Q3 2018 Results and Operational Highlights
Consolidated Results – Strength in Execution
- Production of 40,612 boe/d (88% liquids), representing 12% growth year over year
- Record adjusted funds flow of $62.2 million ($0.12/sh) and operating income of $83.7 million
- Capital expenditures of $52.4 million; 75% weighted to high margin Light Oil activity
- Net debt of $372 million and available funding capacity of $356 million
Light Oil – High Margin Liquids Rich Growth
- Production of 10,135 boe/d, representing 29% growth year over year
- Operating income of $29.8 million, representing 117% growth year over year
- Top tier netbacks of $31.95/boe supported by high liquids (51%) and low lifting costs ($7.52/boe)
- Placid Montney: multi-well pad tie-in underway with a single drilling rig active in the field
- Duvernay: strong results with 937 boe/d IP30s (91% liquids) on a recent multi-well volatile oil pad
Thermal Oil – Low Decline Production
- Production of 30,477 bbl/d, representing 8% growth year over year
- Operating income of $62.3 million and free cash flow of $48.6 million
- Reduced non-energy costs by 25% year over year with Leismer at an all-time low of $6.69/bbl
Business Environment and Outlook
- Athabasca is strategically slowing production in Thermal Oil by 5,000 – 8,000 bbl/d for the balance of the year to optimize netbacks during an unprecedented WCS differential environment
- Reiterating 2018 production guidance of 39,000 – 41,000 boe/d on a $200 million capital program
- Differentials are expected to narrow in 2019 with a resumption in refining demand and increased egress capacity
- The Company plans to align 2019 capital with cash flow and is prepared to pare back activity as required; a low corporate decline allows the Company to maintain production with modest capital
Athabasca is a liquids-weighted intermediate producer with exposure to Canada’s most active resource plays (Montney, Duvernay, Oil Sands). The Company’s emphasis is on generating strong margins to maximize shareholder return and generate free cash flow into the future.
The Company offers investors excellent exposure to improving oil prices with low total leverage and funds flow sensitivity of approximately $80 million for each incremental US$5/bbl increase in WTI.
Financial and Operational Highlights
|3 months ended Sept. 30||9 months ended Sept. 30|
|($ Thousands, unless otherwise noted)||2018||2017||2018||2017|
|Petroleum and Natural Gas Volumes (boe/d)||40,612||36,133||39,614||33,183|
|Operating Netback1,2 ($/boe)||$||23.21||$||15.59||$||13.60||$||12.73|
|Capital Expenditures Net of Capital-Carry1,3||$||52,389||$||67,741||$||147,938||$||179,365|
|LIGHT OIL DIVISION|
|Oil, Condensate and NGLs (bbl/d)||5,167||4,282||5,382||3,446|
|Natural Gas (mcf/d)||29,811||21,556||32,698||16,504|
|Petroleum and Natural Gas Volumes (boe/d)||10,135||7,875||10,832||6,197|
|Operating Netback1 ($/boe)||$||31.95||$||18.98||$||28.76||$||21.87|
|Capital Expenditures Net of Capital-Carry1,3||$||38,619||$||47,314||$||89,935||$||131,848|
|THERMAL OIL DIVISION|
|Bitumen Production (bbl/d)||30,477||28,258||28,782||26,986|
|Operating Netback1 ($/bbl)||$||23.30||$||13.27||$||12.10||$||9.73|
|CASH FLOW AND FUNDS FLOW|
|Cash Flow from Operating Activities||$||61,733||$||49,488||$||86,097||$||24,637|
|per share (basic)||$||0.12||$||0.10||$||0.17||$||0.05|
|Adjusted Funds Flow1||$||62,151||$||34,400||$||81,471||$||60,315|
|per share (basic)||$||0.12||$||0.07||$||0.16||$||0.12|
|NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)|
|Net Income (Loss) and Comprehensive Income (Loss)||$||31,419||$||5,113||$||(81,178||)||$||181|
|per share (basic and diluted)||$||0.06||$||0.01||$||(0.16||)||$||–|
|COMMON SHARES OUTSTANDING|
|Weighted Average Shares Outstanding (basic)||515,792,185||509,335,251||513,575,091||496,845,215|
|Weighted Average Shares Outstanding (diluted)||527,414,170||513,332,423||513,575,091||502,283,110|
|As at ($ Thousands)||Sept. 30
|LIQUIDITY AND BALANCE SHEET|
|Cash and Cash Equivalents||$||128,340||$||163,321|
|Available Credit Facilities4||$||59,991||$||61,899|
|Capital-Carry Receivable (current & LT portion – undiscounted)||$||101,031||$||164,023|
|Face Value of Long-term Debt5||$||581,558||$||563,310|
- Refer to the “Advisories and Other Guidance” section in the MD&A for additional information on Non-GAAP Financial Measures.
- Includes realized gain (loss) on commodity risk management contracts of $(8.4) million and $(32.9) million for the three and nine months ended September 30, 2018, respectively ($3.7 million and $6.7 million for the three and nine months ended September 30, 2017, respectively).
- Capital expenditures include capitalized G&A.
- Subsequent to September 30, 2018 Athabasca’s available credit and letter of credit facilities increased to $127 million.
- The face value of the 2022 Notes is US$450 million. The 2022 Notes were translated into Canadian dollars at the September 30, 2018 exchange rate of US$1.00 = C$1.2924.
The global crude outlook remains supported by strong demand, low inventories, ongoing geopolitical risk and a decrease in spare productive capacity. Athabasca is a beneficiary with its oil-weighted portfolio.
Despite the strong global crude outlook, Canadian producers have experienced unprecedented differential volatility across light and heavy product streams due to pipeline capacity constraints and refinery turnarounds in key consuming US regions.
The Company anticipates differentials to remain wider than historical levels through the winter. Athabasca has responded to the widening differentials by strategically slowing production by 5,000 – 8,000 bbl/d for the balance of the year (November and December) at Hangingstone and Leismer to optimize netbacks with no long term impacts to the reservoirs.
WCS differentials are expected to normalize between US$18 – 24/bbl over the mid-term supported by a resumption in refinery demand (~1.5 mmbbl/d of peak outages), mobilization of industry crude by rail (currently ~300,000 bbl/d), producer curtailments and Enbridge’s Line 3 Replacement project (370,000 bbl/d). The US refinery complex has made significant investments over the past decade to increase processing capacity of heavy feedstock. Canadian heavy production is expected to have an increasing market share offsetting declines in Venezuela and Mexico.
Athabasca also continues to optimize netback performance by mitigating apportionment with sales to refineries (~60% in Q3) and through access to leased storage in Edmonton. Athabasca has secured long term egress to multiple end markets with 25,000 bbl/d of capacity on TransCanada Keystone XL and 20,000 bbl/d of capacity on the Trans Mountain Expansion Project.
As a net consumer of gas the Company is also a beneficiary of the low Alberta gas pricing environment.
Athabasca has significant flexibility in capital allocation. Thermal Oil underpins a low corporate decline of approximately 10% and provides shareholders free cash flow torque to normalizing differentials and strengthening global oil fundamentals. Placid Montney bolsters the Company’s exposure to high netback production with a flexible development. Kaybob Duvernay is self-funded with minimal capital exposure to the end of 2019 through a joint venture and also increases the Company’s exposure to high value condensate production.
The Company’s priority is to maintain balance street strength by aligning 2019 activity levels to forecasted cash flow and is prepared to implement a minimal capital program until Canadian differentials improve. Growth projects beyond this level will be evaluated in the context of maintaining financial flexibility, corporate free cash flow and external market conditions.
Athabasca ended the quarter with net debt of $372 million. The Company has also recently enhanced its liquidity position by $66.5 million through an increase in letter of credit facilities and the return of a letter of credit issued by the Company in relation to the Trans Mountain Expansion Project until closer to the project startup. Available funding capacity is now estimated at $356 million, including $128 million of cash and equivalents, $127 million of available credit facilities, and a $101 million Duvernay capital carry.
Athabasca is exploring monetization options of its extensive Thermal Oil infrastructure. The Company believes that current timing is favorable following the integration of Leismer and market precedent transactions. A process is underway to explore a wide range of alternatives for this infrastructure which could include a sale, partnership or joint venture. The infrastructure will remain a strategic asset for future growth initiatives at Leismer and Corner.
The Company maintains flexibility for use of potential proceeds which could include bolstering liquidity and/or debt reduction, investing in projects across its asset base that will generate attractive returns for shareholders, and initiating a share buyback program.
Q3 2018 production averaged 10,135 boe/d (51% liquids), representing 29% growth year over year. Light Oil generated third quarter operating income of $29.8 million with a netback of $31.95/boe, supported by a high liquids weighting and low operating expenses of $7.52/boe. Athabasca’s Light Oil netbacks are top tier when compared to Alberta’s other liquids-rich Montney and Duvernay resource producers. The Company spent $38.6 million (net of capital carry) during the quarter.
Greater Placid Montney (70% operated working interest)
During the quarter Athabasca completed a six well development pad (surface location 12-19-60-23W5) which is currently being tied into permanent facilities. Drilling is underway on a seven well development pad (surface location 16-30-60-23W5). In light of current differential volatility and a focus on maximizing shareholder returns, the Company has elected to temporarily defer completion operations.
Over the past two years Athabasca has transitioned Placid from early stage resource capture to efficient multi-well pad development. The Company has organically grown production to ~8,500 boe/d net (~12,000 boe/d gross) and maintains a regional competitive advantage with ownership and operatorship of significant infrastructure. The Company has high graded ~200 liquids rich Montney locations and is positioned for scalable and flexible development.
Greater Kaybob Duvernay (30% non-operated working interest)
Activity in the Duvernay remains robust with the joint venture partnership executing an annual budget of C$387 million (C$30 million net) in 2018 which includes completion operations on 24 wells and placing 26 wells on production. The Duvernay is contributing to strong production and cash flow growth. Q3 Duvernay production was 4,298 boe/d net (63% liquids), up 150% year over year.
Operations are focused on development drilling at Kaybob West and volatile oil delineation across Athabasca’s extensive acreage positon. The joint venture has seen a step change in cost performance with the transition to multi-well pads. The latest development wells have averaged C$8 – 10 million per well (drill & complete).
A string of strong well results continued during the third quarter. IP30s on a five well liquids-rich pad at Kaybob West averaged 1,178 boe/d per well (57% liquids), a two well volatile oil pad at Kaybob East IP30s averaged 711 boe/d (85% liquids) and a three well volatile oil pad at Kaybob West IP30s averaged 937 boe/d (91% liquids).
Q3 2018 production averaged 30,477 bbl/d, representing 8% growth year over year.
Thermal Oil generated Q3 2018 operating income of $62.3 million with a netback of $23.30/bbl. Leismer and Hangingstone accounted for operating income of $53.3 million ($27.55/bbl) and $9.0 million ($12.20/bbl) respectively. Financial results were supported by higher realized crude oil prices and ongoing cost optimization. Optimization initiatives have reduced non-energy operating costs by 25% year-over-year to a record low, with Leismer at $6.69/bbl and Hangingstone at $12.20/bbl. Capital expenditures in the third quarter were $13.7 million with resulting free cash flow of $48.6 million.
At Leismer, field activity included the tie-in of four standing infill wells and the installation of a fifth steam generator that was previously held in inventory. The steam generator reduces downtime for planned maintenance and provides excess steam capacity for the start-up of future sustaining well pairs. The Company has commenced operations on the next Leismer sustaining pad (Pad L7) with drilling to be completed this winter and on-stream timing in H2 2019. Project capital for Pad L7 is $55 million with the majority of capital allocated to 2019.
These initiatives are expected to support base annual production between 20,000 – 22,000 bbl/d over the next several years. The Leismer project has a reserve life of ~80 years (Proved + Probable).
Athabasca’s 2018 budget is $200 million and includes $85 million in Thermal Oil and $115 million in Light Oil ($85 million Placid Montney and $30 million net Kaybob Duvernay).
The Company anticipates achieving its prior annual guidance of 39,000 – 41,000 boe/d despite the temporary production curtailments in Thermal Oil for the remainder of the year.
|2018 Guidance||Full Year|
|Production (boe/d)||39,000 – 41,000|
|Capital Expenditures ($MM)||$200|
|Adjusted Funds Flow ($MM)||$55|
|WCS Differential (US$/bbl)||$26.50|
|AECO Gas (C$/mcf)||$1.55|
About Athabasca Oil Corporation
Athabasca Oil Corporation is a Canadian energy company with a focused strategy on the development of thermal and light oil assets. Situated in Alberta’s Western Canadian Sedimentary Basin, the Company has amassed a significant land base of extensive, high quality resources. Athabasca’s common shares trade on the TSX under the symbol “ATH”. For more information, visit www.atha.com.