March 25, 2024
Athabasca Oil Corporation Downgrading to Sector Perform
Our view: We downgrade Athabasca shares to Sector Perform driven by strong relative performance year-to-date and premium valuation. In our view, operational execution remains strong and management continues to deliver on key priorities including enhanced shareholder returns via the share buyback. While we see longer-term optionality within the company's broader oil sands portfolio, financing and cycle time remain key hurdles.
Key points:
Operational execution remains strong. Athabasca has refocused on the thermal business with Leismer currently producing in excess of 24,000 bbl/ d, and on track to grow to 28,000 bbl/d by mid-year. The company has approval in place to increase volumes to 40,000 bbl/d, which we expect will be phased in over the next several years. Beyond this the company has approval at Corner for 40,000 bbl/d, which likely requires outside financing given a build cost in the range of $1B, with a cycle time of roughly four years from FID.
Shareholder returns a key priority. Management is allocating 100% of FCF to shareholders through the NCIB, completing approximately $66 million in share buybacks (~14 million shares, $4.70/share average price) from January to March 15, 2024, with the company exhausting the prior allowance. The company renewed the NCIB for up to 55.4 million shares, through to March 17, 2025. Based on our updated estimates, we see the company completing $233/$233 million in share buybacks in 2024E/25E, though the allocation framework could change into next year depending on key capital projects and prevailing market conditions.
2024 guidance intact. Athabasca plans to spend $135 million in 2024 driving volumes of 32,000-33,000 boe/d, generating $325 million in free cash flow at US$80/bbl WTI. The company's subsidiary, Duvernay Energy Corp (Athabasca holds a 70% w.i.), is expected to grow through the year averaging roughly 3,000 boe/d on an internally funded $82 million capital program (note here).
Balance sheet - highly flexible. Athabasca exited Q4/23 with $160 million in net cash and $430/$345 million in liquidity/cash. We expect the company will continue to build on this through the balance of 2024, exiting with $445/$335 million in liquidity/cash (net of share buybacks), providing flexibility to further enhance shareholder returns and/or accelerate capital projects into next year.
Sector Perform recommendation. We have downgraded Athabasca shares to Sector Perform (previously Outperform) with our target price unchanged. Athabasca shares now trade at a material premium to oil- weighted peers (Exhibit 3), which we believe is justified by strong operational execution, free cash generation, exposure to WCS heavy oil, and management's continued focus on shareholder returns.