TD Reaffirms 3.25 Target Athabasca Oil Corp.
(ATH-T) C$1.57
Hangingstone Exit Guidance Up, Modest '16 Budget
Event:
As we have noted repeatedly in the past, Athabasca Oil Corp. (ATH-T) is
clearly in a 'show me' phase with the market. As such, our focus remains
squarely on its ability to execute on its core projects while maintaining its
significant cash nest egg. While its Q3 results were broadly in line, the
operational outlook into 2016 has shown subtle but meaningful improvement.
At Hangingstone, production ramp up continues to be slightly ahead of our
internal expectations with the project currently producing at rates of ~5.2
mbbls/d. This is up from ~4 mbbls/d at the end of September. As a result,
Hangingstone 2015 exit guidance has formally been increased to 5-7 mbbls/d
(from 3-6 mbbls/d). In the Duvernay, cost structure improvements continue to
show through with management now expecting D&C costs to come in at
~$10mm per well in the condensate window (down from $11mm in Q2).
With respect to spending, ATH has elected to cut its 2015 budget to $256mm
– this amounts to an additional 10% cut. Just as importantly, the 2016 capital
guidance has been pegged at $100mm and further highlights management's
focus on balance sheet preservation. For perspective, this would be down
from $322mm in 2015 and would also be down from our prior 2016 estimate
of $140mm. Full 2016 guidance is to be issued in early December.
Impact
POSITIVE.
TD Investment Conclusion:
With $805mm of funding in place (inclusive of the last promissory note), we
expect the Street to continue to focus principally on execution on its core
assets (i.e. production ramp-up at Hangingstone and Duvernay drilling
results). The ATH story, in our view, remains in the process of transitioning
from 'event-driven' to more 'fundamental' in nature. With this in mind, we
acknowledge that this may take time with the onus now squarely on
management to prove to the market that previous operational and milestone
missteps are a thing of the past and that it can be a responsible allocator of
capital during extremely challenging times in the patch.
Valuation:
ATH is currently trading at 41% of our NAV, which compares with the peer-group average of 49%.
Justification of Target Price:
Our fully-expanded risked NAV discounted by 12% (to reflect reservoir uncertainty at Hangingstone until such time productivity can be proven) generates a value of $3.25/share. The 100% NAV weighting generates a 12-month target price of $3.25/share.