RJ upgrade The $250-million sale of 70-per-cent of its interest in the Duvernay area “transforms the story” for Athabasca Oil Corp. (ATH-T), according to Raymond James analyst Chris Cox.
Under the agreement, announced Wednesday, Arkansas-based Murphy Oil Corp. also agreed to carry up to $225-million of Athabasca’s costs over five years. Murphy received 30 per cent of Athabasca’s Montney lands, also known as Greater Placid, as well.
In reaction to the deal, Mr. Cox upgraded his rating for the Calgary-based company to “outperform” from “market perform.”
“While the transaction metrics at first blush do not look all that attractive (at least on a relative basis), we nevertheless view the Duvernay joint venture agreement with Murphy as a strong strategic fit and one that noticeably cleans up the story,” the analyst said. “Following the transaction, Athabasca boasts an enviable combination of a solid balance sheet and visible funding outlook, with a meaningful carry over the next five years in the Duvernay. This should allow for an accelerated ramp-up of production and quick recycle of capital, which can be redeployed into an emerging but enticing asset at Placid. In our view, the combination of a solid financial position to weather the storm and attractive upside on its asset base to rising oil prices makes Athabasca a fairly compelling risk/reward opportunity and we are upgrading the shares.”
Mr. Cox said a key strategic benefit of the deal is the probability of an accelerated pace of development for the Duvernay area.
“Even with a smaller stake in the asset, we expect Athabasca’s net Duvernay volumes to ramp-up at a faster pace than the company could otherwise achieve on a 100-per-cent basis,” he said. “However, this is not at the expense of the balance sheet – the JV agreement is based on expected spending of $1-billion (gross) over the next 5 years, of which Athabasca will only have to cover.”
He added: “In our view, one of the more underappreciated elements of the joint venture with Murphy is the ability of Athabasca to quickly recycle the capital being deployed into the Duvernay. We see paybacks on Athabasca’s share of the capital in as little as 6 months in a $50 price environment. With Athabasca retaining a 70-per-cent interest and operatorship of the Placid property, this should allow the company to rapidly redeploy capital here, and similarly accelerate the development of the asset at a faster pace than would otherwise be achievable on a 100-per-cent working interest basis.”
Mr. Cox also raised his price target for the stock to $2.25 from $1.50. The analyst consensus price target is $1.84, according to Thomson Reuters.