Kelt on New Gas Infrastructure and Strategic Optionality

Voiceover:
Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Aaron Bilkoski:
Today we're at the second annual TD Cowen Energy Conference in New York. We're having a series of conversations with leaders who are shaping Canada's energy landscape. Today I'm with Sadiq Lalani, whose CFO of Kelt Exploration. After building their predecessor company Celtic Exploration, it was ultimately sold to ExxonMobil. Sadiq went back to work and since is growing Kelt into a very disciplined, opportunity-rich Montney producer with massive inventory and optionality.
Sadiq, thanks for joining me today.
Sadiq Lalani:
Thank you, Aaron. Happy to be here.
Aaron Bilkoski:
People who aren't familiar with Kelt should get a little bit of an introduction. Tell me about Kelt. Where does it fit into the Canadian landscape?
Sadiq Lalani:
Absolutely. So Aaron mentioned the sale of Celtic Exploration. We sold that company in February of 2013. As part of that transaction when we sold Celtic to Exxon, we spun out about 3000 BOEs a day of production that was valued at $140 million into a spin out. So the shareholder of Celtic got cash and they got half a share in this new spin out, which became Kelt Exploration.
So Kelt Exploration kicked off with that initial asset. And today, after a series of strategic acquisitions and mostly internal organic growth through Crown land sales, we've now grown the company up to 50,000 BOEs a day, exit this this year. We've set the company up with three divisions. So we're primarily a Montney company. The three divisions include Wembley and Pouce Coupe in Alberta, and the Oak asset in BC.
Aaron Bilkoski:
So when you think about how capital is being spent, I think a lot of the attention recently has gone to the Wembley/Pipestone area. There has been a ton of consolidation in that area. And then over in BC, you have the dryer gas Oak/Flatrock assets. How should we think about how you plan to spend capital over the next five years between those two areas?
Sadiq Lalani:
Yeah, absolutely. So you're correct in mentioning that Wembley was the big capital spend area. Basically, we have 170 sections of Montney rights there and we wanted to delineate these lands, which is what we've been doing over the past few years. We signed up for gas processing at three different mid-streamer plants. And the most recent one just came on, which puts us up 80% of our production over and above the original base production there with this new plant.
We've got one more plant coming on in December. It's Pipestone II, which is an expansion to an existing plant that we produce to. At that point, we will have reached our maximum capacity at Wembley. So initially, what we'll do is we'll drill enough wells to keep the production flat there. We will talk to mid-streamers about expanding their plants in the future. But while we're doing that, we'll shift some capital over to Oak. And the reason we haven't spent ... We've got a bigger block at Oak, we've got 300 sections there. The reason we haven't been spending money at Oak is we've had really weak Station 2 prices, which is where most of that gas goes to.
Over the next six months or so, we're going to see a ramp up in LNG Canada exports, and that gas is literally coming off the continent and will help Station 2 pricing. So we feel confident with this uptick in Station 2 pricing that we'll see more capital go into Oak over the next couple years here.
Aaron Bilkoski:
You alluded to the new facility, which is the CSV Albright facility. It's now on stream. How has it been running since it officially started?
Sadiq Lalani:
Yeah, it's been running pretty good for a new startup. This plant is pretty unique in that it's a sulfur recovery plant. Most of the sour gas plants in Alberta that have been built in recent years have acid gas injection. You're basically injecting the acid gas back into the ground and there's a cost to do that. With this new Albright plant, we actually produce the sulfur. Sulfur right now has taken off. There's a shortage of sulfur around the world. If you look at supply-demand in USA, in Asia and in Europe, there is more demand for sulfur than there is supply out there. So the timing is perfect. Recently, the sulfur prices ramped up. It's selling for about 380 US a ton in China. The shipping cost to get from Vancouver to China is probably about 60 bucks US a ton. So our net back at the field is pretty high.
From what we've seen just in the last two or three weeks, we've actually shipped out our first load of sulfur, which is the first sign that, yes, the plant is working well. Because that is the hardest part, to get to the sulfur recovery. So I think probably by the first week of December, this plant should be running at capacity.
Aaron Bilkoski:
That's great. I think people think about sulfur as just a cost or a valueless byproduct. Do you think this actually is a revenue source for Kelt?
Sadiq Lalani:
Oh, it will be. For sure it will be, yeah. We'll probably generate another eight to ten million bucks a year in sulfur revenue just from our interest in this plant. In the big scheme of things, I know that's not a big number when you're running $600 million of revenue. Everything adds up.
Aaron Bilkoski:
I don't think it's a secret that you've, in the past, built up companies, delineated land positions, came up with infrastructure solutions, and then sold those assets. Do you think it's possible that Wembley/Pipestone area is coming up to the point where you might look to monetize that?
Sadiq Lalani:
Oh, absolutely. That's not been a secret. At any point in time, the three divisions we have, whether it's Wembley/Pipestone, or Pouce Coupe, or Oak. Any one of these divisions is for sale any day of the week. Wembley/Pipestone is the one that looks like it's the most ready right now, in terms of it's been fully delineated, we've put all the infrastructure in place and it's now ready for development. That would be appealing to a buyer who just walks in, hand it to them on a silver platter, and off they go and start drilling wells and run a development program.
For us though, it's timing. Timing is everything and we think we're, if not at the bottom, pretty close to the bottom of the commodities cycle and it should be just upside from here. So we're still fairly bearish on oil prices until middle of 2026. We're starting to get quite bullish on gas prices leading up into this winter. And we've structured our hedge program to reflect that. We've hedged quite a bit of oil production up to about June of '26. I think the M&A market is going to actually get hotter in Canada than it has been, as much as it has been pretty good. And the reason I say that is it's a scarcity of assets. The big thing right now for buyers of oil and gas properties is they are looking for inventory and inventory is becoming scarce now. With this recent deal where Ovintiv is taking over NuVista, a few other Montney deals. I think Cygnet is acquisition Kiwetinohk. So there's less and less Montney assets around.
On the oilier side, it's Kelt. On the gassier side, it's Advantage and Birchcliff. There's not a lot of other Montney assets available for sale. So we're in a good position leading into a good market here I think.
Aaron Bilkoski:
You're the last bundle on the block that the developers already bought up.
Sadiq Lalani:
Exactly. As long as it's not a Jenga block, it's fine.
Aaron Bilkoski:
So I'll push you a little bit further on that. If you were to sell Wembley and Pipestone, do you have an idea of what you would do with the proceeds? Would it be returned back to shareholders, or would it be redirected into developing Oak or Flatrock? How are you thinking about that?
Sadiq Lalani:
Yeah. So we've tried to maintain a fairly clean balance sheet, running debt at around half a year's cashflow. So obviously, initially you'd pay that down to zero, which it would still leave you with a significant amount of proceeds. What we'd like to do is take advantage of our tax situation. So we do have a billion dollars of PUC or paid up capital. And on a sale of an entire division, we would be able to give that money back to shareholders as a return on capital. So they would be able to get this money tax-free, reduces the ACB of their investment in Kelt, and then they don't really trigger a tax event until they actually sell their shares. So that would be probably our high priority on a major sale.
Aaron Bilkoski:
So if I pull on the string a little more, what funds Oak and Flatrock? Would that be Pouce?
Sadiq Lalani:
So right now, Pouce is doing exactly that. Pouce has been funding both Wembley and Oak. We're currently producing somewhere between 17 and 18,000 BOEs a day at Pouce. And for all intents and purposes, it does not require a lot of reinvestment in capital. We do have a couple of plays at Pouce that we're excited about, but no, the capital required for those plays would be much lower than the cashflow that that property generates. So we would redirect that cashflow to Oak. It wouldn't take you very long, maybe a couple years, to get Oak to be self-sustaining as well. You wouldn't really have to tap equity markets or debt markets to keep growing the company.
Aaron Bilkoski:
And how do you think about Oak's ultimate scale? It's sort of interesting from a timing perspective because you're transitioning from Wembley development to Oak development just as LNG export capacity is ramping up. But how big could that asset get? Whether it's to Kelt or to somebody else that may ultimately end up with that asset in the future.
Sadiq Lalani:
Yeah. So that's a good question. We don't really know the answer to that today because we haven't delineated the asset base as well as we have, like the Wembley/Pipestone for example. But we do have 300 sections and that's a lot of land, and it's all contiguous, it's one big block. So what we did recently is on half the block, the west-half of the block, we shot at 3D seismic so we have a pretty good understanding of the fault structure in the Oak area. And in '26, we're planning to have an exploration well from an existing pad on the west side of the block that goes east of the river and it could be a potentially long well, like a three-miler. And that would be our first foray east of where we've been drilling all of our wells. If that works out, that opens up the door to some more delineation.
It's hard to actually put a cap on how big Oak can get until you do all that work. But just thinking about the size, 300 sections, it could get pretty big.
Aaron Bilkoski:
I know it's early stage, but how are you thinking about infrastructure in that area?
Sadiq Lalani:
Unlike our areas in Alberta where we have access to multiple gas plants, right now we just have access to one gas plant in Oak and that's the McMahon Plant. Fortunately, it's a big plant. It can process over 600 million a day. We structured a deal with them, the owners, which is a mid-stream company, because in 2020 and '21 to commit to future processing. So even though the plant is running at close to full capacity right now, they've allocated space for us over the next couple years. So right now, we have 45 million of processing at that plant, and by 2028 we'll grow that capacity up to 120 million a day. So that's the initial plan. There is some talk about new plants being built in the area and we'll be a part of those discussions, but that'll move a little slower.
Aaron Bilkoski:
Is there anything I didn't ask you that you want to talk about?
Sadiq Lalani:
I think we've covered all the high points. Commodity prices, I think gas looks really good in the near term. Oil will sort itself out and get better. We're just going to be focused on organic growth, and like I mentioned earlier, planning to exit this year at 50,000 BOEs a day. We'll come out with our '26 budget in January, we'll let the world know what our plans are for production and cashflow forecasts at that time.
Aaron Bilkoski:
What's the single-most important strategic decision Kelt is going to make today to help you outperform over the next five years?
Sadiq Lalani:
Well, I think obviously it's going to be the monetization of a division and at what price. Because at the end of the day, if you're looking for the biggest rate of return, we've got all this inventory that's out in the future and that NPV stuck out in the future, so we have to find a way to bring that LPV forward. So the one most critical decision is how do we bring that NPV forward?
Aaron Bilkoski:
Great. That was awesome. Thanks for joining me.
Sadiq Lalani:
Thank you.
Aaron Bilkoski:
Appreciate it.
Voiceover:
Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.