December 26, 2013 - 3:31pm EST by
2013 2014
Price: 6.25 EPS -$0.27 -$0.22
Shares Out. (in M): 424 P/E 0.0x 0.0x
Market Cap (in $M): 2,648 P/FCF 0.0x 0.0x
Net Debt (in $M): 160 EBIT -117 -109
TEV (in $M): 2,808 TEV/EBIT 0.0x 0.0x

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  • Discount to NAV
  • Asset Sale
  • Settlement
  • Canada
  • Commodity exposure
  • Oil Price Exposure
  • Litigation
  • E&P


Athabasca Oil Corp. (ATH CN, herein ATH) is the worst-performing stock in its comparable set of mid-sized Canadian E&Ps, down 40% YTD. In this carnage lies opportunity, as ATH’s asset base – much of which will eventually be handed over to the company in cash – is worth 60-100+% more than the current stock price. The market is giving us this opportunity after a series of improbable legal decisions and management’s misguided promises have left investors pessimistic and questioning the company’s credibility. The counter to this pessimism is that the legal decisions and resultant delays have only a minor impact on fair value of ATH, and in management’s defense, the series of events witnessed in 2013 was essentially unprecedented and of such a low likelihood that they could not assume them as base case scenarios. The company has reacted and has put forth a “Plan B” budget for 2014 which retains financial flexibility, and in our view, the issues which have hampered the stock should alleviate over the next two quarters.

Description and Background

ATH is a mid-cap with extensive oil sands holdings and a relatively large conventional and developing E&P portfolio, all located in Alberta, Canada. The company is currently producing (6000-6500 boe/d guided for Q1) and is developing an oil sands project, named Hangingstone (Project 1 is the first stage) which should add over time 12,000 boe/d – first “steam” is expected in Q4’14. Over its three phases, the plan is to develop production of >80k boe/d at Hangingstone (2017 and beyond). The company’s other major oil sands development is Dover West Sands which will eventually target 275k boe/d (and which may incorporate co-development with the potentially more productive, but longer-term, Dover West Carbonate).

In terms of the potentially more lucrative light oil opportunity, ATH’s jewel asset is arguably its Duvernay acreage – 350k prospective net acres, including 200k high-graded acres – in what is considered a world class resource. Indeed, majors Chevron and Shell have been promoting their recent results in the region and much of their acreage is contiguous or near ATH’s. In October, CVX said:

Chevron Canada Limited successfully concluded the initial twelve well exploration drilling program in the liquids-rich portion of the Duvernay shale play…The company’s acreage is well positioned in the condensate-rich and volatile-oil portion of the play. Liquids yield for the completed wells range from 30 to 70 percent with initial production rates up to 7.5 million cubic feet of natural gas per day and 1,300 barrels of condensate per day.

“Early results of our Duvernay exploration program are encouraging,” said George Kirkland, vice chairman of Chevron Corporation. “This discovery creates a foundation for future growth in Canada.”

“Well performance and condensate yields exceeded our expectation and strengthen our plans going forward….

In addition to the Duvernay, ATH holds a valuable position in the Montney play (200k total prospective, 100k high-graded acres). These wells, while cheaper than the Duvernay ($4-7mm vs $10-15mm cost) also have a lower NPV, though neither play has been fully optimized yet. For approximate estimates, mgmt. assumes a ~$7.5mm per well NPV for the Duvernay, and $2mm for the Montney. The Duvernay acreage is currently subject to a JV bid process as management seeks ways to accelerate development.

History and the Dover Put

ATH was incorporated in 2006 to focus on oil sands development. The largest owners of the stock at the IPO in April 2010 – remaining so today - were the Ziff family (65mm shares as of today, 16.3% of the company, under ZAM Investments) and insiders (the CEO Svarte Sveinung controls 13.7mm shares while Chairman Bill Gallacher owns 13.2mm – making them the 3rd and 4th-largest owners, respectively). ATH had raised ~$800mm as a private company and announced a JV agreement with PetroChina just prior to the IPO related to the company’s MacKay and Dover assets (60% working interest in both projects for $1.9bn). The JV agreement also included a put/call option for the remainder of each of these assets – which factors mightily into the under-performance we have seen in 2013. The transaction for the 40% of MacKay River was closed in March 2012, while Dover remains outstanding.

The IPO for 19% of the company was priced aggressively at $18/share. The IPO of $1.35bn – most of which was used to build up the light oil portfolio and begin development of the oil sands projects - was the largest Canadian IPO over the prior decade, but subsequently performed poorly, breaking price on its opening day (closing at $15.70). It surpassed its IPO price once, in March 2011, but the chart since then suggests a slow decline, bringing us to today ($6.25, with low close of the year in May at $5.74). What has created ATH’s stock price weakness over the last year? Put simply, there is doubt as to whether ATH will be able to exercise its final put – the 40% of Dover (aka Brion), for $1.32bn, or 50% of its current market cap – to PetroChina, due to a dispute with the natives living in the area of the deposit, the Fort McKay First Nations…the first oil sands project they have objected to since 1993.

To frame the discussion, this was an issue that was supposed to originally be finalized in the spring of 2013 with final approval for the project likely to come in the summer, a necessary precondition before PetroChina could pay for the part of Dover that it did not already own. From the March 21, 2013 Q4 call: “…we don't know exactly the full reasons for the statement of concerns which have been filed. We won't know that before that group has done its filing next week. But we are in constant dialogue with the other party, and concerning the project, keep a good relationship. And depending on the outcomes on those dialogues, a public hearing maybe held late April. As you know, hearings are formal parts of the excellent regulatory system in Alberta. And if it takes a hearing to achieve regulatory approvals, we will go through that hearing. This is nothing new, and something most large oil sands projects have gone through before. And if such a hearing takes place, it would be end of April so it's finished early May. And then, ERCB has 90 days to - before they have to come up with their ruling. So we will probably then get ERCB approval late July to early August.”

However, what soon transpired cast that timeline into doubt. The first day of the hearing, on April 23, saw ATH stock fall 15%. Typically, cases of public opposition to developments usually result in conditional approvals, according to the Energy Resources Conservation Board (renamed the Alberta Energy Regulator), but this situation seemed more problematic and no settlement was forthcoming, a surprise to the company. The issue at stake is the so-called buffer zone, with the First Nations seeking 20 km free of development with the company apparently offering only 5 km. With the hearing concluded on April 29, investors were told that the AER would consider the arguments for approximately 90 days, and the company expressed confidence that with that wrapped up, the matter would move to the provincial cabinet, which would issue approval and allow the put to be exercised in Q4. That is to say, well before year-end, ATH was supposed to be $1.32bn richer.

That approval did indeed arrive, on August 6 – so far, the company’s proclamations appeared back on track and the stock at one point that following day was up 22% (opening at $9). From there, the path appeared clear, and the company (and analysts) indicated that an appeal was highly unlikely as it would only be heard on constitutional grounds, and those seemed absent in this case. Regardless, the FMFN did appeal in early September, but not many gave the appeal any chance…until time kept dragging on with no word. Finally, on October 18, to the market’s surprise, an Alberta court did indeed accept the appeal on a very narrow constitutional issue, causing one (final, we hope) capitulation move downwards. The other overhangs included the fact that cabinet approval was supposed to be independent and happen in parallel…but as that approval was to come from an elected body, they appear to have taken a wait-and-see approach (our conversations indicating that once the issue with the FMFN is resolved, this can move forward). Finally, given the need in northern Canada to drill only in the winter when the ground is firm enough, PetroChina would have needed the asset transferred by the beginning of December in order to undertake a winter drilling season, and that was missed. Analysts questioned what incentive there was for PetroChina to transfer funds until the following winter in late 2014.

So, where does that leave us?

Per management’s public comments and our checks, we understand that Brion is in final settlement negotiations with the FMFN.

We know that PetroChina has publicly stated their intent to honor their contract. And, we also know that post the Nexen transaction (CNOONC was the acquirer) in December 2012, the Canadian government unveiled foreign investment guidelines to prevent future takeovers of oil sands companies by state-owned companies, except under “exceptional circumstances.” Said a different way, the grandfathered Dover deal is likely to be the last deal we see in the Canadian oil sands by a Chinese state operator unless the rules are changed, which appears unlikely. PetroChina wants these assets.

Lastly, the company has provided us a “Plan B” 2014 capex budget of $460mm (release on December 17). This budget allows them to move Hangingstone forward and take important steps on their light oil portfolio. They also gave themselves breathing room by selling a 50% interest in their Kaybob area (Duvernay) light oil infrastructure to a third party for $145mm of cash. This should tide them over until, worst-case, they go to hearing in March and finally settle this issue in Q2/Q3 2014.

Our conclusion, however, is that well before the March hearing, Brion (ATH and PetroChina) will settle with the FMFN, and the cabinet will move forward with approval either before that or soon after, and PetroChina will honor the put agreement as soon as all preconditions are met, and ATH will be in receipt of $1.32bn of cash within two quarters. Once this sequence of events occurs, ATH can appreciate to its fair value, which by our reckoning is at or close to its NAV.

Upside = NAV

ATH today -

Share price: 6.25

FD shares out: 423.8

Market cap: $2,648mm

Net debt: $159.8mm

Enterprise value: $2,808mm

There are a number of ways to value E&Ps, with NAV being the most consistent though it is helpful in earlier stage producers to analyze acreage values, particularly in emerging plays. To the extent you did that with JUST the light oil assets of ATH, you would see that the current valuation arguably captures only those assets, and none of the oil sands, and certainly not the $1.32bn put. Specifically, with the Duvernay at $9,500/acre (200,000 high-graded net acres = $1.9bn) and Montney at $7,500/acre (100,000 high-graded net acres = $750mm), one can roughly derive a valuation of $2.65bn, just shy of the current enterprise value.

For a sanity check, please refer to Trilogy Energy (TET CN), a major Duvernay and Montney player, which trades at an EV north of $17,000/acre of developed land ($3.95bn EV, 226k acres of developed land).

Using a more traditional NAV build-up which in this case is much less generous on the value of the light oil assets (but more generous on the oil sands projects, using strip pricing), it is clear that there is significant upside (in this case, north of $17):





Strip Pricing




Reserves   (mmboe)


PV   AT $m









Conventional Reserves (10% AT)





















Conventional Total














Oil Sands (9% AT)














Phase   1







Phase   2







Phase   3







Hangingstone Total














Dover West







 Phase 1







 Phase 2







 Phase 3







 Other contingent







Dover West Total





















 Phase 1







 Phase 2







 Phase 3







 Other contingent







Dover Total







Dover Option Value














Other contingent resource







 Birch - clastics







 Dover West - carbonates







 Grosmont - carbonates







Other contingent resource total





















Undeveloped Land - Light Oil Division







Option Proceeds ($mm)







(Net Debt)/Cash (3Q13)














Core NAV







Core +   Risked Upside NAV








Suffice to say, there is a significant margin of safety in this idea that will be catalyzed by the receipt of 50% of its market cap in cash. To the extent that the put is some way is completely eliminated – in our view, a miniscule probability – ATH’s asset valuation remains intact and could be haircut by 60% or more before you saw downside from the current stock price and even in a fire sale with competitive bidders, we would view this as unlikely. We view ATH as worth $10-15 depending on what discount to NAV the market is willing to ascribe to the enterprise.

Catalysts and Risks

The key catalyst will be a settlement with the FMFN. This is the key that unlocks ATH value, as it should be followed by cabinet approval / order in council, which then unlocks the AER approval, which then satisfies all of the conditions for the put to be exercised. Once ATH receives the put proceeds, it can ramp its capex in order to fully realize its NAV. And, at that point, it may become an attractive takeover candidate. In the meantime, we should also hear about the parameters of a Duvernay JV, as the data room is currently open and per the company, there are a number of interested bidders. This will help frame the light oil valuation and is an important marker.


1)      Oil price, and oil price differentials in Canada. As an E&P it goes without saying that there is some commodity risk. This may eliminate the idea as a “value stock” for some purists, but there are obviously many ways to hedge oil price risk.

2)      Further delays through the court system to the extent no settlement is achieved. In this case, assuming steady oil prices, I would expect the stock to languish or even weaken further in the absence of positive updates.

3)      Is ATH considered a distressed seller and will this impact the Duvernay valuation achieved in the JV? Possibly.

4)      Both the Duvernay and Montney are early-stage plays and there is still a lot to learn about actual recoverable reserves and costs.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


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