Athabasca Oil Corp.
(ATH-T) C$5.18
Downgrade to HOLD on Material Outperformance, Multiple
Expansion
Event
Downgrading to HOLD.
Impact: NEUTRAL
Now at the higher end of valuation range vs. peers: ATH shares have rallied 54%
since our early-December upgrade (note), outperforming pure-play MEG (+22%) and
its oil-weighted peers (BTE/CPG/SCR/WCP; +9% on average). Year-to-date, ATH is
the top-performer across our coverage. Assuming US$75/bbl WTI (US$14/bbl WCS
heavy differential), ATH is trading at 4.0x 2025E EV/DACF multiple vs. MEG at 4.6x
and oil-weighted peers at 2.7x. On 2025E FCF yield, ATH is trading at 16% vs. MEG
at 15% and oil-weighted peers at 20%.
Leismer expansion to 40mbbl/d could diminish near-term FCF and RoC: ATH
management has been clear that it requires full certainty on successful TMX ramp-up
to sanction its 12 mbbl/d Leismer expansion to 40mbbl/d. TMX line-fill is reportedly
set to span April/May, with ramp-up potentially through mid-year. Therefore, we
expect Leismer expansion sanctioning with its 2025 budget, if not sooner.
Although we consider the Leismer expansion to 40mbbl/d highly economic and
positive in the long term, it diminishes near-term FCF available for shareholder
capital returns. Although we expect ATH to continue to return 100% of FCF (we
assume AFFO less total capex), we estimate this shrinks to $192mm in 2025E
(down 44% vs. $342mm in 2024E) at US$75/bbl WTI as expansion capital is
deployed (9% 2025E cash-return yield vs. MEG at 12%; oil-weighted peers at
11%).
ATH shares largely pricing-in tighter WCS heavy differentials: We estimate ATH
shares currently price-in an ~US$14/bbl heavy differential (vs. 2025E strip at ~US
$13.60/bbl), whereas MEG reflects ~US$15.50/bbl. Although pipeline economics
point to a narrowing down to ~US$10/bbl, this differential more likely trades at ~US
$12-US$14/bbl on a sustained basis following TMX ramp-up, in our view.
TD Investment Conclusion
Despite its comparatively smaller size, ATH fundamentally remains one of the
strongest companies we cover. Although the balance sheet is pristine (Q4/23 exit
—$131mm net cash), 2025E capital returns likely shrink y/y as Leismer expansion
capital is deployed. ATH is also advantaged on royalties (next tier not triggered at
Leismer until 2027; Hangingstone—2030) and cash taxes (not until 2030). With an
intact $6.00 target price, our 16% target return falls short of our 20% BUY-rating
threshold. Downgrading to HOLD.