If you are a believer in rising oil prices in 2018 then Athabasca Oil just may be the company for you.

Athabasca’s base of high operating cost thermal oil operations provides leverage to rising oil prices — small oil price increases cause big increases in Athabasca’s cash flow.

Athabasca’s exposure to heavy oil also makes the company a beneficiary of the narrowing heavy oil differential throughout 2018 — something that is expected to happen as rail expansions debottleneck the system.

Management has guided that a $5 per barrel increase in WTI would result in an $80 million increase in cash flow on an unhedged basis. That is for a company that is expected to generate $155 million in cash flow at $60 WTI.

As I said…..huge leverage. A $10/b increase in oil price doubles cash flow.
A $2.50/b narrowing of heavy oil differentials would increase cash flow by $45 million. That could be key as analysts see heavy oil differentials narrowing from $24 per barrel to $18 per barrel in the second half of 2018.

That means big leverage to both oil prices and heavy oil differentials. If both things happen in 2018 then this company could see some explosive gains.
We won’t talk about what happens if oil prices declined and differentials widened……just remember that leverage works in BOTH WAYS!


Share Price: $1.19
Basic Shares Outstanding: 510 million
Market Cap: $607 million
Year End 17 Net Debt: $275 million
Enterprise Value (EV): $941 million
2017 Production Actual: 35,421 boe/d (90% liquids)
2018 Production Estimate: 40,000 boe/d (87% liquids)
2018 Cash Flow estimate: $155 million
2018 Capex estimate: $140 million
Ent Value/Production 2018: $23,525 per flowing barrel
Ent Value/2018 Cash Flow: 6.1 times
Debt / Q4 ‘17 Cash Flow Run Rate: 1.6 times


– Growing production while living within cash flow at $60 WTI
– Big leverage to oil prices and narrowing of heavy oil differentials
– Duvernay growth comes without requiring capex thanks to Murphy Oil (MUR-NYSE) joint venture
– Midstream asset sale could unlock cash


– High operating costs on thermal oil production
– Not a good company to own at lower oil prices
– Reasonable debt but not a pristine balance sheet
– Statoil owning 20 percent of shares creates an overhang on stock


Athabasca Oil Corp came to the public markets in 2010 under the name of Athabasca Oil Sands Corp. At that time the company was marketed as being a
SAGD (Steam Assisted Gravity Drainage) pure play with a huge resource base.

That was when people wanted to own SAGD producers because everyone believed the world was running out of oil and $100 per barrel would be our future.

Shortly after the IPO management acquired a huge land base in the Duvernay, Montney and Nordegg formations. Not thermal assets, but horizontal resource plays—very different, like night and day different. This was an unexpected event and the market didn’t like that — the market never likes sudden changes in strategy.

From there it became a storm of unexpected events.

The acquisition was followed by all kinds of controversy over the sale of a billion dollar put option on Dover oil sands asset to PetroChina, the departure of Athabasca’s Chairman and founder, then the departure of the CEO, the oil price crash and finally ATH’s first SADG project at Hangingstone underperforming.

Strategy change, management change, oil price change and assets underperforming. Nothing worked out.

Add them all together and you get a stock chart that has done this since the 2010 IPO:

That brings us to today. Athabasca’s share price is down 95 percent, but at least the company survived — many others didn’t.

There is a new Chairman (Ronald Eckhardt formerly of Talisman) and a new CEO (Rob Broen also from Talisman). Uncertainties over funding of light oil growth plans have been removed.

I think it is time for a fresh look.

Athabasca Oil – Light Oil Division

In the Light Oil Division, Athabasca produces light oil and liquids-rich natural gas from unconventional reservoirs. This is horizontal development, high decline wells and evolving technologies.

Athabasca’s horizontal operations can be split into two areas. The Montney formation in Saxon/Placid and the Duvernay formation in Kaybob near the town of Fox Creek in northwestern Alberta.

Production from the Light Oil Division, for the year ended December 31, 2017, averaged 7,535 boe/d, an increase of 64% compared to the prior year. The Company achieved record production in Q4 17–averaging 11,507 boe/d. Most of that production (85%) is from the Montney, the rest from the deeper Duvernay.

In the Greater Placid area, the Company has a 70% operated interest in approximately 80,000 gross Montney acres as at December 31, 2017.

During 2017 Athabasca spent $141 million (net) in the Greater Placid area on a 20-well (gross) winter drilling program that had been started during the 2016/2017 drilling season plus the completion of infrastructure buildout.

A new oil battery was commissioned in Q2 and a new compressor was added Q4 to get ready for future production growth.

A 6 well (gross) pad was rig-released in Q4 17 and is being brought into production in 2018. An additional 6 well (gross) pad was spud in Q4 17 which is expected to be rig released prior to spring break-up in 2018. Production from those wells will be seen in Q2.

The wells that were rig-released in Q4 17 have been brought onto production with restricted IP30 rates of ~1,010 boe/d (57% liquids) which was right in line with the type curve for those wells.

That type curve shows that at $60 WTI those wells have 16 month paybacks and generate before tax rates of return of 72%.  That works, but frankly I’ve seen a lot better at $60 WTI.

Management estimates that they have 200 drilling locations here.

In the Greater Kaybob area, the Company has a 30% non-operated interest in approximately 200,000 gross Duvernay acres (approximately 97,500 net) with exposure to both liquids-rich gas and volatile oil opportunities.

What’s key to Athabasca’s Duvernay Adventure is the company’s joint venture deal with Murphy Oil.

In May 2016 Murphy Oil paid Athabasca $250 million in cash and commited to carry Athabasca for $225 million of future Duvernay drilling (funding 75% of Athabasca’s capital cost per well).  This is expected to cover five years worth of development and $1 billion of gross spending.

That got Murphy a 70% interest in Athabsca’s Kaybob (Duvernay) land and a 30 percent in Greater Placid (Montney).  Murphy became the operator at Kaybob but Athabasca remained operator at Greater Placid.

What this means is that in the Duvernay Athabasca is now investing 7.5 cents per dollar spent and earning a 30 percent interest in production.  For 7.5 percent of the capital being spent, Athabasca gets a 30% interest.

That’s a very balance sheet friendly way to grow production.

That will last for $1 billion of total capital spending, $75 million of which will be spent by Athabasca.

$62 million ($12 million net of the capital-carry) was spent on capital projects in the Greater Kaybob area during the year ended December 31, 2017. That covered 13 (gross) wells with 11 (gross) wells brought on production during 2017 and an additional 10 (gross) wells were spud during the fourth quarter of 2017 and are expected to be brought into production in 2018.

During 2018 it is expected that 2-3 rigs will run with a total budget of $387 million

which is $30 million net to Athabasca. Budget calls for rig release 26 wells, and placing 28 wells on production.

The slide above doesn’t paint these Duvernay wells as being the “knock your socks off” kind at this point.  Athabasca shows near-term paybacks of 26 months and IRRs of 41% at $55 WTI.

Longer term they point to 18 month paybacks and 71% IRRs, but to get there will require bringing down well costs from $10 million to $8.5 million.  Given that Murphy Oil has increased spending from $62 million to $387 million one would have to think that they like what they are seeing in the wells.

Athabasca Oil – Thermal Division

The second part of Athabasca’s business is heavy oil, produced using thermal recovery.  Thermal oil production has a very low decline, but operating costs tend to be high.

There are two assets here.  One is Leismer with 21,000 barrels per day of production ($42 WTI break-even oil price), the other is Hangingstone with 9,550 barrels per day of production ($54 WTI break-even oil price).

Athabasca actually purchased Leismer from Statoil on January 1, 2017 for $435 million in cash, 100 million common shares of Athabasca and some bonus payments if oil prices go over $70 per barrel (expires in 2020).

The Leismer project was commissioned in 2010 and has proved reserves in place to support a flat production profile for over 30 years and a reserve life index approximately 70 years (proved plus probable).

Athabasca intends to maintain a stable production base from these assets for the foreseeable future.

The assets are high quality and resilient to lower commodity prices. Leismer’s current steam-oil-ratio (“SOR”) of ~2.7x ranks it as one of the lowest among operating projects in the basin.

The lower the steam oil ratio the better the economics (lower steam = lower costs).

Operating income break-even is estimated at ~US$44/bbl WTI.

Over the next five years, Athabasca estimates that Leismer will generate free cash flow in excess of $575 million under US$60/bbl WTI prices.

This asset was acquired to provide the free cash flow to fund growth spending in the light oil division.

The other thermal asset is Hangingstone which was Athabasca’s first development of the assets that it had when the company IPO’d in 2010.  Production at Hangingstone is just under 10,000 barrels per day so it is half the size of Leismer.

It is also half as profitable thanks to much higher operating and transportation costs.  Leismer netbacks in Q4 2017 were $20.59 vs $8.08 at Hangingstone.


In 2018 Athabasca plans to spend $140 million split evenly between light oil and thermal and have production average 38,500 – 41,000 boe/d (87% liquids).  That would be production-per-share-growth of 11% year on year.

To achieve that growth Athabasca will slightly outspend cash flow (by $15 million) if we get $60 WTI and a $20 WCS heavy oil price differential.

The view for 2019 is to continue growing at a similar rate while generating excess cash flow.  Whether that is achievable — who can say for certain?



Athabasca exited 2017 with $255 million of cash and $120 million of available credit.  That is ample to cover 2018 and 2019 growth plans.

Don’t forget that there is also $164 million of carry left on Duvernay spending from Murphy Oil.

Net debt at year end 2017 was $275mm (~1.6x annualized Q4 17 cash flow). The company has US$450mm of senior secured second lien notes.  Net debt will go up during 2018 by roughly $20 million as the company outspends cash flow.

Valuation-wise Athabasca doesn’t appear inexpensive on an enterprise value to cash flow basis.  We have to keep in mind that a $5 per barrel increase in oil or a $2.50 per barrel narrowing of differentials greatly changes that cash flow figure in that calculation.

On a reserve basis things get a little more interesting with the current share price basically providing an enterprise value equal to Athabasca’s proved-producing reserves.

This is a company with a big resource base, and years of no-decline production at Leismer.

Most of the reserve value in the company today does relate to those thermal assets.

For a long term oil bull I would say that Athabasca looks very attractively priced.  For the short term I’d say pretty much the same thing.

What we have here then is a pretty safe way to get a lot of leverage to rising oil prices.


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