ConocoPhillips to purchase select British Columbia assets from Kelt
Kelt Exploration Ltd. has entered into an agreement to sell its Inga/Fireweed/Stoddart assets in British Columbia that are held by its wholly owned subsidiary, Kelt Exploration (LNG) Ltd., to ConocoPhillips.
Kelt will receive cash proceeds of $510.0 million, prior to closing adjustments, and the Purchaser will assume certain specific financial obligations related to the Inga Assets in the amount of approximately $41.0 million.
All of the Company's remaining British Columbia assets, including the Montney lands at Oak/Flatrock will remain with Kelt LNG.
The effective date for the transaction is July 1, 2020. Completion of the transaction is subject to customary closing conditions, including receipt of regulatory approvals, including under the Competition Act (Canada). Closing is expected to occur on or around August 21, 2020.
Kelt has a large inventory of future drilling locations for which the net present value was not being reflected in the Company's current valuation. As a result, the Company's board of directors has determined that the sale of its Inga Assets, representing a monetization of approximately 27% of the Company's Montney acreage, is an opportunity to bring forward the value of certain assets and at the same time put the Company in a position of increased financial strength during an uncertain economic environment. Kelt's remaining Montney land holdings of 374,528 net acres (585 net sections) continues to place the Company as one of the largest Montney players in the Western Canadian Sedimentary Basin.
Kelt, pro-forma the completion of the sale of its Inga Assets, will be in a strong financial position with no debt and a large Montney land acreage position to grow the Company's production base as commodity prices improve. In addition to its three remaining Montney play areas, the Company will also be in a position to develop its Charlie Lake play in Alberta.
A comparision of Kelt pre and post completion of the asset sale transaction is summarized in the following table:
CURRENT ECONOMIC ENVIRONMENT AND COVID-19 PANDEMIC UPDATE
Kelt is providing a corporate update in response to the current market conditions resulting from the COVID-19 pandemic. Kelt's highest priority remains the health and safety of its employees, partners and the communities where it operates. The Company continues to implement measures to protect the well-being of these stakeholders and is proud of the dedication of its workforce to maintain safe operations and business continuity in a challenging environment.
The unprecedented impact to global oil demand destruction resulting from the COVID-19 pandemic resulted in a collapse in crude oil prices around the world. The WTI crude oil price averaged US$16.55 per barrel during the month of April 2020, the lowest monthly average price since March 1999. In recent weeks, many regions around the world have started to phase in a return to opening up their economies and as a result, crude oil prices have recovered from recent low levels as global oil demand slowly returns. WTI crude oil averaged US$38.31 per barrel during the month of June 2020, an increase of 131% from the April 2020 average price.
As producers shut in certain oil and gas wells during the pandemic, North American gas supply was reduced considerably. However, the pandemic resulted in global gas demand destruction which in turn negatively impacted North American LNG exports. As a result, natural gas prices have dropped significantly in most North American gas hubs as gas storage levels are running significantly ahead of historical levels for this time of the year. Kelt was proactive with its hedging program and is currently in a position to offset lower priced physical gas sales with its financial gas swaps. The Company has fixed the price on 45,000 MMBtu per day of NYMEX Henry Hub natural gas at a price of CAD $2.83 per MMBtu for the period from April to November 2020. In addition, Kelt has fixed the NYMEX-AECO differential on 25,000 MMBtu per day at USD $0.4675 per MMBtu for the period from June to October 2020.
In addition to its gas hedging program, Kelt has fixed the price on 3,000 barrels per day of MSW light oil at a price of CAD $31.36 per barrel for the period from July to December 2020. This hedge position protects the Company from the potential of decreasing WTI crude oil prices (in the event of further oil demand destruction from a potential second wave of economy lock downs), widening WTI-MSW differentials (in the event of major oil export pipeline interruptions) and the potential of a strengthening Canadian dollar relative to the US dollar.
Kelt will continue to monitor oil and gas prices and watch for improvements in the economic outlook, as the Company expects to be in a strong financial position to re-commence drilling and completion operations at Wembley/Pipestone (Alberta) where the Company owns 107,155 net acres (167 sections) of Montney rights, at Oak/Flatrock (British Columbia) where the Company owns 203,661 net acres (318 sections) of Montney rights and in Alberta where the Company owns 74,719 net acres (116 sections) of Charlie Lake rights.
Kelt will continue to reassess its ability to reasonably estimate and provide annual financial guidance and plans to continue to provide corporate updates during this period of heightened commodity price volatility and economic uncertainty.