % 8 -3 Depletion and depreciation expense of $32.8 million for the quarter ended December 31, 2023 increased by 17% from $28.2 million in the comparable period in 2022. Depletion and depreciation expense for the year ended December 31, 2023 increased by 8% as compared to the prior year. On a per BOE basis, the depletion and depreciation expense per BOE decreased slightly in 2023, due to increased reserves compared to 2022. Based on its assessment as of December 31, 2023, the Company determined that there were no indicators of impairment for the Alberta CGU and BC CGU and there are no previous impairments available for reversals. INCOME TAXES (CA$ 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 2023 7,895 31,624 25.0% 2022 16,412 70,650 23.2% % -52 -55 7 2023 2022 28,503 51,441 114,477 210,199 24.9% 24.5% % -45 -46 2 Kelt’s consolidated combined federal and provincial statutory tax rate averaged 23.3% and 23.9% during the three months ended December 31, 2023 and 2022, respectively. 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, 2023 are estimated to be approximately $780.4 million as summarized in the table below. (CA$ 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 % 2023 60,905 241,162 407 230,290 - 247,657 780,421 2022 66,848 192,737 - 228,487 -9 25 - 1 8 -100 280,308 -12 768,388 2 (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 2042. KELT EXPLORATION LTD. 13 2023 ANNUAL REPORT ADJUSTED FUNDS FROM OPERATIONS The following table provides a continuity of income and expenses included in the Company’s calculation of operating income, operating netback and adjusted funds from operations generated during the three months and year ended December 31, 2023 and 2022 respectively. Three months ended December 31 Year ended December 31 (CA$ thousands, except as otherwise indicated) 2023 2022 Petroleum and natural gas sales Cost of purchases 129,000 152,720 (4,952) (8,509) Realized gain (loss) on financial instruments (1) 259 4,279 Royalties Production expense Transportation expense Operating Income (2) Financing expense (3) G&A expense Gain (loss) on foreign exchange Other income Adjusted funds from operations (2) Basic ($ per common share) (4) Diluted ($ per common share) (4) (17,938) (15,864) (25,662) (28,116) (10,830) (7,803) 69,877 96,707 (344) (581) (3,048) (3,559) (102) 235 219 65 66,618 92,851 0.34 0.33 0.48 0.47 % -16 -42 -94 13 -9 39 -28 -41 -14 -147 262 -28 -29 -30 2023 2022 % 495,580 613,358 (16,565) (21,438) 15,057 (56,509) (59,170) (65,567) (109,422) (101,566) (38,808) (30,467) 286,672 337,811 (1,310) (1,460) (10,384) (10,302) (104) 1,326 788 155 276,200 326,992 1.43 1.40 1.71 1.67 -19 -23 127 -10 8 27 -15 -10 1 -113 755 -16 -16 -16 ($ per BOE) Petroleum and natural gas sales Cost of purchases Realized gain (loss) on financial instruments (1) Royalties Production expense Transportation expense Operating Netback (2) Financing expense (3) G&A expense Gain (loss) on foreign exchange Other income Adjusted funds from operations (2) Three months ended December 31 Year ended December 31 2023 43.35 (1.66) 0.09 (6.03) (8.62) (3.64) 23.49 (0.12) (1.02) (0.03) 0.08 22.40 2022 59.21 (3.30) 1.66 (6.15) (10.90) (3.03) 37.49 (0.23) (1.38) 0.09 0.03 36.00 % -27 -50 -95 -2 -21 20 -37 -48 -26 -133 167 -38 2023 44.51 (1.50) 1.35 (5.31) (9.83) (3.48) 25.74 (0.12) (0.93) (0.01) 0.12 24.80 2022 61.70 (2.16) (5.68) (6.60) (10.22) (3.06) 33.98 (0.15) (1.04) 0.08 0.02 32.89 % -28 -31 124 -20 -4 14 -24 -20 -11 -113 500 -25 (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. During the three months ended December 31, 2023, adjusted funds from operations of $66.6 million ($0.33 per share, diluted) decreased by 28% from $92.9 million ($0.47 per share, diluted) in the fourth quarter of 2022. During the year ended December 31, 2023, adjusted funds from operations of $276.2 million ($1.40 per share, diluted) decreased by 16% from $327.0 million ($1.67 per share, diluted) during the year ended December 31, 2022. The decrease in adjusted funds from operations for both the three and year ended December 31, 2023 compared to the same periods in 2022 was primarily due to a decrease in petroleum and natural gas sales. KELT EXPLORATION LTD. 14 2023 ANNUAL REPORT NET INCOME AND COMPREHENSIVE INCOME Change in Net Income Year ended December 31, 2023 $13.1 $6.4 $4.1 $22.9 $24.2 $(9.6) $(16.2) $(117.8) $86.0 200 150 100 50 0 $158.8 s n o i l l i M $ 2022 Derivative financial instruments Deferred income taxes E&E Expense Royalties Other (1) DD&A Operating & transportation P&NG sales 2023 (1) Other includes changes in net income related primarily to cost of purchases, and foreign exchange gain (loss). (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 2023 23,729 0.12 0.12 8.01 194,359 199,223 2022 54,238 0.28 0.28 21.05 191,812 195,828 % -56 -57 -57 -62 1 2 2023 2022 85,974 158,758 0.45 0.44 7.71 0.83 0.81 15.96 193,116 191,101 197,063 195,456 % -46 -46 -46 -52 1 1 (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. Net income was $23.7 million ($0.12 per common share, diluted) for the three months ended December 31, 2023, compared to a net income of $54.2 million ($0.28 per common share, diluted) in the same three-month period of 2022. Net income was $86.0 million ($0.44 per common share, diluted) for the year ended December 31, 2023, compared to a net income of $158.8 million ($0.81 per common share, diluted) in the same period of 2022. The decrease in net income was primarily driven by a reduction in benchmark commodity prices in 2023, which was more than offset by higher production levels. KELT EXPLORATION LTD. 15 2023 ANNUAL REPORT INVESTING ACTIVITIES Capital Expenditures before A&D ($000) $83,732 $89,072 0% 36% 39% $75,262 1% 29% 64% 60% 70% $76,681 1% 24% 74% $68,582 2% 52% 46% $44,891 1% 24% 73% $98,287 1% 21% 78% $62,735 57% 42% Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Drilling and completion of wells ($000) Facilities, pipeline and well equipment ($000) Other ($000) CAPITAL EXPENDITURES The Company’s capital expenditures, before and net of acquisitions and dispositions (“A&D”), are summarized in the following table: (CA$ thousands, except as otherwise indicated) 2023 2022 % 2023 2022 % 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 Capital expenditures, net of A&D (1) 141 77 26,545 35,918 54 62,735 6,510 (6,550) 62,695 465 531 31,558 35,928 100 68,582 62 (50) 68,594 -70 -85 -16 - -46 -9 - - -9 1,668 1,162 1,509 623 193,175 191,026 85,834 122,662 755 828 282,594 316,648 7,022 3,462 (6,970) (2,570) 282,646 317,540 11 87 1 -30 -9 -11 103 171 -11 (1) Refer to advisories regarding “Non-GAAP and Other Financial Measures”. Capital expenditures, before A&D, decreased 9% in the fourth quarter of 2023 and decreased 11% from the year ended December 31, 2023 versus the comparable period in 2022. In the fourth quarter of 2023, drilling and completion costs of $26.6 million included the drilling of 4.0 net wells and completion of 6.0 net wells. Kelt’s facility, pipeline and well equipment spending in the fourth quarter of 2023 of $35.9 million included a new compressor station at Wembley/Pipestone, well equipment and pipeline construction. For the year ended December 31, 2023, drilling and completion costs of $193.2 million included the drilling of 27.0 net wells and completion of 24.0 net wells. The wells drilled included 21 gross (21 net) Montney wells and 7 gross (5.0 net) Charlie Lake wells. KELT EXPLORATION LTD. 16 2023 ANNUAL REPORT Gross Wells Drilling Completion Service Net Wells Drilling Completion Service LAND HOLDINGS Three months ended December 31 Year ended December 31 2023 2022 4 6 - 3 7 - % 33 -14 - 2023 2022 28 25 2 31 35 - % -10 -29 - Three months ended December 31 Year ended December 31 2023 2022 4.0 6.0 - 3.0 6.0 - % 33 - - 2023 27.0 24.0 2.0 2022 28.4 32.1 - % -5 -25 - The table below sets-out Kelt’s significant Montney and Charlie Lake land holdings across British Columbia and Alberta as at December 31, 2023. MONTNEY RIGHTS British Columbia Alberta Total CHARLIE LAKE RIGHTS Alberta Net Acres Net Sections 193,607 146,187 339,794 87,667 303 228 531 137 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. At December 31, 2023 the Company has a $100.0 million credit facility available from a syndicate of financial institutions. As at December 31, 2023, there were no borrowings outstanding under the Credit Facility, with outstanding letters of credit of $2.6 million. The Credit Facility may be extended annually at Kelt’s option and subject to lender approval, with a 364 day term-out period on amounts drawn 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. KELT EXPLORATION LTD. 17 2023 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) Adjusted funds from operations (1) Net debt to adjusted funds from operations ratio (1) (1) Refer to advisories regarding Capital Management Measures. December 31, December 31, 2023 - 85,171 (14,340) (52,646) (5,188) 12,997 276,200 0.0 2022 11,300 83,288 (125) (81,075) (3,599) 9,789 326,992 0.0 The Company monitors its capital structure and short-term financing requirements using a net debt to adjusted funds from operations ratio, which is a non-GAAP financial measure. Kelt targets a net debt to 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. In doing so, 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, 2023: Accounts payable and accrued liabilities Derivative financial instruments Lease liability Total COMMITMENTS Within 1 Year 1 to 5 Years More than 5 Years 85,171 585 1,125 86,881 - - 332 332 - - - - Total 85,171 585 1,457 87,213 As of December 31, 2023, the Company is committed to future payments under the following agreements: Firm processing commitments Firm transportation commitments 2024 33,726 35,187 2025 50,021 36,244 2026 60,301 35,415 2027 60,341 32,482 2028 Thereafter 63,230 461,559 31,059 139,839 Total commitments 68,913 86,265 95,716 92,823 94,289 601,398 In 2023, the Company entered into two gas processing agreements with third-party midstream companies. The gas processing facilities are expected to become operational in mid-2025 and early 2026 resulting in an increase of approximately $220.0 million to commitments as of December 31, 2023. 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, 2023 there were 194.5 million common shares issued and outstanding. There are no preferred shares issued or outstanding. At December 31, 2023, officers, directors, and employees have been granted options to purchase 10.0 million common shares of the Company at an average exercise price of $3.74 per common share. In addition, there are 1.7 million RSUs outstanding. KELT EXPLORATION LTD. 18 2023 ANNUAL REPORT The following table outlines Kelt’s common share trading activity during 2023 and 2022: SHARE TRADING ACTIVITY (KEL) High ($) Low ($) Close ($) Volume traded (thousands) Value traded ($ thousands) Weighted average trading price ($) RELATED PARTY TRANSACTIONS 2023 8.16 4.29 5.72 111,257 638,458 5.74 2022 8.32 4.67 5.01 125,751 759,986 6.04 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, 2023, the Company incurred $0.4 million (December 31, 2022 – $0.4 million) in disbursements to related parties in the normal course of business. OFF-BALANCE SHEET TRANSACTIONS The Company did not engage in any off-balance sheet transactions during the periods ended December 31, 2023 and 2022. 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, 2023 and at December 31, 2022 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, 2023. More information on the Company’s reserves are included in the Annual Information Form as at December 31, 2023, dated March 7, 2024, which can be found at www.sedarplus.ca. At December 31, 2023, Kelt’s proved plus probable reserves were 413.1 million BOE, up 21% from 340.8 million BOE at December 31, 2022. The Company’s net present value of proved plus probable reserves at December 31, 2023, discounted at 10% before-tax, was $4.5 billion, an increase of 32% from $3.4 billion at December 31, 2022. Sproule’s forecast commodity prices for 2024 which were used to determine the present value of the Company’s reserves at December 31, 2023, are US$76.00 per barrel for WTI oil and US$2.75 per MMBtu for NYMEX Henry Hub. At December 31, 2023, the weighting of proved plus probable reserves was 36% oil/NGLs and 64% natural gas. At December 31, 2022, the weighting of proved plus probable reserves was 38% oil/NGLs and 62% natural gas. The following table outlines a summary of the Company’s reserves volumes at December 31, 2023: SUMMARY OF RESERVE VOLUMES Proved developed producing Proved Proved plus Probable (1) “Liquids” include field condensate and NGLs. Crude Oil (Mbbls) Liquids(1) (Mbbls) Natural Gas Combined FDC Costs (MMcf) (MBOE) ($ thousands) 12,852 50,859 74,745 11,848 46,296 74,418 278,283 71,081 956,575 256,584 1,583,515 413,082 - 1,768,370 2,467,126 KELT EXPLORATION LTD. 19 2023 ANNUAL REPORT CHANGE IN RESERVES – YEAR OVER YEAR (MBOE) Proved developed producing Proved Proved plus Probable December 31 2023 December 31 2022 % Change 71,081 256,584 413,082 61,062 192,073 340,801 16 34 21 The following table outlines forecasted future prices that Sproule has used in their evaluation of the Company’s reserves at December 31, 2023: FUTURE COMMODITY PRICE FORECAST US$/bbl CA$/bbl US$/MMBtu CA$/GJ US$/CA$ WTI Cushing Canadian NYMEX AECO-C USD/CAD Oklahoma Light Sweet Henry Hub Spot Exchange 2024 2025 2026 2027 2028 Five year average 76.00 76.00 76.00 77.52 79.07 76.92 97.33 97.25 97.17 99.12 101.10 98.39 2.75 3.75 4.00 4.08 4.16 3.75 2.21 3.45 3.75 3.82 3.90 3.43 1.333 1.333 1.333 1.333 1.333 1.333 The following table summarizes the net present value of the Company’s reserves (before-tax) as at December 31, 2023: NET PRESENT VALUE (BEFORE-TAX) (CA$ millions) Proved developed producing Proved Proved plus Probable NET ASSET VALUE Undiscounted NPV 5% BT NPV 10% BT 1,258,157 1,104,595 5,302,740 3,765,421 9,185,863 6,206,924 948,144 2,827,673 4,515,374 The Company estimates its net asset value to be $4.7 billion or $22.75 per common share as at December 31, 2023 based on the present value of its 2P reserves before-tax, discounted at 10%. The components of Kelt’s net asset value calculation are set-forth in the table below. The reader is cautioned that these amounts may not be directly comparable to other companies, as the term “Net asset value” does not have a standardized meaning under GAAP or NI 51-101. The net present value of petroleum and natural gas (“P&NG”) reserves was determined by Sproule in their year-end evaluation reports, based on a discount rate of 10% before-tax. Undeveloped land at December 31, 2023 was internally valued at an average price of $381 per acre (2022 – $344 per acre). Management believes that the “Net asset value” provides a useful measure to analyze the comparative change in the Company’s estimated value on a normalized basis. (CA$ thousands, except per share amounts) December 31, 2023 December 31, 2022 Present value of 2P P&NG reserves, discounted at 10% before-tax (1) 4,515,374 3,430,114 Undeveloped land (2) Net (debt) surplus (3) Proceeds from exercise of stock options (3)(4) Net asset value Common shares, RSU’s and “in the money” stock options (000s) (4) Net asset value ($ per common share) (3) 140,191 (12,997) 33,767 129,396 (9,789) 18,353 4,676,335 3,568,074 205,590 22.75 199,706 17.87 (1) As estimated by Sproule at December 31, 2023. The present value of 2P reserves includes undiscounted future development capital of $2.5 billion. (2) The undeveloped land value is based on internal estimates of Kelt’s undeveloped lands which do not have reserves assigned. (3) Refer to advisories regarding “Non-GAAP and Other Financial Measures”. KELT EXPLORATION LTD. 20 2023 ANNUAL REPORT (4) The calculation of proceeds from exercise of stock options and the diluted number of common shares outstanding only include stock options that are “in-the-money” based on the closing price of KEL of $5.72 on December 31, 2023. All outstanding RSUs are included in diluted common shares outstanding. SUMMARY OF QUARTERLY RESULTS The following tables summarize the Company’s financial and operating results over the past eight quarters: (CA$ thousands, except as otherwise indicated) Q4 2023 Q3 2023 Q2 2023 Q1 2023 Q4 2022 Q3 2022 Q2 2022 Q1 2022 Petroleum and natural gas sales 129,000 116,948 110,061 139,571 152,720 143,254 178,938 138,446 Royalties Revenue (17,938) (15,468) (7,472) (18,292) (15,864) (16,697) (18,152) (14,854) 111,062 101,480 102,589 121,279 136,856 126,557 160,786 123,592 Cash provided by operating activities 62,477 52,424 68,163 100,160 63,742 85,104 91,623 65,553 Adjusted funds from operations (1) 66,618 58,772 58,810 92,000 92,851 65,189 94,783 74,169 Per share – basic ($/common share) (1) Per share – diluted ($/common share) (1) 0.34 0.33 0.30 0.30 0.31 0.30 0.48 0.47 0.48 0.47 0.34 0.33 0.50 0.48 0.39 0.38 Net income and comprehensive income 23,729 20,060 25,799 16,336 54,238 23,089 70,711 10,720 Per share – basic ($/common share) Per share – diluted ($/common share) 0.12 0.12 0.10 0.10 0.13 0.13 0.09 0.08 0.28 0.28 0.12 0.12 0.37 0.36 0.06 0.06 Capital expenditures, net of A&D (1) 62,695 98,287 45,035 76,629 68,594 76,181 89,072 83,693 Total assets Bank debt Net debt (surplus) (1) Shareholders’ equity 1,260,292 1,222,412 1,174,609 1,174,489 1,128,104 1,078,619 1,035,372 967,119 - - - - 11,300 - - - 12,997 15,917 (18,580) (4,899) 9,789 33,537 23,117 34,685 1,003,663 976,146 948,215 919,809 901,424 845,103 818,734 739,673 Average daily production (BOE/d) 32,344 28,179 29,705 31,833 28,036 25,791 27,713 27,413 Combined net realized price ($/BOE) (1)(2) Operating income ($/BOE) (1) 41.78 23.49 42.68 23.36 38.64 22.55 54.00 33.27 57.57 37.49 48.97 28.19 58.50 49.96 38.52 31.26 Operating netback % of combined net realized price (2) 56% 55% 58% 62% 65% 58% 66% 63% (1) Refer to advisories regarding “Non-GAAP and Other Financial Measures”. (2) In this table, combined net realized prices are after derivative financial instruments. In 2022, crude oil prices 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. Crude oil prices in the first and second quarter of 2023 decreased from the average price in 2022 as demand growth in the OECD countries slowed and crude oil demand from China came in below expectations, while crude oil remained relatively well supplied globally. In the third quarter of 2023, crude oil increased compared to the first and second quarters of 2023 as OPEC+ announced additional production curtailments. North American benchmark natural gas prices in the first half of 2022 were well supported due to record LNG exports, below average inventory levels and increased 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 North American benchmark natural gas prices in the fourth quarter of 2022 and into 2023. Natural gas prices in 2023 continued to be impacted by North American production growth and lower demand from a warmer than average winter resulting in higher than average natural gas inventory levels. 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.sedarplus.ca. KELT EXPLORATION LTD. 21 2023 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 Royalties Revenues Cash provided by operating activities Adjusted funds from operations (1) Per share – basic ($/common share) (1) Per share – diluted ($/common share) (1) Net income and comprehensive income 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 Return on average capital employed (%) (1) 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 derivative financial instruments. OUTLOOK AND GUIDANCE 2023 495,580 (59,170) 436,410 283,224 276,200 1.43 1.40 2022 613,358 (65,567) 547,791 306,022 326,992 1.71 1.67 2021 316,763 (27,414) 289,349 159,714 161,394 0.85 0.85 85,974 158,758 114,256 0.45 0.44 0.83 0.81 282,646 317,540 1,260,292 1,128,104 - 12,997 1,003,663 12 30,510 44.36 25.74 58% 11,300 9,789 901,424 25 27,236 53.86 33.98 63% 0.61 0.60 213,511 913,497 1,150 28,220 722,724 20 20,987 38.38 22.29 58% The table below compares the Company’s previously forecasted assumptions and expected financial and operating results for 2023 to actual 2023 results: (CA$ millions, except as otherwise indicated) 2023 Actuals 2023 Budget % Change (2) 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$/CA$) 11,738 112.6 30,510 77.63 100.40 2.53 2.50 0.7410 11,910 –12,660 111.5 – 114.5 30,500 – 31,750 78.50 101.58 2.60 2.62 0.7427 -4 - -2 -1 -1 -3 -4 - KELT EXPLORATION LTD. 22 2023 ANNUAL REPORT (CA$ millions, except as otherwise indicated) 2023 Actuals 2023 Budget % Change (2) Capital Expenditures Drilling & Completions Equipment, Facilities & Pipeline Infrastructure Land, Seismic and A&D 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”. (2) Percent change for production is calculated using the mid-point of each production range. 193.2 85.8 3.6 282.6 495.6 276.2 1.40 13.0 193.1 188.0 88.0 9.0 285.0 509.0 280.0 1.42 11.3 192.7 3 -2 -60 -1 -3 -1 -1 15 - Kelt’s financial results for the year ended December 31, 2023 was largely within its previous guidance. 2024 BUDGET Crude oil prices remain volatile amid geopolitical impact on supply and concerns of slowing global economic growth. The WTI crude oil price averaged US$74.15 per barrel during January 2024. Kelt has reduced its forecasted average 2024 WTI oil price by 6% from US$80.00 per barrel to US$75.00 per barrel. North American natural gas prices have dropped after a warm winter, resulting from a strong El Niño weather pattern. This reduced heating related natural gas demand significantly which led to above average gas storage levels. Kelt has reduced its forecasted average 2024 NYMEX Henry Hub natural gas price by 26% from US$3.50/MMBtu to US$2.60 MMBtu and the Company has reduced its forecasted average 2024 AECO natural gas price by 30% from CA$3.16/GJ to CA$2.20/GJ. In response to lower forecasted natural gas prices, Kelt has reduced its 2024 capital expenditure program to $325.0 million, down 7% from its previous budget of $350.0 million. Kelt expects to drill 29 net wells in 2024, down 15% from its previous budget of 34 net wells. Three of the five wells that have been deferred are at Oak and the other two wells are at Pouce Coupe. The Company will focus its 2024 capital program on wells that have a higher oil weighting. Despite a reduced capital expenditure program for 2024, the Company has not changed its previous 2024 average production guidance of 36,000 to 39,000 BOE per day. Using the revised commodity price forecasts for 2024, Kelt is forecasting 2024 adjusted funds from operations of $290.0 million ($1.46 per common share, diluted), down 17% from its previous forecast. Kelt estimates net debt of $48 million at the end of December 31, 2023, an increase of $36.7 million from its previous forecast. A 10% increase/decrease in the Company’s forecasted oil/NGLs price for 2024 would increase/decrease forecasted adjusted funds from operations by approximately $29.6 million. A 10% increase/decrease in the Company’s average gas price forecasted for 2023 would increase/decrease adjusted funds from operations by approximately $12.7 million. KELT EXPLORATION LTD. 23 2023 ANNUAL REPORT The table below outlines the Company’s updated forecast for 2024 with a comparison to the previously announced guidance included in Kelt’s press release dated November 9, 2023 and a comparison to 2023 actuals: % Change Previous 2024 to Current Current Guidance 2024 (CA$ millions, except as otherwise indicated) 2024 Budget (Nov 9, 2023) Budget 2023 Actuals 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) 14,250 –15,750 14,250 –15,750 130.5 – 139.5 130.5 – 139.5 36,000 – 39,000 36,000 – 39,000 75.00 96.66 2.60 2.20 80.00 102.68 3.50 3.16 Average Exchange Rate (US$/CA$) 0.7348 0.7353 Capital Expenditures Drilling & Completions Equipment, Facilities & Pipeline Infrastructure Land, Seismic and A&D 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 225.0 80.0 20.0 325.0 583.0 290.0 1.46 48.0 247.0 83.0 20.0 350.0 670.0 350.0 1.76 11.3 - - - -6 -6 -26 -30 - -9 -4 - -7 -13 -17 -17 325 11,738 112.6 30,510 77.63 100.40 2.53 2.50 0.7410 193.2 85.8 3.6 282.6 495.6 276.2 1.40 13.0 Current 2024 Budget % Change to 2023 Actuals 28 20 23 -3 -4 3 -12 1 16 -7 456 15 18 5 4 269 (millions) (1) 194.7 194.7 - 193.1 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 net income. 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 material accounting policies applied by the Company are disclosed in note 3 of the consolidated financial statements as at and for the year ended December 31, 2023. 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. KELT EXPLORATION LTD. 24 2023 ANNUAL REPORT Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are reviewed and for any future years affected. Significant judgments, estimates and assumptions made by management in the consolidated annual financial statements are discussed below.  Estimates are used in the evaluation of proved and proved plus probable reserves. Reserve estimates are based on production forecasts, future production costs, forecasted commodity prices and future development capital. Proved reserves and future development capital are used to deplete the net carrying value of property, plant, and equipment (“PP&E”). Proved plus probable reserves are used to measure the fair value less cost of disposal (“FVLCD”) in calculating impairment of PP&E. Reserves also impact the 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 or whether an impairment exists;    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. The FVLCD is calculated on a CGU basis to determine whether there is an impairment of PP&E; The determination of the value of decommissioning liabilities depends upon estimates of future costs, timing of expenditures, the risk-free rate and inflation rate; 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; and  Estimates and assumptions are used in the Black-Scholes option pricing model to calculate the stock option expense. For more details regarding the Company’s use of estimates and judgements, refer to note 2c) of the consolidated financial statements as at and for the year ended December 31, 2023. 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, 2023 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, 2023 to December 31, 2023 and year ended December 31, 2023. The CEO and the CFO have evaluated the effectiveness of Kelt’s internal controls over financial reporting as at December 31, 2023 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. KELT EXPLORATION LTD. 25 2023 ANNUAL REPORT 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;  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, asset retirement obligations, 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 cost to borrow and 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 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;  Potential limitations on the volumes of water required for completion activities due to drought, conditions of low river flow, government restrictions or other factors; KELT EXPLORATION LTD. 26 2023 ANNUAL REPORT   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 On January 18, 2023, the Government of British Columbia and the Blueberry River First Nation (the “BRFN”) signed the Blueberry River First Nations Implementation Agreement (the “BRFN Agreement”). The BRFN Agreement aims to address the cumulative effects of development on BRFN’s claim area through restoration work, establishment of areas protected from industrial development, and a constraint on development activities. Such measures will remain in place while a long-term cumulative effects management regime is implemented. Specifically, the BRFN Agreement includes, among other measures, the establishment of a $200-million restoration fund by June 2025, an ecosystem-based management approach for future land- use planning in culturally important areas, limits on new petroleum and natural gas development, and a new planning regime for future oil and gas activities. The BRFN will receive $87.5 million over three years, with an opportunity for increased benefits based on petroleum and natural gas revenue sharing and provincial royalty revenue sharing in the next two fiscal years. In late January 2023, the Government of British Columbia and four Treaty 8 First Nations, Fort Nelson, Salteau, Halfway River and Doig River First Nations reached consensus on a collaborative approach to land and resource planning (the “Consensus Agreement”). The Consensus Agreement implements various initiatives including a “cumulative effects” management system linked to natural resource landscape planning and restoration initiatives, new land-use plans and protection measures, and a new revenue-sharing approach to support the priorities of Treaty 8 First Nations communities. In July 2022, Duncan’s First Nation filed a lawsuit against the Government of Alberta claiming in its lawsuit that Alberta has failed to uphold its treaty obligations by authorizing development without considering the cumulative impacts on the First Nation’s treaty rights. The Company does not currently expect that there will be a significant impact to Kelt’s 2024 guidance as a result of the BRFN Agreement, the Consensus Agreement, or the Duncan’s First Nation lawsuit. However the long-term impacts on the Canadian oil and gas industry remain uncertain therefore the Company awaits additional information on these agreements to assess what the future impact will be on the overall development of oil and gas resources in British Columbia and Alberta. Environmental Risks All phases of the oil and natural gas business present environmental risks and hazards and are subject to federal, provincial and municipal laws and regulations. Environmental legislation provides for 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. 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 provincial governments have implemented legislation aimed at incentivizing the use of alternatives fuels and reducing KELT EXPLORATION LTD. 27 2023 ANNUAL REPORT 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. During the year ended December 31, 2023, the Company has not experienced a cybersecurity breach that had a material impact on the business. 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, 2023, dated March 7, 2024 which can be found at www.sedarplus.ca. 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. KELT EXPLORATION LTD. 28 2023 ANNUAL REPORT NON-GAAP FINANCIAL MEASURES P&NG sales after cost of purchases Throughout this MD&A, reference is made to “P&NG sales” 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 derivative financial instruments. P&NG sales after cost of purchases includes P&NG sales (in accordance with GAAP), net of the cost of third-party volumes purchases. P&NG sales after cost of purchases are used by management to assess the Company’s sales 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 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. Combined net realized prices referenced throughout this MD&A are before derivative financial instruments (“combined net realized price, before financial instruments”), except as otherwise indicated as being after derivative financial instruments (“combined net realized price, 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 income and operating netback Operating income 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 derivative financial instruments. The Company also presents operating income on a per BOE basis, referred to as “operating netback” or “operating income per BOE”, 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 income 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: KELT EXPLORATION LTD. 29 2023 ANNUAL REPORT (CA$ thousands, except as otherwise indicated) Cash used in investing activities Three months ended December 31 Year ended December 31 2023 82,324 2022 2023 2022 95,916 265,485 328,945 Change in non-cash investing working capital (19,629) (27,322) 17,161 (11,405) Capital expenditures, net of A&D 62,695 68,594 282,646 317,540 Property acquisitions (1) Property dispositions (1) (10) 50 (12) - (102) 50 (933) 41 Capital expenditures, before A&D 62,735 68,582 282,594 316,648 (1) Property acquisitions and property dispositions for the year ended December 31, 2023 includes $6.9 million of non-cash consideration. Property acquisitions and property dispositions for the year ended December 31, 2022 includes $2.5 million of non-cash consideration. Adjusted earnings before interest and taxes Kelt calculates adjusted earnings before interest and taxes (“EBIT”) as net income and comprehensive income plus financing, less accretion of decommissioning obligations, plus deferred income tax expense. Kelt uses adjusted EBIT as a measure of long-term operating performance and as a component in the calculation for return on average capital employed (“ROACE”). The following table contains a reconciliation of adjusted EBIT to the most directly comparable GAAP measure, net income and comprehensive income. (CA$ thousands, except as otherwise indicated) Net income and comprehensive income Financing expenses Accretion of decommissioning obligations Deferred income tax expense Adjusted EBIT Average capital employed December 31, 2023 85,974 4,190 (2,880) 28,503 115,787 December 31, 2022 December 31, 2021 158,758 3,911 (2,451) 51,441 211,659 114,256 2,443 (2,003) 21,436 136,132 Kelt calculates average capital employed as the total of net debt plus the short and long term lease obligations and shareholders equity. Kelt uses average capital employed as a measure of long-term capital management and operating performance, and as a component in the calculation for ROACE. The table below provides a reconciliation of average capital employed to the most directly comparable GAAP measures of shareholders equity. (CA$ thousands, except as otherwise indicated) Net debt – beginning of period Current portion of lease obligations Long-term portion of lease obligations Shareholders' equity - beginning of period Opening capital employed (A) Net debt – end of period Current portion of lease obligations Long-term portion of lease obligations Shareholders' equity - end of period Closing capital employed (B) Average capital employed (A+B)/2 December 31, 2023 December 31, 2022 December 31, 2021 9,789 28,220 (27,655) 505 543 609 399 901,424 722,724 912,261 751,952 12,997 1,125 332 1,003,663 9,789 505 543 901,424 684 780 603,684 577,493 28,220 609 399 722,724 1,018,117 912,261 751,952 965,189 832,107 664,723 KELT EXPLORATION LTD. 30 2023 ANNUAL REPORT Return on average capital employed Kelt calculates ROACE, expressed as a percentage, as adjusted EBIT divided by the average capital employed. The components adjusted EBIT and average capital employed are non-GAAP financial measures. Kelt uses ROACE as a measure of long-term financial performance. (CA$ thousands, except as otherwise indicated) Adjusted EBIT Average capital employed ROACE (%) Three-year Average December 31, 2023 December 31, 2022 December 31, 2021 115,787 211,659 136,132 965,189 832,107 664,723 19% 12% 25% 20% CAPITAL MANAGEMENT MEASURES Funds from operations and adjusted funds from operations Management considers funds from operations and adjusted funds from operations as a key capital management measure as it demonstrates the Company’s ability to meet its financial obligations and cash flow available to fund its capital program. Funds from operations and adjusted funds from operations are not standardized measures and therefore may not be comparable with the calculation of similar measures by other entities. The most comparable GAAP measure is “Cash provided by operating activities”. Funds from operations and adjusted funds from operations are 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 2023 62,477 1,697 64,174 2,444 66,618 2022 63,742 28,742 92,484 367 2023 2022 283,224 (11,562) 306,022 17,770 271,662 323,792 4,538 3,200 92,851 276,200 326,992 Net debt (surplus) and net debt (surplus) to adjusted funds from operations ratio Management considers net debt (surplus) and a net debt (surplus) to 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 (surplus) to 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 (surplus)” 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 (surplus)” 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 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, gain (loss) on derivative financial instruments, royalties, production expenses, transportation expenses, financing expenses, gross and net G&A expenses, realized gain (loss) on foreign exchange, KELT EXPLORATION LTD. 31 2023 ANNUAL REPORT other income (expense), share based compensation expense and depletion and depreciation 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 and comprehensive income per share (basic and diluted) is calculated by dividing the amounts by the basic weighted average common shares outstanding. Net asset value “Net asset value” is calculated by adding the present value of proved plus probable petroleum and natural gas reserves discounted at 10% before-tax (as estimated by Sproule effective December 31, 2023), undeveloped land value, proceeds from exercise of stock options, and net bank debt (surplus). “Net asset value per common share” is calculated by dividing the “Net asset value” by the diluted number of common shares outstanding. The calculation of proceeds from exercise of stock options and the diluted number of common shares outstanding only include stock options that are “in-the-money” based on the closing price of Kelt common shares as at the calculation date. Management believes that the “Net asset value” provides a useful measure to analyze the comparative change in the Company’s estimated value on a normalized basis. See the “Net asset value” section of this MD&A which provides a reconciliation of the net asset value to Kelt’s Present value of 2P P&NG reserves, discounted at 10% before-tax. SUSTAINABILITY STANDARDS On June 26, 2023 the International Sustainability Standards Board (“ISSB”) issued its first two sustainability standards, IFRS S1 and IFRS S2, which deal with general requirements for sustainability disclosure and climate-related disclosure. There are several hurdles before the ISSB standards move from being voluntary to having the force of law in Canada. The Canadian Securities Administrators (“CSA”) have indicated that they intend to engage and collaborate with the Canadian Sustainability Standard Board (“CSSB”) on a review of the ISSB standards and proposed National Instrument 51-107. Although it is likely the CSSB will start with the ISSB standards, the extent that the final CSSB standards will differ from those issued by the ISSB is unknown. Kelt publishes an annual Environmental, Social, and Governance (“ESG”) Report, which includes the Company’s ESG practices and performance. The latest report, dated May 3, 2023 can be found on the Company’s website at www.keltexploration.com. Kelt’s ESG report is aligned with the standards set out in the Sustainability Accounting Standards Board, Oil and Gas – Exploration and Production Sustainability Accounting Standard. 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 2024. Readers are cautioned that this financial outlook may not be appropriate for other purposes. Certain information with respect to Kelt contained herein, including management’s assessment of future plans and operations, contains forward-looking statements. These forward-looking statements are based on assumptions and are subject to numerous risks and uncertainties, many of which are beyond Kelt’s control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency exchange rate fluctuations, imprecision of reserve estimates, environmental risks, competition from other explorers, stock market volatility and ability to access sufficient capital. As a result, Kelt’s actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any events anticipated by the forward-looking statements will transpire or occur. In addition, the reader is cautioned that historical results are not necessarily indicative of future performance. The forward-looking statements contained herein are made as of the date hereof and the Company does not intend, and does not assume any obligation, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise unless expressly required by applicable securities laws. There are numerous uncertainties inherent in estimating quantities of oil, natural gas and NGL reserves, and the future net revenue attributed to such reserves, including many factors beyond the control of Kelt. The reserves and associated KELT EXPLORATION LTD. 32 2023 ANNUAL REPORT future net revenue information set forth in this MD&A are estimates only. In general, estimates of economically recoverable oil, natural gas and NGLs reserves and the future net revenue therefrom are based upon a number of variable factors and assumptions, such as historical production from the properties, production rates, ultimate reserves recovery, the timing and amount of capital expenditures, marketability of oil, natural gas and NGLs, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary materially from actual results. For these reasons, estimates of the economically recoverable oil, natural gas and NGLs reserves attributable to any particular group of properties, the classification of such reserves based on risk of recovery and estimates of future net revenue associated with reserves prepared by different engineers, or by the same engineer at different times, may vary. Kelt’s actual production, revenue, taxes and development and operating expenditures with respect to its reserves will vary from estimates thereof and such variations could be material. It should not be assumed that the undiscounted or discounted net present value of future net revenue attributable to the Corporation’s reserves estimated by the Corporation’s independent qualified reserves evaluators represent the fair market value of those reserves. There is no assurance that the forecast prices and costs assumptions will be attained, and variances could be material. Actual oil, natural gas and NGLs reserves may be greater than or less than the estimates provided herein, and variances could be material. With respect to the disclosure of reserves contained herein relating to portions of Kelt’s properties, the estimates of reserves and future net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties, due to the effects of aggregation. Unless otherwise stated all references to “reserves” are to Kelt’s gross company reserves before deduction of royalties and without including and royalty interests of Kelt. It should not be assumed that the undiscounted or discounted net present value of the Company’s reserves, as determined by Sproule, represents the fair value of those reserve estimates. 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; the ability to access sufficient water or other fluids needed for completion operations; and the ability to access sufficient capital. We caution that the foregoing list of risks and uncertainties is not exhaustive. KELT EXPLORATION LTD. 33 2023 ANNUAL REPORT ADDITIONAL INFORMATION Additional information relating to Kelt, including the Company’s Annual Information Form (“AIF”) dated March 7, 2024 is filed on SEDAR+ and can be viewed on their website at www.sedarplus.ca. 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. 34 2023 ANNUAL REPORT MANAGEMENT’S REPORT The accompanying consolidated financial statements of Kelt Exploration Ltd. (the “Company”) are the responsibility of management. The consolidated financial statements have been prepared by management in Canadian dollars in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board (“IFRS Accounting Standards”) 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 consolidated 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 consolidated financial statements. Their report, contained herein, outlines the nature of their audit and expresses an unqualified opinion on the consolidated financial statements. [signed] David J. Wilson President and Chief Executive Officer March 7, 2024 [signed] Sadiq H. Lalani Vice President and Chief Financial Officer March 7, 2024 KELT EXPLORATION LTD. 35 2023 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, 2023 and 2022, 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 Accounting Standards). What we have audited The Company’s consolidated financial statements comprise:      the consolidated statements of financial position as at December 31, 2023 and 2022; the consolidated statements of net income and comprehensive net income for the years then ended; the consolidated statements of changes in shareholders’ equity for the years then ended; the consolidated statements of cash flows for the years then ended; and the notes to the consolidated financial statements, comprising material accounting policy information and other explanatory information. Basis for opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2023. 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. PricewaterhouseCoopers LLP Suncor Energy Centre, 111 5th Avenue South West, Suite 3100, Calgary, Alberta, Canada T2P 5L3 T.: +1 403 509 7500, F.: +1 403 781 1825, Fax to mail: ca_calgary_main_fax@pwc.com “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. 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 – Material accounting policies and note 6 – Property, plant and equipment to the consolidated financial statements. The Company has $1,166.4 million of D&P assets as at December 31, 2023 and depletion and depreciation (D&D) expense was $125.8 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 considered this 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 in performing procedures relating to the significant assumptions. How our audit addressed the key audit matter 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.  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 express 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, 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. 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 Accounting Standards, 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 Althen. /s/PricewaterhouseCoopers LLP Chartered Professional Accountants Calgary, Alberta March 7, 2024 KELT EXPLORATION LTD. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS AT DECEMBER 31, 2023 AND DECEMBER 31, 2022 (CA$ thousands) ASSETS Current assets Cash and cash equivalents Accounts receivable and accrued sales Prepaid expenses and deposits Derivative financial instruments Total current assets Derivative financial instruments 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, 2023 December 31, 2022 14,340 52,646 5,188 3,974 76,148 570 17,162 1,166,412 1,260,292 85,171 585 4,360 1,125 91,241 - 95,555 332 69,501 125 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 40,998 256,629 226,680 1,175,465 (12,010) (159,792) 1,003,663 1,260,292 1,162,650 (15,460) (245,766) 901,424 1,128,104 [11] [11] [11] [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. 40 2023 ANNUAL REPORT KELT EXPLORATION LTD. CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE NET INCOME FOR THE YEARS ENDED DECEMBER 31, 2023 AND DECEMBER 31, 2022 (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 Loss on derivative financial instruments Gain (loss) on foreign exchange Gain (loss) on sale of assets Other income 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] [11] [4] [12] [10] [10] Year ended December 31 2023 2022 495,580 (59,170) 436,410 613,358 (65,567) 547,791 109,422 101,566 38,808 16,565 4,190 10,384 7,862 1,413 125,813 314,457 (8,748) (104) 50 1,326 114,477 (28,503) 85,974 0.45 0.44 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 The accompanying notes form an integral part of these consolidated financial statements. KELT EXPLORATION LTD. 41 2023 ANNUAL REPORT KELT EXPLORATION LTD. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AS AT AND FOR THE YEARS ENDED DECEMBER 31, 2023 AND DECEMBER 31, 2022 (CA$ thousands) Balance at December 31, 2021 Net income and comprehensive income Exercise of stock options Vesting of restricted share units Share based compensation Balance at December 31, 2022 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 189,164 1,144,596 (17,348) - 2,802 48 - - 17,896 158 - - (4,968) (158) 7,014 Retained earnings (deficit) (404,524) 158,758 - - - Total shareholders’ equity 722,724 158,758 12,928 - 7,014 192,014 1,162,650 (15,460) (245,766) 901,424 - 2,145 347 - - 11,832 983 - - 85,974 (3,429) (983) 7,862 - - - 85,974 8,403 - 7,862 [10] [10] [10] [10] [10] [10] Balance at December 31, 2023 194,506 1,175,465 (12,010) (159,792) 1,003,663 The accompanying notes form an integral part of these consolidated financial statements. KELT EXPLORATION LTD. 42 2023 ANNUAL REPORT KELT EXPLORATION LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2023 AND DECEMBER 31, 2022 (CA$ thousands) Operating activities Net income and comprehensive income Items not affecting cash: Accretion of decommissioning obligations Share based compensation Exploration and evaluation Depletion and depreciation Unrealized (gain) loss on derivative financial instruments (Gain) loss on sale of assets Deferred income tax expense Settlement of decommissioning obligations Change in non-cash operating working capital Cash provided by operating activities Financing activities (Decrease) increase in bank debt Proceeds on exercise of stock options Repayment of lease liability principal Cash provided by (used in) 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 Net change in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year [Notes] Year ended December 31 2023 2022 85,974 158,758 [14] [10] [5] [6] [11] [4] [12] [8] [17] [7] [10] [9] [5] [6] [4] [4] [17] 2,880 7,862 1,413 125,813 23,805 (50) 28,503 (4,538) 11,562 283,224 (11,300) 8,403 (627) (3,524) (6,115) (276,479) (102) 50 17,161 (265,485) 14,215 125 14,340 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) (594) 719 125 The accompanying notes form an integral part of these consolidated financial statements. KELT EXPLORATION LTD. 43 2023 ANNUAL REPORT KELT EXPLORATION LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 (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 financial statements on March 7, 2024. a) Statement of compliance The Company prepares its consolidated financial statements (the “financial statements”) in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board (“IFRS Accounting Standards”). 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. This evaluation of proved and proved plus probable reserves is prepared in accordance with the reserves definitions as set up by the Canadian Securities Administrators in National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities and the Canadian Oil and Gas Evaluation Handbook (“COGEH”). Future profit (loss) can be affected as a result of the methodology of depleting the net carrying value of property, plant and equipment. 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 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. KELT EXPLORATION LTD. 44 2023 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. 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, 2023, 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. Impairment of non-financial assets Significant judgment is required to assess non-financial assets, namely E&E and PP&E, for indicators of impairments. 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. 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. 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 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. KELT EXPLORATION LTD. 45 2023 ANNUAL REPORT Deferred income taxes The liability method is used 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. Share based compensation The fair value method of accounting is used 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 Black-Scholes option pricing model is used, 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. These assumptions are disclosed in note 10 of these financial statements. The fair value of restricted share units is estimated based on the volume weighted average trading price (“VWAP”) on the TSX over three trading days immediately prior to the date of grant. Judgment is also required to estimate the rate of forfeiture, or number of restricted share units that will ultimately vest. 3. MATERIAL 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. Principles of consolidation As at December 31, 2023, the Company has one wholly-owned subsidiary, Kelt LNG. Subsidiaries are entities controlled by the Company. Control exists when there is power to govern the financial and operating policies of an entity 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 all risks and rewards of ownership have substantially transferred. 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, financial instruments are measured at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, financial instruments are measured at amortized cost or at fair value through profit or KELT EXPLORATION LTD. 46 2023 ANNUAL REPORT loss (“FVTPL”) depending on the purpose for which the instruments were acquired. ii) Derivative financial instruments The Company may use derivative financial instruments for risk management purposes. All derivatives have been classified at FVTPL. 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. Physical commodity contracts are entered into and held for the purpose of receipt or delivery of non-financial items. 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 it is determined that an embedded derivative exists within the contract. Realized gains or losses from physically settled commodities sales contracts are recognized in petroleum and natural gas sales as the contracts are settled. 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. 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 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 expensed 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. 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. KELT EXPLORATION LTD. 47 2023 ANNUAL REPORT The gain or loss from the sale of property, plant and equipment is recognized in the Consolidated Statement of Net Income and Comprehensive Net Income. In addition, 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. Impairment of assets Non-financial assets The carrying value of non-financial assets, including PP&E and E&E, is reviewed 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. FVLCD is calculated 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. Financial assets A financial asset measured at amortized cost is assessed at each reporting date using an expected credit loss (“ECL”) KELT EXPLORATION LTD. 48 2023 ANNUAL REPORT model to determine whether it is impaired. The simplified approach is applied to calculating the ECLs, as prescribed by IFRS 9, which permits the use of the lifetime expected loss provision for all trade receivables. A combination of historical and forward looking information is used 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. Provisions and contingencies Provisions are recognized when there is 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 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 the estimated 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 and Comprehensive Net Income 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 liability method is used for accounting for income taxes. Under this method, deferred income tax is recognized on the 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 and at the time of the transaction, does not give rise to equal taxable and deductible temporary differences. 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 KELT EXPLORATION LTD. 49 2023 ANNUAL REPORT 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 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 with the 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. A practical expedient is applied that allows any incremental costs of obtaining contracts with customers to be recognized as an expense when incurred rather than being capitalized. Arrangements are evaluated 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 primary responsibility for the delivery of the product, having the ability to establish prices or having inventory risk. If management determines that it 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. 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. The fair value method is applied to the 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 with 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 on the exercise of stock options is recorded as an increase in shareholders’ capital, together with the corresponding amounts previously recognized in contributed surplus. Earnings per share amounts Basic net income per common share is calculated by dividing net income for the period attributable to common shareholders 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 average market price during the period. KELT EXPLORATION LTD. 50 2023 ANNUAL REPORT 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, 2023 and the prior year ended December 31, 2022: 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 Non-cash consideration Total consideration Gain (loss) on sale of assets December 31, 2023 December 31, 2022 150 7,137 (265) 7,022 (102) (6,920) (7,022) 2,479 2,273 (1,290) 3,462 (933) (2,529) (3,462) December 31, 2023 December 31, 2022 - (6,920) - (6,920) 50 6,920 6,970 50 (2,513) (331) 78 (2,766) 41 2,529 2,570 (196) In the fourth quarter of 2023, the Company closed a non-cash property plant and equipment swap transaction for $6.5 million. 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, 2023 December 31, 2022 16,843 6,115 150 - (4,533) (1,413) 17,162 29,529 7,061 2,479 (2,513) (5,229) (14,484) 16,843 During the year ended December 31, 2023, exploration and evaluation expense was approximately $1.4 million (December 31, 2022 – $14.5 million). The Company concluded that there are no indicators of potential impairment of its E&E assets at December 31, 2023. KELT EXPLORATION LTD. 51 2023 ANNUAL REPORT 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, 2023 December 31, 2022 1,164,248 1,589 575 1,166,412 995,464 1,189 631 997,284 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, 2021 Additions Property acquisitions Property dispositions Change in decommissioning obligations Transfers from E&E Balance at December 31, 2022 Additions Property acquisitions Property dispositions Change in decommissioning obligations Transfers from E&E 1,475,797 308,759 2,273 (331) (26,884) 5,229 1,764,843 275,724 7,137 (6,920) 12,676 4,533 Corporate Assets ROU Assets Total PP&E 6,325 828 2,792 789 1,484,914 310,376 - - - - - - - - 7,153 755 3,581 1,036 - - - - - - - - 2,273 (331) (26,884) 5,229 1,775,577 277,515 7,137 (6,920) 12,676 4,533 Balance at December 31, 2023 2,057,993 7,908 4,617 2,070,518 Accumulated depletion, depreciation and impairment D&P Assets Corporate Assets ROU Assets Total PP&E Balance at December 31, 2021 Depletion and depreciation expense Balance at December 31, 2022 Depletion and depreciation expense Balance at December 31, 2023 654,780 114,599 769,379 124,366 893,745 5,547 975 6,522 811 7,333 1,783 609 2,392 636 3,028 662,110 116,183 778,293 125,813 904,106 Future capital costs required to develop proved reserves in the amount of $1,768.4 million (December 31, 2022 – $1,210.1 million) are included in the depletion calculation for development and production assets. Based on its assessment as of December 31, 2023, 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 At December 31, 2023 the Company has a $100.0 million credit facility available from a syndicate of financial institutions. As at December 31, 2023, there were no borrowings outstanding under the Credit Facility, with outstanding letters of credit of $2.6 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 KELT EXPLORATION LTD. 52 2023 ANNUAL REPORT 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 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 Net Debt to Cash Flow ratio of between less than 0.5 times to greater than five times. 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, 2023 December 31, 2022 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 88,632 1,927 265 - (4,538) 6,308 - 4,441 2,880 99,915 4,360 95,555 3.0% 2.0% 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% (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 and site specific information. As at December 31, 2023 the undiscounted amount of the estimated cash flows required to settle the obligation is $131.2 million (December 31, 2022 – $126.4 million) and is expected to be incurred over the next 50 years. The undiscounted amount of the estimated future cash flows required to settle the obligation is $242.3 million at December 31, 2023 (December 31, 2022 – $247.0 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). KELT EXPLORATION LTD. 53 2023 ANNUAL REPORT 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, 2023 December 31, 2022 1,048 1,036 96 (723) 1,457 1,125 332 1,008 789 46 (795) 1,048 505 543 Lease liabilities include commercial office space, field equipment and vehicle leases. The weighted average discount rate for new leases entered in the period ended December 31, 2023 was 10.0% (December 31, 2022 – 9.0%). Payments under short-term leases were $12.9 million for the year ended December 31, 2023 (December 31, 2022 – $9.4 million), which primarily related to short term drilling rig and field equipment rentals. 10. SHARE CAPITAL Authorized The Company is authorized to issue an unlimited number of common shares and an unlimited number of preferred shares, each without par value. Issued and outstanding The following table summarizes the change in common shares issued and outstanding. There are no preferred shares issued or outstanding as of December 31, 2023 (December 31, 2022 – nil). Balance at December 31, 2021 Issued on exercise of stock options Transfer from contributed surplus on exercise of stock options Released upon vesting of restricted share units Balance at December 31, 2022 Issued on exercise of stock options Transfer from contributed surplus on exercise of stock options Released upon vesting of restricted share units Balance at December 31, 2023 Stock options Number of Shares (000s) 189,164 2,802 - 48 192,014 2,145 - 347 Amount ($ thousands) 1,144,596 12,928 4,968 158 1,162,650 8,403 3,429 983 194,506 1,175,465 The Incentive Stock Option Plan (the “Option Plan”) includes stock options which may be granted 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 vest in equal tranches over a three year period and have a maximum term of five years to expiry. KELT EXPLORATION LTD. 54 2023 ANNUAL REPORT The following table summarizes the change in stock options outstanding: Balance at December 31, 2021 Granted Exercised (1) Forfeited Expired Balance at December 31, 2022 Granted Exercised (1) Forfeited Expired Balance at December 31, 2023 Number of Options (000s) Average Exercise Price ($/share) 10,523 3,528 (2,802) (333) (384) 10,532 2,005 (2,145) (428) (267) 9,697 3.52 5.40 4.61 4.55 6.77 3.71 4.94 3.92 5.53 7.35 3.74 (1) The average share price on the date stock options were exercised during the year ended December 31, 2023 was $6.54 per common share ($6.94 per common share on average during the year ended December 31, 2022). The total fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with weighted average assumptions as follows: Risk free interest rate Expected life (years) Expected volatility (1) Expected dividend yield Expected forfeiture rate Fair value of options granted during the year ($/share) Year ended December 31 2023 3.32% 3.4 65.8% 0.0% 5.1% 2.36 2022 2.00% 3.5 76.1% 0.0% 4.8% 2.87 (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, 2023: 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) 1,579 3,087 4,676 355 9,697 1.3 1.7 3.5 4.5 2.6 1.00 2.77 5.06 7.00 3.74 1,579 2,339 988 28 4,934 1.00 2.77 5.26 6.33 2.72 Range of exercise prices per common share $0.00 to $2.00 $2.01 to $4.00 $4.01 to $6.00 $6.01 to $8.00 Total Restricted share units The restricted share unit plan includes restricted share units (“RSUs”) that may be granted 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. KELT EXPLORATION LTD. 55 2023 ANNUAL REPORT The following table summarizes the change in RSUs outstanding: Balance at December 31, 2021 Granted Released upon vesting Forfeited Balance at December 31, 2022 Granted Released upon vesting Forfeited Balance at December 31, 2023 Number of RSUs (000s) 759 200 (48) (38) 873 1,284 (347) (68) 1,742 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 2023 5,359 2,503 7,862 2022 5,902 1,112 7,014 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 2023 193,116 3,947 197,063 2022 191,101 4,355 195,456 The treasury stock method is used 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. 11. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Financial instruments of the Company include cash and cash equivalents, accounts receivable and accrued sales, deposits, accounts payable and accrued liabilities, derivative financial instruments, lease liabilities 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. KELT EXPLORATION LTD. 56 2023 ANNUAL REPORT 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 risk management policy that permits 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, 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. As of December 31, 2023, the following commodity price derivative financial instrument contracts are outstanding: Natural gas derivative financial instrument contracts Contract Type (1) Notional Volume Contract Price $/MMBtu Remaining Term NYMEX-AECO 7A basis swap 10,000 MMBtu/d Monthly AECO basis calculated at 30% of the floating monthly NYMEX price NYMEX-AECO 7A basis swap 10,000 MMBtu/d NYMEX less USD$1.06 NYMEX-AECO 5A basis swap 30,000 MMBtu/d NYMEX less USD$1.10 NYMEX-AECO 7A basis swap 10,000 MMBtu/d NYMEX less USD$1.06 (1) NYMEX Henry Hub (“NYMEX”) Jan 24 – Oct 24 Jan 24 – Oct 24 Nov 24 – Oct 25 Nov 24 – Oct 25 Subsequent to December 31, 2023, the Company paid $0.2 million to unwind 10,000 MMBtu/d of its NYMEX less USD$1.06 to AECO 7A basis swap contract for April to October 2025. Crude oil derivative financial instrument contracts Contract Type (1) Notional Volume Contract Price Remaining Term WTI fixed price swap 500 bbl/d CAD$115.00/bbl Jan 24 – Mar 24 (1) West Texas Intermediate (“WTI”) Subsequent to December 31, 2023, Kelt entered into the following commodity price derivative financial instrument contracts: Crude oil derivative financial instrument contracts Contract Type (1) Notional Volume Contract Price Term WTI fixed price swap 500 bbl/d CAD$102.70/bbl Apr 24 – Jun 24 WTI fixed price swap 500 bbl/d CAD$103.50/bbl Apr 24 – Jun 24 WTI fixed price swap 500 bbl/d CAD$105.50/bbl Jul 24 – Sep 24 Sold call option 500 bbl/d CAD$102.70/bbl Sold call option 500 bbl/d CAD$103.50/bbl Sold call option 500 bbl/d CAD$105.50/bbl Option exercise and expiration date – Jun 28, 2024 Term if exercised: Jul 24 – Sept 24 Option exercise and expiration date – Jun 28, 2024 Term if exercised: Jul 24 – Sept 24 Option exercise and expiration date – Sep 30, 2024 Term if exercised: Oct 24 – Dec 24 (1) West Texas Intermediate (“WTI”) KELT EXPLORATION LTD. 57 2023 ANNUAL REPORT Interest rate risk The Company is exposed to interest rate risk as changes in market interest rates will impact the Credit Facility which is subject to a floating interest rate. As at December 31, 2023, there were no amounts drawn on the credit facility and there are no interest rate derivative financial instrument 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 marketing arrangements. As at December 31, 2023, the following foreign exchange derivative financial instrument contracts are outstanding: Contract Type Notional Volume Contract/Exercise Price Remaining Term CAD/USD swap USD$0.5 million/month $1.3700 CAD/USD Jan 24 – Dec 24 CAD/USD swap USD$2.0 million/month $1.3790 CAD/USD Jul 24 – Dec 24 Sold call option USD$1.0 million/month $1.3800 CAD/USD Sold call option USD$1.0 million/month $1.3750 CAD/USD Option exercise date – Dec 24 Term if exercised: Jan 25 – Jun 25 Option exercise date – Dec 24 Term if exercised: Jan 25 – Dec 25 CAD/USD swap USD$1.0 million/month $1.3620 CAD/USD Jan 25 – Dec 25 Gains and losses on derivative financial instrument contracts The table below summarizes realized and unrealized gains (losses) on derivative financial instrument contracts: Realized gain (loss) Derivative financial instrument contracts Natural gas embedded derivative Total realized gain (loss) Unrealized gain (loss) Derivative financial instrument contracts Natural gas embedded derivative Total unrealized gain (loss) Loss on derivative financial instruments Fair value measurements Year ended December 31 2022 2023 11,490 3,567 15,057 (15,416) (8,389) (23,805) (8,748) (60,633) 4,124 (56,509) 15,146 8,389 23,535 (32,974) The Company classifies fair value measurements using a 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 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 fair value of cash and cash equivalents, accounts receivable and accrued sales, deposits, accounts payable and KELT EXPLORATION LTD. 58 2023 ANNUAL REPORT accrued liabilities approximate their carrying value due to the short term to maturity of these instruments. Bank debt bears interest at a floating market rate and accordingly the fair market value of bank debt approximates the carrying amount. Derivative financial instruments are classified as Level 2. The fair value of financial assets and liabilities, excluding working capital, is attributable to the following fair value hierarchies: Balance as at December 31, 2023 Gross Netting(1) Net CV Level 1 Level 2 Level 3 Carrying Value (“CV”) Fair Value Financial assets Derivative financial instrument 4,544 Financial liabilities Derivative financial instrument 585 - - 4,544 585 - - 4,544 585 - - 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 - - - (1) Financial assets and liabilities are only offset if there is a 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, 2023, the carrying amount of cash and cash equivalents, accounts receivable and accrued sales, deposits, and derivative financial instruments represent the Company’s maximum credit exposure. Potential losses are mitigated from this credit exposure by holding cash and cash equivalents with a Canadian chartered bank, and restricting derivative financial instrument transactions to counterparties that are all investment grade. The remaining credit risk exposure arises primarily from receivables from oil and gas marketers and joint venture partners. The composition of accounts receivable is set out in the following table: Joint venture partners Oil and gas marketers GST input tax credits Derivative financial instrument contracts Other Expected credit loss provision Accounts receivable and accrued sales December 31, 2023 December 31, 2022 3,803 42,950 2,399 59 3,951 (516) 52,646 11,080 59,271 2,879 1,669 7,160 (984) 81,075 During the year ended December 31, 2023, sales to three oil and gas marketers accounted for approximately 10%, 24%, and 42% of total sales. During the year ended December 31, 2022, sales to four oil and gas marketers accounted for approximately 31%, 20%, 16% and 14% of total sales. Credit risk from oil and gas marketers is mitigated through transacting with investment grade rating counterparties in the majority of its oil and gas marketing transactions. The oil and gas industry has a pre-arranged monthly clearing day for payment of sales from all buyers of oil and natural gas; this occurs on the 25th day following the month of sale. As a result, production sales are current. All other accounts receivable are generally contractually due within 30-90 days. KELT EXPLORATION LTD. 59 2023 ANNUAL REPORT The balance of accounts receivable outstanding for more than 90 days relates primarily to receivables from 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, 2023, 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, 2022 – less than 1.0%). Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they are due. Financial obligations include accounts payable, derivative financial instruments, lease liabilities and bank debt. Liquidity risk is managed through the budgeting process, which sets out expected debt levels, capital expenditures and funds from operations. In addition, derivative financial instrument contracts 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, 2023: Accounts payable and accrued liabilities Derivative financial instruments Lease liability Total Capital Management Within 1 Year 1 to 5 Years More than 5 Years 85,171 585 1,125 86,881 - - 332 332 - - - - Total 85,171 585 1,457 87,213 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 Management considers adjusted funds from operations as a key capital management measure that demonstrates the Company’s ability to meet its financial obligations and cash flow available to fund its capital program. Adjusted funds from operations are not a standardized measure and therefore may not be comparable with the calculation of similar measures by other entities. Adjusted funds from operations are calculated as follows: Cash provided by operating activities Change in non-cash working capital Settlement of decommissioning obligations Adjusted funds from operations Year ended December 31 2023 283,224 (11,562) 4,538 276,200 2022 306,022 17,770 3,200 326,992 KELT EXPLORATION LTD. 60 2023 ANNUAL REPORT Net debt and net debt to adjusted funds from operations ratio Management considers net debt and a net debt to 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 adjusted funds from operations ratio of less than 2.0 times. Net debt and a net debt to 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 adjusted funds from operations ratio are 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 Adjusted funds from operations Net debt to adjusted funds from operations ratio December 31, 2023 December 31, 2022 - 85,171 (14,340) (52,646) (5,188) 12,997 276,200 0.0 11,300 83,288 (125) (81,075) (3,599) 9,789 326,992 0.0 As described in note 7, there are no financial covenants under the Credit Facility agreement and Kelt is in compliance with all other covenants. 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, 2023 are estimated to be approximately $780.4 million (December 31, 2022 – $768.4 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 resulting from: Non-deductible expenses (1) Deferred income tax expense Year ended December 31 2023 114,477 23.3% 26,673 1,830 28,503 2022 210,199 23.7% 49,819 1,622 51,441 (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. KELT EXPLORATION LTD. 61 2023 ANNUAL REPORT 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 Non-capital losses (2) Net deferred tax liability Balance at December 31, 2022 Recognized in profit and CI(1) Recognized in balance sheet Balance at December 31, 2023 (6,386) (122,738) 20,586 194 67,346 (40,998) 5,475 (29,998) 2,618 92 (6,690) (28,503) - - - - - - (911) (152,736) 23,204 286 60,656 (69,501) 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) (1) Comprehensive income has been abbreviated as “CI”. (2) The Company’s non-capital losses expire in years 2033 to 2042. The amount and timing of reversals of temporary differences will be dependent upon a number of factors, including future capital expenditures and 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. Marketing revenue is generated from the sales of third-party volumes related to its oil blending and natural gas operations, with the production being sold under the same terms as the variable price contracts discussed above. Where third party marketers are contracted to deliver natural gas using Kelt’s transportation pipeline contracts, title transfer occurs at a different location than the benchmark commodity price location. For the year end December 31, 2023, gas production sales in relation to these contracts was $13.3 million (December 31, 2022 – $12.4 million). KELT EXPLORATION LTD. 62 2023 ANNUAL REPORT 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, 2023 December 31, 2022 283,892 975 67,598 122,978 3,321 16,816 495,580 240,195 718 99,973 249,125 1,606 21,741 613,358 Included in accounts receivable at December 31, 2023 is $43.0 million (December 31, 2022 - $59.3 million) of accrued oil and gas sales related to December 2023 production. 14. FINANCING EXPENSES Total interest expense Accretion of decommissioning obligations [note 8] Total financing expense 15. COMMITMENTS Year ended December 31 2023 1,310 2,880 4,190 2022 1,460 2,451 3,911 As of December 31, 2023, the Company is committed to future payments under the following agreements: Firm processing commitments Firm transportation commitments 2024 33,726 35,187 2025 50,021 36,244 2026 2027 2028 Thereafter 60,301 35,415 60,341 32,482 63,230 461,559 31,059 139,839 Total annual commitments 68,913 86,265 95,716 92,823 94,289 601,398 In 2023, the Company entered into two gas processing agreements with third-party midstream companies. The gas processing facilities are expected to become operational in mid-2025 and early 2026 resulting in an increase of approximately $220.0 million to commitments as of December 31, 2023. 16. GENERAL AND ADMINISTRATIVE (“G&A”) EXPENSES The following table summarizes significant components of G&A expenses: Salaries and benefits (1) Other G&A expenses G&A expenses before recoveries Overhead recoveries G&A expense Year ended December 31 2023 13,349 5,292 18,641 (8,257) 10,384 2022 12,287 5,521 17,808 (7,506) 10,302 (1) Refer to additional information regarding salaries and benefits paid to key management personnel in note 18 of these financial statements. KELT EXPLORATION LTD. 63 2023 ANNUAL REPORT 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 2023 28,429 (1,589) 1,883 28,723 11,562 17,161 28,723 2022 (38,491) (1,519) 10,835 (29,175) (17,770) (11,405) (29,175) During the reporting period, the following cash outlays were made 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 2023 1,069 - 2022 1,068 - (1) Kelt was not required to pay cash income taxes as there were sufficient income tax deductions available to shelter taxable income (note 12). 18. RELATED PARTY TRANSACTIONS The Company has engaged a law firm where the corporate secretary of Kelt is a partner, and has engaged the services of a registrar and transfer agent where an officer of Kelt is a director of the company. During the year ended December 31, 2023, the Company incurred $0.4 million (December 31, 2022 – $0.4 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 2023 3,250 4,056 7,306 2022 2,685 5,728 8,413 During the year ended December 31, 2023, key management personnel were granted 621,000 stock options with an exercise price of $4.56 per share and 529,000 RSUs. During the year ended December 31, 2022, key management personnel were granted 1,636,500 stock options with an exercise price of $5.34 per share and 155,00 RSUs. KELT EXPLORATION LTD. 64 2023 ANNUAL REPORT ABBREVIATIONS A&D Acquisitions and dispositions NGLs Natural Gas Liquids AECO Alberta Energy Company “C” Meter Station of NGX Natural Gas Exchange Inc. (Canada) the NOVA Pipeline System NGTL Nova Gas Transmission Line AT bbls After income taxes barrels bbls/d barrels per day bcf billion cubic feet NIT NOVA Inventory Transfer (“AB-NIT”), being the reference price at the AECO Hub NYMEX New York Mercantile Exchange OPEC+ The Organization of Petroleum Exporting Countries along with BOE barrels of oil equivalent 10 additional oil-producing countries BOE/d barrels of oil equivalent per day P&NG Petroleum and Natural Gas BT Before income taxes CA$/CAD Canadian Dollar Dawn Gas traded at Union Gas' Dawn Hub in Dawn Township, Ontario Q1 Q2 Q3 Q4 First quarter ended March 31st Second quarter ended June 30th Third quarter ended September 30th Fourth quarter ended December 31st E&E FDC G&A GJ Exploration and Evaluation ROACE Return on average capital employed Future Development Capital SBC Share Based Compensation General and Administration SEDAR+ System for Electronic Document Analysis and Retrieval gigajoules Station 2 Spectra Energy receipt location Mbbls thousand barrels TSX Toronto Stock Exchange MBOE thousand barrels of oil equivalent US$/USD United States dollar Mcf thousand cubic feet MD&A Management’s Discussion and Analysis MMBtu million British Thermal Units MMcf million cubic feet MMcf/d million cubic feet per day MSW Mountain sweet blend crude oil WTI YTD 1P 2P West Texas Intermediate Year to date Proved reserves Proved plus probable reserves CONVERSION OF UNITS Imperial = Metric 1 acre = 0.4 hectares 2.5 acres = 1 hectare 1 bbl = 0.159 cubic metres 6.29 bbls = 1 cubic metre 1 foot = 0.3048 metres 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 Sulphur is equated to gas on the basis of 1LT = 10 Mcf (1 BOE = 0.6 LT) KELT EXPLORATION LTD. 65 2023 ANNUAL REPORT CORPORATE INFORMATION BOARD OF DIRECTORS William C. Guinan 8, 9 Board Chair, Independent Jennifer Haskey 2, 6, 7 Director, Independent Michael R. Shea 5, 7, 8 Director, Independent Neil G. Sinclair 1, 9, 10 Director, Independent Janet E. Vellutini 3, 6, 7 Director, Independent David J. Wilson 4, 10 President & Chief Executive Officer, Kelt Exploration Ltd. 1 chair, audit committee 2 chair, reserves committee 3 chair, compensation and corporate governance committee 4 chair, health, safety, environment and sustainability committee 5 chair, nominating committee 6 member, audit committee 7 member, reserves committee 8 member, compensation and corporate governance committee 9 member, health, safety and environment and sustainability committee 10 member, nominating committee 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. 66 2023 ANNUAL REPORT SUITE 300, EAST TOWER 311 SIXTH AVENUE SOUTH WEST CALGARY, ALBERTA T2P 3H2 

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