Note: All figures in Canadian dollars
Athabasca Oil (ATH.TO) has a jaded history. The company went public in 2010 at $18.00 a share and everyone who particpated in the offering has taken a bath. The company was then valued at about $7 billion. Today, the 532 million shares trade at about $2.40 a share and the market capitalization is $1.3 billion.
If there was ever a management team to put on the naughty list, this one is a contender. The company’s assets are fine, but the aggressive approach to acquiring assets burdened the company with excessive debt and Athabasca has flirted with insolvency throughout its short existence.
In recent years, a more conservative approach saw the company pick away at its debt despite being forced to pay relatively high interest rates to sustain itself, and incur substantial losses. As of March 31, 2022, the company had $3.1 billion of tax pools of which $2.4 billion was immediately accessible operating losses carried forward. A taxable acquirer in the industry (who lines up with the Canadian tax codes on survival of tax losses post merger or acquisition, of course) would immediately be able to claim that $2.4 billion against current taxable income according to the note in the Q1 statemetns.
The larger Canadian energy companies are now taxable including Canadian Natural Resources (CNQ.TO), Suncor (SU.TO) and Cenovus (CVE.TO) and all are expert in managing oil sands projects in general and SAGD projects in particular. At a 35% assumed tax rate (who can predict tax rates under a left wing Liberal government?) the immediate tax recovery approximates $840 million or about $1.60 per Athabasca share.
Athabasca has debt of ~$355 million offset by cash of over $200 million and is cash flow positive. A bid of $4.00 a share would cost the acquirer about $2.2 billion with an immediate offset of $840 million for a net purchase price of $2.40 per share, spot on the current trading price. Shareholders are likely to snap up the $4.00 a share which is a premium of 67% to the current price and the jury is still out as to whether the currently firm oil prices will survive a likely recession.
Athabasca assets include 80,000 Montney acres at Greater Placid; 210,000 Duvernay assets at Greater Kaybob; and, producing SAGD projects at Leismer and Hangingstone. Those assets are well worth the residual price of $2.40 a share or $1.3 billion with cash flows at current prices which I estimate at ~$300 million for 2022 after the drag of interest costs of ~$50 million more or less.
Betting on an acquisition is speculative but with Athabasca forecasting to be net debt free by year end, the risk of collapse is low and if commodity prices remain firm the investment may pay off with or without a takeover offer. In my judgment, it is a decent businessman’s gamble.