Athabasca Oil Corporation
Onward & Upward
Our view: Our constructive stance towards Athabasca reflects its solid operating performance, strong balance sheet and 100% payout of (thermal) free cash flow to shareholders. We are maintaining a Sector Perform recommendation on Athabasca but raising our one-year price target by $0.50 (9%) to $6.00 per share.
Key points:
Athabasca Oil delivered impressive third-quarter results punctuated by in- line production of 38,900 boe/d and robust consolidated free cash flow generation of $113 million which supported $85 million of common share repurchases. Year-to-date, the company has repurchased $257 million (50.8 million) of its common shares.
Capital Guidance Tweaks. Guidance wise, Athabasca maintained its mid- point 2024 production outlook of 36,500 boe/d, while lowering its capital program slightly by 2% ($5 million) to $270 million. This reflects a slight reshuffling of capital amid $7 million (9%) lower Duvernay Energy capital spending to $75 million and $2 million (1%) higher thermal oil capital expenditures to $195 million.
Leismer Record. At Leismer, Athabasca produced a record 27,500 bbl/d of bitumen in the third-quarter (SOR = 3.1x according to AER data through July-August) following facility expansion which was completed mid-year. The company’s second-half activity includes drilling four new well pairs at Pad L10 and six extended redrill opportunities on Pad L1, with production expected to come on-stream in early-2025.
Free Cash Flow. We peg Athabasca’s free cash flow (excluding the Duvernay Energy minority interest, including A&D) under our base outlook at approximately $308 million in 2024 and $184 million in 2025. Under futures pricing, we peg Athabasca’s free cash flow at $302 million in 2024 and $198 million in 2025. The company has $2.4 billion of tax pools and does not anticipate paying cash taxes through the remainder of the decade.
Relative Valuation. Under our base outlook, Athabasca is trading at debt- adjusted cash flow multiples of 4.7x in 2024E (vs. our oil sands weighted peer group avg. of 6.0x) and 5.4x in 2025E (vs. our peer group at 6.2x) and free cash flow yields of 12% (vs. our peer group at 10%) in 2024E and 8% (vs. our peer group at 9%) in 2025E. We think that Athabasca should trade at an average/modest discount valuation vs. our peer group given its strong balance sheet, favourable operating momentum, partly offset by its limited scale.