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Kelt Exploration Ltd. Management Reports 2025
47121_rns_2025-05-08_77806a24-73dc-436e-8c69-1cfed8cf0a6e.pdf
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kelt exploration
MANAGEMENT'S DISCUSSION & ANALYSIS
AS AT AND FOR THE THREE MONTHS ENDED
MARCH 31, 2025
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.
The Company was incorporated under the Business Corporations Act (Alberta) on October 11, 2012. Kelt's assets are comprised of three core operating divisions, namely: (1) Wembley/Pipestone in Alberta; (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.
This Management's Discussion and Analysis ("MD&A") is dated May 7, 2025 and should be read in conjunction with the Company's unaudited condensed consolidated interim financial statements and related notes as at and for the three months ended March 31, 2025 and its audited annual consolidated financial statements and MD&A as at and for the year ended December 31, 2024. The accompanying condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board ("IFRS Accounting Standards").
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 "funds from operations", "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, net of A&D", "net debt (surplus)", "net realized prices", "combined net realized prices", and "net debt (surplus) to adjusted funds from operations ratio" which do not have standardized meanings prescribed by generally accepted accounting principles ("GAAP") and therefore may not be comparable to similar measures presented by other companies where similar terminology is used. For further information and reconciliation to Canadian generally accepted accounting principles "GAAP" measures, see "Non-GAAP and Other Financial Measures" in this MD&A.
This MD&A contains forward-looking information within the meaning of applicable Canadian securities laws. The use of 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.
MANAGEMENT'S DISCUSSION & ANALYSIS
FINANCIAL AND OPERATING SUMMARY
| Three months ended March 31 | |||
|---|---|---|---|
| (CA$ thousands, except as otherwise indicated) | 2025 | 2024 | % |
| FINANCIAL PERFORMANCE | |||
| Petroleum and natural gas sales | 142,501 | 126,391 | 13 |
| Cash provided by operating activities | 86,929 | 62,493 | 39 |
| Adjusted funds from operations (1) | 78,214 | 61,176 | 28 |
| Diluted ($/ common share) (1) | 0.39 | 0.31 | 26 |
| Net income and comprehensive income | 18,979 | 11,847 | 60 |
| Diluted ($/ common share) | 0.09 | 0.06 | 50 |
| Capital expenditures, net of A&D (1) | 104,746 | 80,181 | 31 |
| Bank debt | 102,766 | - | - |
| Net debt (1) | 150,024 | 31,961 | 369 |
| OPERATIONAL PERFORMANCE | |||
| Average daily production (BOE/d) | 40,015 | 32,910 | 22 |
| Combined net realized price, before derivative financial instruments (1) | 38.76 | 40.59 | -5 |
| Combined net realized price, after derivative financial instruments (1) | 40.53 | 40.59 | - |
| Operating netback (1) | 23.25 | 21.69 | 7 |
(1) Refer to advisories regarding Non-GAAP and Other Financial Measures.
In the first quarter of 2025, Kelt's financial and operating results are highlighted by the following:
- Production – First quarter 2025 production averaged 40,015 BOE per day (38% liquids), an increase of 22% from 32,910 BOE (37% liquids) per day in the first quarter of 2024 and increased by 10% from 36,450 BOE per day (39% liquids) in the fourth quarter of 2024.
- Petroleum and natural gas sales – For the three months ended March 31, 2025, petroleum and natural gas sales increased by 13% compared to the first quarter of 2024. Kelt's combined net realized price before derivative financial instruments of $38.76 per BOE decreased 5% from the first quarter of 2024.
- Operating netback – Kelt's operating netback was $23.25 per BOE for the quarter ended March 31, 2025, up 7% from $21.69 per BOE during the quarter ended March 31, 2024. The increase in the operating netback was primarily due to a 16% decrease in royalties per BOE to $4.23, a 8% decrease in production expenses per BOE to $9.54 and an increase in realized gains on derivative financial instruments.
- Cash provided by operating activities and adjusted funds from operations – Cash provided by operating activities increased to $86.9 million in the first quarter of 2025 compared to $62.5 million in the first quarter of 2024. Adjusted funds from operations of $78.2 million during the three months ended March 31, 2025 ($0.39 per common share, diluted) increased 28% from the first quarter of 2024 primarily due to higher petroleum and natural gas sales, and an increase in realized gains on derivative financial instruments.
- Net income – Kelt reported net income of $19.0 million ($0.09 per common share, diluted) for the three months ended March 31, 2025, compared to net income of $11.9 million ($0.06 per common share, diluted) for the three months ended March 31, 2024. The increase in net income was primarily due to an increase in petroleum and natural gas sales which was partially offset by higher depletion and depreciation expenses.
- Capital investments – Capital expenditures, net of A&D, was $104.7 million in the first quarter of 2025 which included the drilling of 10.6 net wells and completion of 6.6 net wells.
- Liquidity – The Company ended the quarter with net debt of $150.0 million (0.6 times trailing 12-month adjusted funds from operations).
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
PRODUCTION
Kelt Quarterly Production (BOE/D)
| (CAS thousands, except as otherwise indicated) | Three months ended March 31 | ||
|---|---|---|---|
| 2025 | 2024 | % | |
| Average daily production: | |||
| Oil (bbls/d) | 9,444 | 8,758 | 8 |
| NGLs (bbls/d) | 5,631 | 3,497 | 61 |
| Gas (Mcf/d) | 149,637 | 123,931 | 21 |
| Combined (BOE/d) | 40,015 | 32,910 | 22 |
| Liquids weighting | 38% | 37% | 3 |
Average production for the three months ended March 31, 2025 increased 22% compared to the same period in 2024 and increased 10% compared to the average production during the fourth quarter of 2024. The increase in production was primarily due to additional wells coming on-stream in Alberta, and third-party facility optimization work resulting in higher gas processing run times in Alberta. In the fourth quarter of 2024, Kelt added third-party natural gas processing at Oak which resulted in higher overall NGLs recoverability. The liquids weighting of total production increased slightly to 38% during the first quarter of 2025 compared to 37% in the comparable period of 2024.
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
PETROLEUM AND NATURAL GAS SALES ("P&NG SALES")
Kelt Quarterly Petroleum and Natural Gas Sales ($000)
| Three months ended March 31 | |||
|---|---|---|---|
| (CAS thousands, except as otherwise indicated) | 2025 | 2024 | % |
| Oil | 79,230 | 71,765 | 10 |
| NGLs | 20,813 | 16,603 | 25 |
| Gas | 39,469 | 33,103 | 19 |
| Marketing revenue (1) | 2,989 | 4,920 | -39 |
| P&NG Sales | 142,501 | 126,391 | 13 |
| Cost of purchases (2) | (2,904) | (4,835) | -40 |
| P&NG Sales after cost of purchases (3)(4)(5) | 139,597 | 121,556 | 15 |
| Combined net realized price ($/BOE) (4)(6) | 38.76 | 40.59 | -5 |
(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) Refer to advisories regarding Non-GAAP and Other Financial Measures
Petroleum and natural gas sales in the first quarter of 2025 was $142.5 million, up 13% from $126.4 million in the first quarter of 2024. The increase in P&NG sales from 2024 was due to an increase in production which was offset by a 5% decrease in the combined net realized price.
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
Kelt Quarterly Realized Prices (1)
(1) Net realized prices are calculated based on Petroleum and Natural Gas Sales, less the cost of purchases of third-party volumes and reflect Kelt's realized commodity prices plus the net benefit of oil blending and natural gas marketing activities. Net realized prices exclude both realized and unrealized gains and losses on risk management contracts. Refer to additional information under the heading of "Non-GAAP and Other Financial Measures".
| (CA$ thousands, except as otherwise indicated) | Three months ended March 31 | ||
|---|---|---|---|
| 2025 | 2024 | % | |
| Net realized prices (9) | |||
| Oil ($/bbl) | 93.32 | 90.15 | 4 |
| NGLs ($/bbl) | 41.07 | 52.18 | -21 |
| Gas ($/Mcf) | 2.93 | 2.94 | - |
| Combined ($/BOE) | 38.76 | 40.59 | -5 |
| Average benchmark prices | |||
| Oil and NGLs | |||
| WTI Cushing Oklahoma (US$/bbl) (1) | 71.85 | 77.57 | -7 |
| Mixed Sweet Blend Edmonton ("MSW") ($/bbl) (2) | 95.99 | 92.98 | 3 |
| Edmonton Pentane ($/bbl) (3) | 98.96 | 98.84 | - |
| Edmonton Butane ($/bbl) (3) | 47.84 | 46.29 | 3 |
| Edmonton Propane ($/bbl) (3) | 39.87 | 30.09 | 33 |
| Edmonton Ethane ($/bbl) (3) | 5.88 | 6.07 | -3 |
| Natural Gas | |||
| NYMEX Henry Hub (US$/MMBtu) (6) | 4.28 | 2.43 | 76 |
| AECO 5A (CA$/MMBtu) (4) | 2.16 | 2.51 | -14 |
| Chicago Alliance, into Interstates (CA$/MMBtu) (5) | 5.75 | 3.68 | 56 |
| Dawn (CA$/MMBtu) (5) | 5.54 | 3.08 | 80 |
| Malin (CA$/MMBtu) (5) | 4.65 | 4.25 | 9 |
| Sumas (CA$/MMBtu) (5) | 3.65 | 4.35 | -16 |
| Station 2 (CA$/MMBtu) (7) | 1.26 | 2.62 | -52 |
| Marcellus (TZ4 L300) (CA$/MMBtu) (5) | 5.49 | 2.41 | 128 |
| Average exchange rate (CA$/US$) (8) | 1.4356 | 1.3488 | 6 |
(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.
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
(9) 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 5% to $38.76 per BOE in the first quarter of 2025 versus the comparable period in 2024. The decrease in the average realized price was primarily due to lower realized NGLs prices.
Oil prices
The mixed sweet blend benchmark crude oil price increased by 3% in the quarter ended March 31, 2025 compared to the first quarter of 2024. Benchmark crude oil prices remained relatively range-bound in the first quarter of 2024 between USD $70-80 per barrel.
NGL prices
NGLs prices are impacted both by benchmark prices, as well as localized market supply and demand issues.
For the three months ended March 31, 2025, Kelt's realized NGLs price decreased 21% compared to the same period in 2024. In the fourth quarter of 2024 Kelt added third-party natural gas processing resulting in higher overall NGLs recoverability, including lower value propane and ethane, which resulted in an overall reduction in Kelt's average NGLs realized price.
Natural gas prices
Kelt's realized natural gas price remained unchanged in the first quarter of 2025 compared to the first quarter of 2024. The increase in the NYMEX benchmark natural gas price in the first quarter of 2025 compared to the first quarter of 2024 was offset by a decrease in the AECO and Station 2 benchmark natural gas price resulting in a relatively consistent quarter over quarter average realized natural gas price.
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:
| Three months ended March 31 | |||
|---|---|---|---|
| 2025 | 2024 | % | |
| Realized gain (loss) | 6,372 | (1) | - |
| Unrealized loss | (6,326) | (6,949) | -9 |
| Loss on derivative financial instruments | 46 | (6,950) | -101 |
| $ per BOE | 0.01 | (2.32) | -100 |
Commodity price risk
Inherent to the business of producing oil and gas, the Company's cash provided by operating activities is subject to commodity price risk. Commodity price risk is the risk that future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices are impacted by economic events that dictate the levels of supply and demand as well as the currency exchange rate relationship between the Canadian and U.S. dollar.
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
As of May 7, 2025, the following commodity price derivative financial instrument contracts are outstanding:
Crude oil derivative financial instrument swap contracts
| Contract Type (1) | Notional Volume | Contract Price | Remaining Term |
|---|---|---|---|
| WTI fixed price swap | 1,000 bbl/d | CAD$106.46/bbl | Apr 25 – Jun 25 |
| WTI fixed price swap | 2,000 bbl/d | USD$69.6575/bbl | Apr 25 – Dec 25 |
| WTI option (2) | 500 bbl/d | Settles monthly if WTI price > USD$70.50/bbl | Jan 25 – Dec 25 |
(1) West Texas Intermediate ("WTI")
(2) The WTI option is settled monthly at USD$70.50/bbl if the average WTI price is above USD$70.50/bbl.
NGL derivative financial instrument swap contracts
| Contract Type | Notional Volume | Contract Price | Remaining Term |
|---|---|---|---|
| OPIS-Conway propane fixed price swap | 250 bbl/d | USD$33.60/bbl | Apr 25 – Mar 26 |
| OPIS-Conway propane basis swap | 250 bbl/d | Monthly OPIS-Conway basis calculated at 46% of the floating monthly WTI price | Apr 25 – Mar 26 |
Natural gas derivative financial instrument contracts
| Contract Type (1) | Notional Volume | Contract Price $/MMBtu | Remaining Term |
|---|---|---|---|
| NYMEX swap | 20,000 MMBtu/d | CAD$6.405/MMBtu | Apr 25 – Dec 25 |
| AECO 7A swap | 5,000 GJ/d | CAD$1.85/GJ | Apr 25 |
| AECO 7A swap | 10,000 GJ/d | CAD$1.9275/GJ | May 25 – Jul 25 |
| NYMEX costless collar | 10,000 MMBtu/d | Floor: CAD$5.00/MMBtu | |
| Ceiling: CAD$10.00/MMBtu | Apr 25 – Dec 25 | ||
| NYMEX-Dawn basis swap | 5,000 MMBtu/d | NYMEX less CAD$0.635/MMBtu | Apr 25 – Jun 25 |
(1) NYMEX Henry Hub ("NYMEX")
Natural gas embedded derivative
| Contract Type | Notional Volume | Contract Price (1) | Remaining Term |
|---|---|---|---|
| Physical delivery contract | 2,513 GJ/d | Floating AESO power pool price (CAD/MWh) divided by the Fixed Heat Rate of 17.95 GJ/MWh | Apr 25 – Dec 26 |
| Physical delivery contract | 7,349 GJ/d | Floating AESO power pool price (CAD/MWh) divided by the Fixed Heat Rate of 16.75 GJ/MWh | Jan 26 – Dec 26 |
(1) Alberta Electric System Operator ("AESO")
The Company has natural gas physical supply agreements, with a term from January 1, 2025 to December 31, 2026, to deliver gas to the Nova Inventory Transfer point, which contains an embedded derivative. Under the terms of the agreements, the Company receives a price equal to the Floating AESO Power Pool Price divided by the fixed heat rate.
The fair value of the embedded derivative is calculated by the difference between the forecasted Floating AESO Power Pool Price divided by the fixed heat rate, less the forecasted AECO 5A price, for the remaining term of the contract.
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
In addition to the derivative contracts above, the Company has the following fixed price sales contracts for physical delivery:
Natural gas physical delivery contracts
| Contract Type | Notional Volume | Contract Price | Remaining Term |
|---|---|---|---|
| AECO 7A | 5,000 GJ/d | CAD$1.86/GJ | Apr 25 – Jul 25 |
| AECO 7A | 5,000 GJ/d | CAD$1.91/GJ | Apr 25 – Oct 25 |
| AECO 7A (physical) collar | 5,000 GJ/d | Ceiling – $3.90/GJ; Floor – $1.70/GJ | Apr 25 – Mar 26 |
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. Based on bank debt balance as of March 31, 2025 of $102.8 million, an increase (decrease) in the market rate of interest by 25 basis points would have an increased (decreased) annualized interest expense of $0.3 million. As of May 7, 2025, there are no interest rate risk management contracts outstanding.
Foreign exchange risk
Kelt is exposed to fluctuations of the Canadian to U.S. dollar exchange rate given realized pricing is directly influenced by U.S. dollar denominated benchmark pricing and from exposure from certain U.S. dollar denominated natural gas marketing arrangements.
As of May 7, 2025, the following foreign exchange risk management contracts are outstanding:
Foreign exchange derivative financial instrument swap contracts
| Contract Type | Notional Volume | Contract/Exercise Price | Remaining Term |
|---|---|---|---|
| CAD/USD swap | USD$7.0 million/month | $1.3796 CAD/USD | Apr 25 – Jun 25 |
| CAD/USD swap | USD$6.0 million/month | $1.3795 CAD/USD | Jul 25 – Dec 25 |
Foreign exchange derivative financial instrument option contracts
| Contract Type | Notional Volume | Contract/Exercise Price | Exercise/ expiration date | Term if exercised |
|---|---|---|---|---|
| Sold call option | USD$2.0 million/month | $1.3820 CAD/USD | Dec 31, 2025 | Jan 26 – Dec 26 |
| Sold call option | USD$2.0 million/month | $1.3800 CAD/USD | Dec 31, 2025 | Jan 26 – Dec 26 |
ROYALTIES
| (CA$ thousands, unless otherwise indicated) | Three months ended March 31 | ||
|---|---|---|---|
| 2025 | 2024 | % | |
| Royalties | 15,239 | 15,042 | 1 |
| Average royalty rate (1) | 10.9% | 12.4% | -12 |
| $ per BOE | 4.23 | 5.02 | -16 |
(1) The average royalty rate is calculated based on total royalties as a percentage of "P&NG Sales, before marketing revenue" 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 10.9% during the first quarter of 2025, compared to 12.4% during the first quarter of 2024. The decrease in the royalty rate in the first quarter of 2025 was primarily due to new Alberta wells that are eligible for an initial low royalty rate of five percent.
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
PRODUCTION EXPENSES
Quarterly Production Expenses
| Three months ended March 31 | |||
|---|---|---|---|
| (CA$ thousands, unless otherwise indicated) | 2025 | 2024 | % |
| Production expense | 34,352 | 31,220 | 10 |
| $ per BOE | 9.54 | 10.42 | -8 |
The Company incurred production expenses of $34.4 million during the first quarter of 2025, compared to $31.2 million in the first quarter of 2024. Production expenses per BOE decreased by 8% to $9.54 per BOE during the first quarter of 2025, compared to $10.42 per BOE in the same period in 2024. The decrease in production expenses per BOE for the three months ended March 31, 2025 was primarily due to a decrease in utility costs.
TRANSPORTATION EXPENSES
Quarterly Transportation Expenses
| Three months ended March 31 | |||
|---|---|---|---|
| (CA$ thousands, unless otherwise indicated) | 2025 | 2024 | % |
| Transportation expense (1) | 12,632 | 10,363 | 22 |
| $ per BOE | 3.51 | 3.46 | 1 |
(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 remained consistent at $3.51 per BOE during the first quarter of 2025, compared to $3.46 per BOE in the first quarter of 2024.
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
FINANCING EXPENSES
| Three months ended March 31 | |||
|---|---|---|---|
| (CA$ thousands, unless otherwise indicated) | 2025 | 2024 | % |
| Total interest expense | 2,017 | 390 | 417 |
| Accretion of decommissioning obligations | 800 | 719 | 11 |
| Total financing expense | 2,817 | 1,109 | 154 |
| Interest expense per BOE (1) | 0.56 | 0.13 | 331 |
(1) Interest expense used in the calculation of "Interest expense per BOE" includes interest and fees on bank debt.
At March 31, 2025, $102.8 million was drawn under the Company's credit facility, with outstanding letters of credit of $3.7 million. Total interest expense for the three months ended March 31, 2025 was $2.0 million.
Additional information regarding the credit facility is provided under the heading of "Capital Resources and Liquidity".
GENERAL AND ADMINISTRATIVE ("G&A") EXPENSES
The following table summarizes significant components of the Company's G&A expenses:
| Three months ended March 31 | |||
|---|---|---|---|
| (CA$ thousands, unless otherwise indicated) | 2025 | 2024 | % |
| Salaries and benefits | 4,355 | 3,906 | 11 |
| Other G&A expenses | 1,685 | 1,504 | 12 |
| Gross G&A expenses | 6,040 | 5,410 | 12 |
| Overhead recoveries | (2,438) | (1,936) | 26 |
| Net G&A expenses | 3,602 | 3,474 | 4 |
| Gross G&A ($ per BOE) | 1.68 | 1.81 | -7 |
| Net G&A ($ per BOE) | 1.00 | 1.16 | -14 |
Net G&A expenses per BOE decreased 14% to $1.00 per BOE in the first quarter of 2025, compared to $1.16 per BOE in the first quarter of 2024. The decrease in net G&A expenses per BOE was primarily due to higher production volumes which increased at a greater rate than the increase in G&A expenses.
G&A expenses are reported net of overhead recoveries; however, Kelt does not capitalize any direct G&A expenses.
SHARE BASED COMPENSATION ("SBC")
| Three months ended March 31 | |||
|---|---|---|---|
| (CA$ thousands, unless otherwise indicated) | 2025 | 2024 | % |
| Stock options | 1,265 | 1,226 | 3 |
| Restricted share units ("RSUs") | 883 | 731 | 21 |
| Total SBC expense | 2,148 | 1,957 | 10 |
| $ per BOE | 0.60 | 0.65 | -8 |
The increase in SBC expense for the three months ended March 31, 2025 compared to the same periods in 2024 is primarily due to the higher fair value associated with recent option and RSU grants.
As at March 31, 2025, stock options and RSUs outstanding represent 5.0% of total shares outstanding (December 31, 2024 – 6.0%).
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
DEPLETION AND DEPRECIATION
| Three months ended March 31 | |||
|---|---|---|---|
| (CA$ thousands, unless otherwise indicated) | 2025 | 2024 | % |
| Depletion and depreciation expense | 43,769 | 33,867 | 29 |
| $ per BOE | 12.15 | 11.31 | 7 |
Depletion and depreciation expense was $43.8 million for the quarter ended March 31, 2025 compared to $33.9 million in the same quarter in 2024. Depletion and depreciation expense per BOE increased 7% in the quarter ended March 31, 2025, primarily due to an increase in depletable assets and an increase in 1P reserves at December 31, 2024, which was partially offset by an increase in future development capital.
Based on its assessment as of March 31, 2025, the Company determined that there were no indicators of impairment for the Alberta CGU and BC CGU.
INCOME TAXES
| Three months ended March 31 | |||
|---|---|---|---|
| (CA$ thousands, unless otherwise indicated) | 2025 | 2024 | % |
| Deferred income tax expense | 6,192 | 5,697 | 9 |
| Net income before taxes | 25,171 | 17,544 | 43 |
| Effective tax expense rate | 24.6% | 32.5% | -24 |
Kelt's consolidated combined federal and provincial statutory tax rate averaged 23.0% during the three months ended March 31, 2025 and 2024. The Company is not expected to have any cash income taxes payable in 2025.
The Company's consolidated tax pools are estimated to be approximately $924.3 million as of March 31, 2025, an increase of 3% from December 31, 2024 as summarized in the table below.
| (CA$ thousands, unless otherwise indicated) | Rate | March 31
2025 |
| --- | --- | --- |
| Canadian oil and gas property expenses (“COGPE”) | 10-12% | 57,202 |
| Canadian development expenses (“CDE”) | 30-38% | 323,325 |
| Canadian exploration expenses (“CEE”) | 100% | 11,639 |
| Undepreciated capital cost (1) (“UCC”) | 25-31% | 290,367 |
| Non-capital losses (2) (“NCL”) | 100% | 241,760 |
| Estimated tax deductions available, end of period | | 924,293 |
(1) The majority of the Company's undepreciated capital cost deductions relate to Class 41 assets, which are deductible at a rate of 25-31% per year.
(2) The Company's non-capital losses expire in years 2033 to 2044.
ADJUSTED FUNDS FROM OPERATIONS
The following table provides a continuity of income and expenses included in the Company's calculation of operating netback and adjusted funds from operations generated during the three month periods ended March 31, 2025 and 2024, respectively.
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
THREE MONTHS ENDED MARCH 31ST
Amount
$/BOE
| (CAS thousands, unless otherwise indicated) | 2025 | 2024 | % | 2025 | 2024 | % |
|---|---|---|---|---|---|---|
| Petroleum and natural gas sales | 142,501 | 126,391 | 13 | 39.57 | 42.20 | -6 |
| Cost of purchases | (2,904) | (4,835) | -40 | (0.81) | (1.61) | -50 |
| Realized gain (loss) on derivate financial instruments (1) | 6,372 | (1) | - | 1.77 | - | - |
| Royalties | (15,239) | (15,042) | 1 | (4.23) | (5.02) | -16 |
| Production expense | (34,352) | (31,220) | 10 | (9.54) | (10.42) | -8 |
| Transportation expense | (12,632) | (10,363) | 22 | (3.51) | (3.46) | 1 |
| Operating netback (2) | 83,746 | 64,930 | 29 | 23.25 | 21.69 | 7 |
| Financing expense (3) | (2,017) | (390) | 417 | (0.56) | (0.13) | 331 |
| G&A expense | (3,602) | (3,474) | 4 | (1.00) | (1.16) | -14 |
| Gain (loss) on foreign exchange | 73 | 35 | 109 | 0.02 | 0.01 | 100 |
| Other income | 14 | 75 | -81 | - | 0.03 | -100 |
| Adjusted funds from operations (2) | 78,214 | 61,176 | 28 | 21.71 | 20.44 | 6 |
| Basic ($ per common share) (4) | 0.40 | 0.31 | 29 | |||
| Diluted ($ per common share) (4) | 0.39 | 0.31 | 26 |
(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 obligation.
(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 March 31, 2025, adjusted funds from operations increased by 28% to $78.2 million ($0.39 per common share, diluted) compared to $61.2 million ($0.31 per common share, diluted) during the first quarter of 2024. Adjusted funds from operations per BOE increased by 6% to $21.71 per BOE in the first quarter of 2025 from $20.44 per BOE in the first quarter of 2024. The increase in adjusted funds from operations per BOE was primarily due to a reduction in royalties of 16% to $4.23 per BOE, a reduction in production expenses of 8% to $9.54 per BOE, and a realized gain on derivative financial instruments of $6.4 million in the first quarter of 2025.
NET INCOME AND COMPREHENSIVE INCOME
Change in Net Income
Three months ended March 31, 2025
(1) Operating expenses include production expense, transportation expense, exploration and evaluation expense, and cost of purchases
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
| Three months ended March 31 | |||
|---|---|---|---|
| (CA$ thousands, unless otherwise indicated) | 2025 | 2024 | % |
| Net income and comprehensive income | 18,979 | 11,847 | 60 |
| $ per common share, basic | 0.10 | 0.06 | 67 |
| $ per common share, diluted (1)(2) | 0.09 | 0.06 | 50 |
| $ per BOE | 5.26 | 3.97 | 32 |
| Weighted average shares outstanding, basic (000s) | 197,531 | 194,655 | 1 |
| Weighted average shares outstanding, diluted (000s) (1) | 200,525 | 198,285 | 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.
Kelt reported net income of $19.0 million ($0.09 per common share, diluted) for the three months ended March 31, 2025, compared to net income of $11.8 million ($0.06 per common share, diluted) during the three months ended March 31, 2024. The increase in net income in 2025 was primarily due higher adjusted funds from operations, partially offset by higher depletion and depreciation expenses.
INVESTING ACTIVITIES
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
CAPITAL EXPENDITURES
The Company's capital expenditures, net of acquisitions and dispositions ("A&D"), are summarized in the following table:
| Three months ended March 31 | |||
|---|---|---|---|
| (CA$ thousands, unless otherwise indicated) | 2025 | 2024 | % |
| Capital expenditures: | |||
| Lease acquisition and retention | 267 | 144 | 85 |
| Geological and geophysical | 10,730 | 193 | 5,460 |
| Drilling and completion of wells | 48,644 | 43,000 | 13 |
| Facilities, pipeline and well equipment | 45,073 | 35,937 | 25 |
| Corporate assets | 32 | 238 | -87 |
| Capital expenditures, before A&D (1) | 104,746 | 79,512 | 32 |
| Property acquisitions | - | 1,051 | -100 |
| Property dispositions | - | (382) | -100 |
| Capital expenditures, net of A&D (1) | 104,746 | 80,181 |
(1) Refer to advisories regarding "Non-GAAP and Other Financial Measures".
Capital expenditures, before A&D increased 32% in the first quarter of 2025 compared to the same quarter in 2024. Drilling and completion costs of $48.6 million in the first quarter of 2025 included the drilling of 10.6 net wells and the completion of 6.6 net wells. Kelt's facility, pipeline and well equipment expenditures were $45.1 million in the first quarter of 2025. The Company incurred $10.7 million in 2025 on a 3-D seismic program at its Oak property.
| Three months ended March 31 | |||
|---|---|---|---|
| Gross wells | 2025 | 2024 | % |
| Drilling | 15 | 10 | 50 |
| Completion | 9 | 3 | 200 |
| Service | - | 1 | -100 |
| Three months ended March 31 | |||
| --- | --- | --- | --- |
| Net wells | 2025 | 2024 | % |
| Drilling | 10.6 | 8.1 | 31 |
| Completion | 6.6 | 3.0 | 120 |
| Service | - | 1.0 | -100 |
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.
The Company has a $250.0 million credit facility from a syndicate of financial institutions. At March, 31, 2025 $102.8 million was drawn under the Credit Facility, with outstanding letters of credit of $3.7 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.
MANAGEMENT'S DISCUSSION & ANALYSIS
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 375 basis points depending upon the Net Debt to Cash Flow ratio of between less than 0.5 times and three times. Under the Credit Facility, borrowings through the use of CORRA term loans are also available. Stamping fees fluctuate based on a pricing grid and range from 2.75% to 4.75%, depending upon the Net Debt to Cash Flow ratio of between less than 0.5 times and three times.
| March 31, 2025 | December 31, 2024 | |
|---|---|---|
| Bank debt | 102,766 | 108,993 |
| Accounts payable and accrued liabilities | 114,718 | 80,463 |
| Cash and cash equivalents | (89) | (228) |
| Accounts receivable and accrued sales | (64,159) | (60,236) |
| Prepaid expenses and deposits | (3,212) | (4,109) |
| Net debt (1) | 150,024 | 124,883 |
| Adjusted funds from operations (1)(2) | 239,016 | 221,978 |
| Net debt to adjusted funds from operations ratio (1) | 0.6 | 0.6 |
(1) Refer to advisories regarding Capital Management Measures.
(2) 12-month trailing adjusted funds from operations.
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 March 31, 2025:
| Within 1 Year | 1 to 5 Years | More than 5 Years | Total | |
|---|---|---|---|---|
| Accounts payable and accrued liabilities | 114,718 | - | - | 114,718 |
| Derivative financial instruments | 9,303 | - | - | 9,303 |
| Lease liability | 1,650 | 505 | - | 2,155 |
| Bank debt and estimated interest (1) | 6,269 | 102,766 | - | 109,035 |
| Total | 131,940 | 103,271 | - | 235,211 |
(1) Estimated interest for future years related to the Credit Facility was calculated using the weighted average interest rate of 6.1% for the quarter ended March 31, 2025, applied to the principal balance outstanding as at that date.
COMMITMENTS
As of March 31, 2025, the Company is committed to future payments under the following agreements:
| 2025 | 2026 | 2027 | 2028 | 2029 | Thereafter | |
|---|---|---|---|---|---|---|
| Firm processing commitments | 39,588 | 72,132 | 72,538 | 74,713 | 73,606 | 409,380 |
| Firm transportation commitments | 32,380 | 47,028 | 42,622 | 41,239 | 37,303 | 141,979 |
| Total annual commitments | 71,968 | 119,160 | 115,160 | 115,952 | 110,909 | 551,359 |
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
SHARE INFORMATION
The Company is authorized to issue an unlimited number of common shares and an unlimited number of preferred shares. As at March 31, 2025 there were 198.6 million common shares issued and outstanding; there are no preferred shares issued or outstanding.
The Company's common shares trade on the TSX under the symbol "KEL". During the first three months of 2025, 26.4 million common shares traded on the TSX at a weighted average price of $6.70 per common share, compared to the volume weighted average trading price of $6.14 per common share during the year ended December 31, 2024.
As at March 31, 2025, officers, directors, and employees have been granted options to purchase 8.7 million common shares of the Company at an average exercise price of $4.78 per common share. In addition, there are 1.2 million RSUs outstanding. Additional information regarding the Company's stock options and RSUs is included in note 8 of the interim financial statements.
OFF-BALANCE SHEET TRANSACTIONS
The Company did not engage in any off-balance sheet transactions during the periods ended March 31, 2025 and 2024.
SUMMARY OF QUARTERLY RESULTS
The following tables summarize the Company's financial and operating results over the past eight quarters:
| (CAS thousands, except as otherwise indicated) | Q1 2025 | Q4 2024 | Q3 2024 | Q2 2024 | Q1 2024 | Q4 2023 | Q3 2023 | Q2 2023 |
|---|---|---|---|---|---|---|---|---|
| Revenue | 127,262 | 115,512 | 94,985 | 91,849 | 111,349 | 111,062 | 101,480 | 102,589 |
| Cash provided by operating activities | 86,929 | 48,067 | 52,166 | 46,419 | 62,493 | 62,477 | 52,424 | 68,163 |
| Adjusted funds from operations (1) | 78,214 | 69,406 | 48,939 | 42,457 | 61,176 | 66,618 | 58,772 | 58,810 |
| Per share – basic ($/common share) (1) | 0.40 | 0.35 | 0.25 | 0.22 | 0.31 | 0.34 | 0.30 | 0.31 |
| Per share – diluted ($/common share) (1) | 0.39 | 0.35 | 0.24 | 0.21 | 0.31 | 0.33 | 0.30 | 0.30 |
| Net income and comprehensive net income | 18,979 | 13,800 | 8,871 | 10,905 | 11,847 | 23,729 | 20,060 | 25,799 |
| Per share – basic ($/common share) | 0.10 | 0.07 | 0.05 | 0.06 | 0.06 | 0.12 | 0.10 | 0.13 |
| Per share – diluted ($/common share) | 0.09 | 0.07 | 0.04 | 0.05 | 0.06 | 0.12 | 0.10 | 0.13 |
| Capital expenditures, net of A&D (1) | 104,746 | 97,046 | 82,110 | 73,810 | 80,181 | 62,695 | 98,287 | 45,035 |
| Total assets | 1,512,752 | 1,450,679 | 1,378,621 | 1,328,148 | 1,282,456 | 1,260,292 | 1,222,412 | 1,174,609 |
| Bank debt | 102,766 | 108,993 | 45,428 | 12,611 | - | - | - | - |
| Net debt (1) | 150,024 | 124,883 | 95,889 | 63,084 | 31,961 | 12,997 | 15,917 | (18,580) |
| Shareholders' equity | 1,086,264 | 1,063,004 | 1,046,142 | 1,033,204 | 1,018,604 | 1,003,663 | 976,146 | 948,215 |
| Average daily production (BOE/d) | 40,015 | 36,450 | 32,378 | 30,693 | 32,910 | 32,344 | 28,179 | 29,705 |
| Combined net realized price ($/BOE) (1)(2) | 40.53 | 37.01 | 35.86 | 37.18 | 40.59 | 41.78 | 42.68 | 38.64 |
| Operating netback ($/BOE) (1) | 23.25 | 21.80 | 17.91 | 16.55 | 21.69 | 23.49 | 23.36 | 22.55 |
| Operating netback % of combined net realized price (2) | 57% | 59% | 50% | 45% | 53% | 56% | 55% | 58% |
(1) Refer to advisories regarding "Non-GAAP and Other Financial Measures".
(2) In this table, combined net realized prices are after derivative financial instruments.
In 2023 and 2024, crude oil demand and supply remained relatively balanced, resulting in a range bound crude oil benchmark price.
North American benchmark natural gas prices in 2023 were impacted by higher than historical average inventory levels which continued into 2024 with a warmer than average 2023/2024 winter and record high North American natural gas production. A colder than average 2024/2025 winter, which, combined with additional LNG export capacity in the US coming on-stream in 2025, resulted in rising US national gas prices in 2025. Canadian benchmark
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
natural gas prices in 2024 were lower than historical norms as natural gas inventory levels remained elevated, however AECO benchmark prices increased in 2025.
Kelt's business objective is for long-term profitable growth by implementing a full cycle exploration and development program. Over the past eight quarters, Kelt has focused its cash provided from operating activities on its development capital program which has resulted in higher average daily production and adjusted funds from operations.
Refer to the "Financial and Operating Summary" section of this MD&A for further discussion. Additional information relating to Kelt, including the Company's MD&A for previous quarters, is filed on SEDAR+ and can be viewed at www.sedarplus.ca.
OUTLOOK AND GUIDANCE
As of the date of this MD&A, management has updated its 2025 guidance from January 6, 2025 to incorporate revised commodity price assumptions and first quarter results.
| (CA$ millions, except as otherwise indicated) | Current 2025 Budget | Previous 2025 Guidance (January 6, 2025) | % Change to Current 2025 Budget |
|---|---|---|---|
| Average Production (2) | |||
| Oil and NGLs (bbls/d) | 16,500 – 18,000 | 16,500 – 18,000 | - |
| Gas (MMcf/d) | 165 – 174 | 165 – 180 | -2 |
| Combined (BOE/d) | 44,000 – 47,000 | 44,000 – 48,000 | -1 |
| Forecasted Average Commodity Prices | |||
| WTI oil price (US$/bbl) | 63.00 | 69.00 | -9 |
| Canadian Light Sweet ($/bbl) | 82.75 | 91.55 | -10 |
| NYMEX natural gas price (US$/MMBtu) | 3.90 | 3.25 | 20 |
| AECO natural gas price ($/GJ) | 2.46 | 2.27 | 8 |
| Station 2 natural gas price ($/GJ) | 1.85 | 2.14 | -14 |
| Average Exchange Rate (US$/CA$) | 0.715 | 0.7100 | 1 |
| Capital Expenditures, net of A&D (1) | 325.0 | 328.0 | -1 |
| Petroleum and natural gas sales | 611.0 | 671.2 | -9 |
| Adjusted funds from operations (1) | 325.0 | 345.0 | -6 |
| Per common share, diluted (1) | 1.60 | 1.70 | -6 |
| Net debt (1) (3) | 126.0 | 110.0 | 15 |
| Weighted average common shares outstanding (millions) (1) | 198.7 | 198.7 | - |
(1) Refer to advisories regarding "Non-GAAP and Other Financial Measures".
(2) Percent change for production is calculated on the mid-point of each production range.
(3) Kelt adjusted its Net debt to $110.0 million from $100.0 million in its April 2025 external corporate presentation.
Forecasted average production for 2025 is estimated to be approximately 44,000 to 47,000 BOE per day, a decrease of 2% from the previous 2025 forecasted production. The decrease in forecasted production is a result of a delay in the start-up of a third-party natural gas processing facility at Wembley.
WTI crude oil prices are forecasted to average US$63.00 per barrel, a decrease of 9% from the Company's previous guidance. Forecasted AECO natural gas prices have been increased by 8% to average $2.46 per GJ, and forecasted Station 2 natural gas prices has been revised down 14% to average $1.85 per GJ. After giving effect to the changes in production and commodity price assumptions, Kelt is forecasting adjusted funds from operations to be $325.0 million, a decrease of 6% from its previous forecast of $345.0 million.
Capital expenditures, net of A&D, decreased to $325.0 million for 2025 from $328 million previously. Net debt at December 31, 2025 is estimated to be $126.0 million, an increase from $110.0 million in the previous guidance.
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
A 10% increase/decrease in the Company's forecasted average oil/NGLs price for the nine months remaining in 2025 would increase/decrease forecasted adjusted funds from operations in 2025 by approximately $17.7 million. A 10% increase/decrease in the Company's average natural gas price forecasted for the nine months remaining in 2025 would increase/decrease adjusted funds from operations in 2025 by approximately $11.7 million.
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 outlined in note 2 of the December 31, 2024 audited annual consolidated financial statements.
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.
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 changes to the Company's internal controls over financial reporting during the interim period from January 1, 2025 to March 31, 2024 that have materially affected, or are reasonably likely to materially affect the Company's internal controls over financial reporting.
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.
NON-GAAP AND OTHER FINANCIAL MEASURES
This MD&A contains certain non-GAAP financial measures and other specified financial measures, as described below, which do not have standardized meanings prescribed by GAAP and do not have standardized meanings under the applicable securities legislation. As these non-GAAP, and other specified financial measures are commonly used in the oil and gas industry, the Company believes that their inclusion is useful to investors. The reader is cautioned that these amounts may not be directly comparable to measures for other companies where similar terminology is used.
NON-GAAP FINANCIAL MEASURES
P&NG sales 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
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
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 Net 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, except as otherwise indicated as being after derivative 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 and operating netback from P&NG sales, which is a GAAP measure.
Capital expenditures
"Capital expenditures, before A&D" and "Capital expenditures, net of A&D" are measures the Company uses to monitor its investment in exploration and evaluation, investment in property plant and equipment, and net investment in acquisition and disposition activities. The most directly comparable GAAP measure is "Cash used in investing activities", and is calculated as follows:
| Three months ended March 31 | ||
|---|---|---|
| (CA$ thousands, except as otherwise indicated) | 2025 | 2024 |
| Cash used in investing activities | 82,758 | 76,389 |
| Change in non-cash investing working capital | 21,988 | 3,792 |
| Capital expenditures, net of A&D | 104,746 | 80,181 |
| Property acquisitions | - | (669) |
| Capital expenditures, before A&D | 104,746 | 79,512 |
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
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
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:
| Three months ended March 31 | ||
|---|---|---|
| 2025 | 2024 | |
| Cash provided by operating activities | 86,929 | 62,493 |
| Change in non-cash working capital | (9,241) | (2,266) |
| Funds from operations | 77,688 | 60,227 |
| Settlement of decommissioning obligations | 526 | 949 |
| Adjusted funds from operations | 78,214 | 61,176 |
Net debt (surplus) and net debt (surplus) to adjusted funds from operations ratio
Management considers net debt (surplus) and 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 financial instruments, royalties, production expenses, transportation expenses, financing expenses, gross and net G&A expenses, realized loss (gain) on foreign exchange, other income (expense), share based compensation expense, and depletion and depreciation expense 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 net income per share (basic and diluted) is calculated by dividing the amounts by the basic weighted average common shares outstanding.
BUSINESS RISKS
The business of exploration, development, production and acquisition of oil and gas reserves involves a number of uncertainties. As a result, the Company is exposed to certain business risks inherent in the oil and gas industry which may impact the Company's operations or financial results. A discussion of business risks, as well as economic and industry factors affecting the Company is included in Kelt's annual MD&A for the year ended December 31, 2024, dated March 12, 2025.
Additional information is included in Kelt's Annual Information Form dated March 12, 2025 which can be found at www.sedarplus.ca.
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
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 2025. 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, the scope and duration of export tariffs, export restrictions, or import tariffs on commodities that Kelt sells, or products that Kelt uses in its supply chains, 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.
Any forward-looking information or financial outlook set out herein does not include any potential impact of tariffs or trade-related regulations that have been announced by the U.S. and Canada.
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 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 McDaniel, 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
KELT EXPLORATION LTD.
MANAGEMENT'S DISCUSSION & ANALYSIS
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; its expected oil and NGLs weighting; the start-up date of the postponed wells; the cost and timing of future capital expenditures and expected results; the expected timing of wells bring brought on-production; the expected timing of production additions from capital expenditures; the ability to show significant production growth; the expected reductions in drill and complete costs; the expected timing and processing capacity from the start-up of a third party facility; the expected timing of when the Company shoots its 3-D seismic program; and the Company's expected future financial position and operating results.
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.
ADDITIONAL INFORMATION
Additional information relating to Kelt, including the Company's Annual Information Form ("AIF") dated March 12, 2025 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.
MANAGEMENT'S DISCUSSION & ANALYSIS
KELT EXPLORATION LTD.
24
MANAGEMENT'S DISCUSSION & ANALYSIS
ABBREVIATIONS
| A&D | Acquisitions and dispositions | NGX | Natural Gas Exchange Inc. (Canada) |
|---|---|---|---|
| AECO | Alberta Energy Company “C” Meter Station of the NOVA Pipeline System | NGTL | Nova Gas Transmission Line |
| AT | After income taxes | NIT | NOVA Inventory Transfer (“AB-NIT”), being the reference price at the AECO Hub |
| bbls | barrels | NYMEX | New York Mercantile Exchange |
| bbls/d | barrels per day | Oil | Oil includes crude oil and field condensate |
| bcf | billion cubic feet | OPEC+ | The Organization of Petroleum Exporting Countries along with 10 additional oil-producing countries |
| BOE | barrels of oil equivalent | ||
| BOE/d | barrels of oil equivalent per day | P&NG | Petroleum and Natural Gas |
| BT | Before income taxes | Q1 | First quarter ended March 31^{st} |
| CA$/CAD | Canadian Dollar | Q2 | Second quarter ended June 30^{th} |
| CORRA | Canadian Overnight Repo Rate Average | Q3 | Third quarter ended September 30^{th} |
| Dawn | Gas traded at Union Gas' Dawn Hub in Dawn Township, Ontario | Q4 | Fourth quarter ended December 31^{st} |
| SBC | Share Based Compensation | ||
| E&E | Exploration and Evaluation | SEDAR+ | System for Electronic Document Analysis and Retrieval |
| FDC | Future Development Capital | Station 2 | Spectra Energy receipt location |
| G&A | General and Administration | TSX | Toronto Stock Exchange |
| GJ | gigajoules | US$/USD | United States dollar |
| LNG | Liquefied Natural Gas | WTI | West Texas Intermediate |
| Mbbls | thousand barrels | YTD | Year to date |
| MBOE | thousand barrels of oil equivalent | 1P | Proved reserves |
| Mcf | thousand cubic feet | 2P | Proved plus probable reserves |
| 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 | ||
| NGLs | Natural Gas Liquids |
CONVERSION OF UNITS
| Imperial = Metric | 1 Mcf = 28.2 cubic metres | Natural gas is equated to oil on the basis of 6 Mcf = 1 BOE |
|---|---|---|
| 1 acre = 0.4 hectares | 0.035 Mcf = 1 cubic metre | |
| 2.5 acres = 1 hectare | 1 mile = 1.61 kilometres | Sulphur is equated to gas on the basis of 1LT = 10 Mcf (1 BOE = 0.6 LT) |
| 1 bbl = 0.159 cubic metres | 0.62 miles = 1 kilometre | |
| 6.29 bbls = 1 cubic metre | 1 MMBtu = 1.054 GJ | |
| 1 foot = 0.3048 metres | 0.949 MMBtu = 1 GJ | |
| 3.281 feet = 1 metre |
KELT EXPLORATION LTD.
25
MANAGEMENT'S DISCUSSION & ANALYSIS
CORPORATE INFORMATION
BOARD OF DIRECTORS
William C. Guinan 5, 8, 9
Board Chair, Independent
Jennifer Haskey 2, 6, 10
Director, Independent
Ray Kwan 1, 7
Director, Independent
Neil G. Sinclair 4, 8, 10
Director, Independent
Janet E. Vellutini 3, 6, 7
Director, Independent
David J. Wilson 9
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
AUDITOR
PricewaterhouseCoopers LLP
Suite 3100, 111 Fifth Avenue S.W.
Calgary, Alberta T2P 5L3
EVALUATION ENGINEER
McDaniel & Associates Consultants Ltd
2000, 525 8th Ave SW
Calgary, Alberta T2P 1G1
STOCK EXCHANGE LISTING
Toronto Stock Exchange
Common shares "KEL"
kelt
exploration
SUITE 300, EAST TOWER
311 SIXTH AVENUE SOUTH WEST
CALGARY, ALBERTA T2P 3H2