TD AnalysisRecommendation: BUY Prior: HOLD Risk: HIGH 12-Month Target Price: C$4.50 12-Month Dividend (Est.): C$0.00 12-Month Total Return: 33.9% Market Data (C$)
Event Last night, ATH announced its 2024 capital budget. Impact: POSITIVE Best-in-class balance sheet affords growth optionality, in our view—plenty of share buybacks in the interim: ATH has the strongest balance sheet within our coverage, and it expects to exit 2023 with $155mm net cash. In our view, its strong financial position allows it to selectively pursue organic growth, including the eventual 12mbbl/d Leismer expansion to 40mbbl/d. Notably, ATH also updated its Corner development plan, where it is prepared to explore external funding options (note its history of creative financing arrangements). For the 12mbbl/d Leismer expansion, we now model project sanctioning in 2025, assuming successful TMX ramp-up through H2/24, and subsequent stabilization of WCS heavy differentials. ATH estimates a $17mm cash-flow increase for every US$1/bbl narrowing in the heavy differential. Boosting shareholder capital returns to 100% of FCF in 2024: This is up from the current 75% FCF returns in 2023 through buybacks (defined as adjusted funds flow less sustaining capex). On strip, we model a 2024E total cash return yield of 15%. 2024E capex and production guidance broadly in line with consensus/TD estimates: 2024E capex of $175mm ($150mm sustaining capex) compares with the recent consensus estimate of $179mm and our $250mm forecast—we had modelled mid-year sanctioning of the Leismer expansion, with $300mm spread over three years. Production of 35-36mboe/d (98% liquids) is similarly in line with recent consensus at 35.6mboe/d (TD—36.1mboe/d). ATH expects to exit 2024 at rates of 37.5mboe/d as the Leismer expansion to 28mbbl/d is completed by mid-year and two additional Duvernay wells pads are brought online in Q2/24. TD Investment Conclusion Despite its relatively smaller size and torque to heavy oil, ATH is fundamentally one of the strongest companies we cover. The balance sheet is pristine (expects to exit 2023 with $155mm net cash) and 2024E shareholder capital returns are ramping to 100% of FCF. Further, ATH does not expect to become cash taxable until 2030, or graduate to the next royalty tier (i.e., post-payout) until 2027. Its shares are down 19% since we launched coverage in late-September. With an intact $4.50 target price and 34% target return, we are confidently upgrading to BUY