Upgrade ’’CIBC World Markets analyst Trevor Bolland said a “major” transformation over the last several years has “substantially changed” his outlook for Athabasca Oil Corp. (ATH-T), leading him to a more “constructive” view.
He initiated coverage of the stock today with an “outperformer” rating.
“Despite our cautious stance on exposure to the Canadian SMID-cap E&P subsector due to ongoing market access issues facing the industry, we view Athabasca as uniquely positioned given its exposure to a low-decline and low-sustaining-cost thermal business that is accompanied by a high-quality liquids-rich natural gas business,” he said. “The company is also in a position to generate free cash flow for the first time. Combined with an influx of cash from its recent midstream monetization, it is in the enviable position of having excess cash to allocate to growth, share buybacks and/or debt reduction. It is important to note, however, that, despite our overall positive view, Athabasca’s cash flow sensitivity to changes in oil prices is among the highest in our coverage universe, and this leverage to rising oil prices naturally cuts both ways.”
He set a target of $1.35. The consensus on the Street is currently $1.53.
“Athabasca is trading at a deeply discounted 2019/2020 estimated EV/DACF [enterprise value to debt-adjusted cash flow] multiple of 2.7 times/3.3 times on strip pricing versus its SMID-cap oil sands peers at 4.5 times/5.9 times and the broader Canadian oil-weighted SMID-cap space at 3.9 times/4.2 times,” said Mr. Bolland. “However, given Athabasca’s comparatively low leverage, its low decline rate and modest sustaining capital requirements in its thermal segment and the peer-leading netbacks generated by its light oil segment, we believe the company is deserving of a more in-line multiple as the Street begins to recognize and properly value these enduring qualities.”