In October 2012, Kelt Exploration Ltd. was formed in a spin-off after ExxonMobil acquired Celtic Exploration Ltd. Its growth in production since that time has been impressive. The operational base is now very robust, but Q2 2015 results do highlight an increase in operational expenses caused by the growth strategy based around acquisitions employed by Kelt since the start of 2014.

Overview of Kelt’s Growth Since Start of Operations

Source: CanOils

This is undoubtedly steady, aggressive growth. The company has been consistently moving up in the rankings of production by Canadian companies. In CanOils’ latest Top 100 Oil & Gas Companies report, the company is the 34th highest producing TSX listed company in Q2 and the 30th highest TSX producer with assets in Canada.

The main strategy for the growth has been acquisitions and as of July 2015 – according to CanOils Assets data – the company was participating in 1,246 active wells across Alberta and British Columbia.

Kelt Exploration Ltd. – Active Wells as of July 31, 2015 (1,246 wells)

Source: CanOils Assets Webmap – Click here for Map Legend

Analysis using data from the CanOils M&A database reveals that Kelt has completed a grand total of approximately $710 million worth of acquisitions since the start of 2013, which is composed of 43% cash, 39% stock and 18% debt assumption. In this time, Kelt has acquired two companies – Capio Exploration Ltd. in July 2014 and Artek Exploration Ltd. in April 2015. It also completed a major asset acquisition from Penn West Petroleum Ltd. in December 2013 to establish one of its core areas. So far in 2015, besides the Artek deal, the company has completed two other minor deals for a total of around $15 million (the company acquired assets from TAQA and Enerplus Corp; see note 1.)

The three deals in 2015 were chiefly targeted at giving Kelt a more consolidated ownership position over its core properties and surrounding infrastructure. Analysis of data from CanOils Assets shows that acquiring Artek, for example, involved interests in 313 oil and gas wells that were still listed as active in July 2015 – Kelt already had an interest in 181 (58%) of these wells prior to the acquisition (see note 2). The acquisition was completed at a very reasonable cost as well, with normalised consideration per boe of $32,810 for production and $7.37 for proved reserves (see note 3).

Following these recent deals, according to Kelt’s August 2015 corporate presentation, the company’s average working interest of its developed properties is 58% and for its undeveloped acreage the average working interest is 82%. So the acquisitions have increased the ownership over its current production and as more and more of its undeveloped properties are brought onstream, this ownership level and therefore control over its own production will rise. The deals have also increased the company’s oil weighting to give Kelt a more balanced portfolio to work with. The company’s production in Q2 2015 was 36% oil, a significant increase from Q1 2014’s 30%.

The moves to consolidate ownership in wells and infrastructure in key producing areas as well as the move to a more balanced oil-to-gas portfolio would normally make a lot of sense. The company will be more in control of its own destiny while also enjoying more flexibility to cope with negative price movements in either oil or gas.

Operating Expenses per Barrel

However, the speed of this consolidation and movement to a balanced portfolio has caused operating expenses per barrel to increase very quickly. While commodity prices remain low, these expenses are vital to keep under control. Below is a chart of the Q2 2015 operating expenses per barrel for Kelt and eight other Canadian companies that produce between 10,000-50,000 boe/d with an oil weighting of between 25%-50% (Kelt’s oil weighting in Q2 2015 was 36%). The nine companies ranked between 22nd and 54th in the most recent CanOils’Top 100 Oil & Gas Companies report (see note 4).

Source: CanOils

Kelt recorded the highest operating expense per barrel of this peer group at $13.58. Kelt lists three reasons in its quarterly report for the high costs:

  • Movement towards oil weighted assets
  • Third party downtime reducing production by 1,630 boe/d
  • ‘Initial integration’ of Artek properties

The first two reasons will obviously have contributed to the number being higher than in the past for Kelt itself, but neither can be the main reason for the company operating at much higher costs than its peers. Firstly, the other companies in the peer group all have an oil weighting similar to Kelt’s current portfolio, so this cannot be the main reason for Kelt’s higher operating expenses per boe produced. Secondly, if the third party downtime did not happen and the 1,630 boe/d of production was not lost, Kelt’s operating expense per barrel would still have been second highest of the peer group at $12.53. Location of assets could, of course, play a part here as some of the eight companies operate in completely different areas to Kelt, but as Paramount Resources Ltd., for example, has a large asset base in and around Kelt’s operations with a similar overall production mix (40% oil in Q2 2015) and enjoys much lower costs, again this cannot be a hugely significant factor.

Therefore, it must be the integration of the Artek assets and the other properties acquired to sharply increase production levels over the past 18 months that contribute to the company’s high expenses. The use of the phrase ‘initial integration’ and further notes in the company’s quarterly report suggest that Kelt management is viewing these high costs as a temporary issue. In low price environments, keeping operating expenses under control is essential for achieving and maintaining any sort of profit. Kelt shareholders will no doubt be hoping that the company’s high operating expenses are indeed as temporary as company rhetoric suggests, so that Kelt can actually succeed with this strong base of operations it has quickly put together since formation.


  1. The selling companies for both of these deals were deduced from CanOils Assets data and not reported by Kelt itself.
  2. The figures here only include oil and gas wells. The acquisition of Artek also involved 18 wells that were not oil and gas wells, but instead were disposal, drainage or injection wells. Kelt only had an interest in 1 of these 18 wells prior to acquiring Artek, a water disposal well.
  3. Normalised deal metrics for production and proved reserves are calculated for all relevant deals in the CanOils M&A database. To calculate these metrics, CanOils will remove the estimated value of any probable, possible, contingent and prospective resources, as well as any values of undeveloped land, large tax pools and non-E&P assets involved in the deal, from the total acquisition cost before calculating the amount that companies are paying per barrel for production and proved reserves in a transaction.
  4. PrairieSky Royalty Ltd. (TSX:PSK) was the only company in CanOils’ Top 100 Oil & Gas Companies report for Q2 2015 that fits the criteria for the chart that was not included. As a company that holds royalty interests only, it does not report operating expenses in the same way that the other companies do. With 17,205 boe/d, PrairieSky was the 39th biggest producer on the TSX for Q2 2015.
  5. All $ values refer to Canadian Dollars.

This article is for information and discussion purposes only and does not form a recommendation
to invest or otherwise. The value of an investment may fall. The investments referred to in this
article may not be suitable for all investors, and if in doubt, an investor should seek advice from
a qualified investment adviser. More

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