CALGARY, Alberta, Dec. 10, 2018 (GLOBE NEWSWIRE) — Athabasca Oil Corporation (TSX: ATH) (“Athabasca” or the “Company”) is pleased to provide an update on its midstream process, preliminary 2019 capital guidance expectations and its recent reductions in corporate costs.
Strategic Infrastructure Transaction
Athabasca has entered into an agreement with Enbridge Inc. (“Enbridge”) for the sale of its Leismer pipelines and Cheecham storage terminal (“Leismer Infrastructure Transaction”). Enbridge has been a key partner with Athabasca across its Thermal Oil business unit and the Company looks forward to continuing this long term strategic relationship. The transaction unlocks tremendous value for shareholders while preserving strategic flexibility for the long term development of Athabasca’s high quality Leismer and Corner assets, each of which have regulatory approval for 40,000 bbl/d and a reserve life in excess of 80 years. Key elements of the transaction include:
- $265 million cash consideration with an annual toll of ~$26 million
- Priority service on pipelines and dilbit/diluent tanks; excess volumes receive a discounted toll
- Enhanced credit terms with Enbridge across the Thermal Oil business
Transaction proceeds are approximately 50% of Athabasca’s market capitalization and will significantly bolster the Company’s liquidity, reduce net debt and improve financial resiliency. Leismer’s cost structure will remain competitive with other top tier oil sands projects with a US$43 WTI operating break-even price (assuming a US$18 WCS differential). Future use of proceeds may include debt reduction, growth initiatives or share buybacks. The transaction is expected to close in Q1 2019.
Athabasca acquired the Leismer and Corner assets in early 2017 for cash consideration of $435 million, 100 million of common shares and contingent value payments triggered at oil prices above US$65 WTI (inflated adjusted). In less than two years, the Company has recovered approximately $500 million of its investment through free cash flow generation, the sale of a contingent bitumen royalty and the transaction proceeds.
Athabasca has taken a number of steps to enhance liquidity to ensure financial resiliency. Early in Q4 2018, the Company obtained the release of a $41.5 million letter of credit related to the Trans Mountain Expansion Project and secured a $25 million increase to its letter of credit facilities. Pro forma funding capacity, including enhancements to Enbridge credit terms, is now approximately $525 million (cash and cash equivalents, available credit facilities and Duvernay capital carry).
Canadian producers have experienced unprecedented differential and basis spread volatility across light and heavy product streams due to pipeline capacity constraints. This has culminated in Western Canadian Select (“WCS”) heavy differentials trading to peak levels of US$55 in early Q4. Recently, the Alberta Government announced mandatory short term industry production curtailments (“the Industry Curtailments”) starting in January 2019 to alleviate the high differential situation until additional egress is added in 2019. Athabasca is supportive of these actions and views them as a necessary step to rebalance inventories in the near term and provide a bridge to permanent market access initiatives.
Following the Alberta Government’s announcement, the WCS differential outlook has improved significantly. Athabasca expects differentials to moderate in 2019 supported by the Industry Curtailments (325,000 bbl/d), additional crude by rail (currently ~275,000 bbl/d), the start-up of Northwest Refining’s Sturgeon Refinery (80,000 bbl/d) and the Enbridge Line 3 replacement project in H2 2019 (375,000 bbl/d).
Capital Discipline: 2019 Capital & Production Guidance
Athabasca is implementing a minimum 2019 capital program with a focus on maintaining base production until market fundamentals improve.
- Preliminary capital guidance of $95 – $110 million
- Production guidance range of 37,500 – 40,000 boe/d (88% liquids)
In Light Oil, capital expenditures are expected to range between $15 – 30 million net with production guidance between 10,000 – 11,000 boe/d.
Placid Montney is positioned for flexible pad development with no near term land expiries. The Company has minimal activity planned for the balance of the winter and recently rig released a seven well pad. Completion activity on this pad and drilling on the next multi-well pads has been be deferred until the pricing environment improves.
The Kaybob Duvernay joint venture has been successful at delineating both the gas condensate and the volatile oil windows. Athabasca’s exposure remains protected by the capital carry to the end of 2019 and the asset is expected to be self-funded during the year. Preliminary expenditures are expected between $200 – 375 million gross ($15 – 30 million net) for a resulting 30% WI. Development will continue in the highest returning areas with an inventory of approximately 1,000 gross wells.
In Thermal Oil, capital expenditures are estimated at $80 million with production guidance between 27,500 – 29,000 bbl/d. The Industry Curtailments are not currently included in annual guidance and are expected to be a temporary measure to restore balance in inventories and tighten historically high differentials. Athabasca’s proportional share of the 325,000 bbl/d industry curtailments is estimated at 1,500 – 2,000 bbl/d on a monthly basis through Q1 2019.
At Leismer, the Company has commenced activity on the next five well sustaining pad and associated facilities which are expected to be placed on production in H2 2019. This will be the first sustaining pad drilled at Leismer since the acquisition in 2017. Athabasca has successfully maintained base production through low-cost optimization initiatives. The remainder of the budget relates to operations maintenance and production optimization activities at Leismer and Hangingstone.
The Company retains flexibility to accelerate growth projects across its portfolio beyond this base level of activity. Future capital decisions will be evaluated in the context of maintaining financial flexibility, corporate cash flow and external market conditions.
Enhancing Competitiveness and Resiliency
Athabasca has pro-actively undertaken a number of actions to enhance its competitiveness and resiliency:
- 30% reduction in year-over-year Light Oil operating costs, with Q3 2018 costs of $7.52/boe
- 25% reduction in year-over-year Thermal Oil non-energy operating costs, with Leismer and Hangingstone at records lows of $6.69/bbl and at $12.20/bbl in Q3 2018
- $20 million reduction in run-rate Leismer diluent costs with the tie-in to Norlite in Q2 2018
- Thermal Oil production curtailments in November and December of approximately 8,000 bbl/d
Streamlined Corporate Cost Structure
- 25% reduction in head office staff effective immediately
- Executives and Directors electing a salary rollback of 10%
Marketing and Risk Management
- Thermal Oil apportionment protection through direct sales to refineries (~40% of 2019 production) and access to leased storage in Edmonton
- Thermal Oil hedging: 55% of Q1 2019 at ~US$21 WCS diff and 30% of 2019 at ~US$22 WCS diff
Stronger Balance Sheet
- $41.5 million release of TMX letter of credit and a $25 million increase in letter of credit facilities
- Funding capacity is ~$525 million; term debt in place until 2022 with no maintenance covenants
These actions provide the Company with an effective cost structure and improved liquidity. Athabasca is confident it can compete effectively in the North American market.
“While we are encouraged by the recent short-term steps taken by the Alberta Government, significant damage has already been done to both the Canadian economy and investor confidence,” said Robert Broen, Athabasca’s President & Chief Executive Officer. “The sector is still a long ways away from permanent solutions. Our governments, both Federally and Provincially, need to prioritize long term projects to ensure access to new end markets and to maximize value for Canada. This environment has forced us to make several challenging decisions to ensure our resiliency as a Company including a 50% reduction in 2019 capital spend and a 25% reduction in our Calgary office staff.”
Uniquely positioned, low‐decline, oil‐weighted producer
Athabasca has taken significant steps over the last few years to strategically position the Company with competitive Light Oil and Thermal Oil assets that have exceptional opportunities to generate free cash flow. The Leismer Infrastructure Transaction coupled with a disciplined capital program and enhanced cost structure will allow the Company to remain resilient through a challenging macro environment. The Company’s diverse, low decline and long reserve life portfolio is an advantage during periods of extreme volatility and underpins significant asset value for shareholders. Athabasca offers investors excellent exposure to improving oil prices with low leverage and funds flow sensitivity of $80 million for each incremental US$5/bbl increase in WTI.
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.