A Classic Short Term Trade: Athabasca Oil Corporation
Athabasca Oil Corporation (OTCPK:ATHOF) is one of Canada's premier oil development companies with a range of prime light oil and thermal oil assets. The company holds a vast amount of land leases with 1.5M net acres in the Athabasca area in Northern Alberta and over 2M net acres in northwestern Alberta. The company has about 400.64M shares outstanding and a market capitalization of $2.75B.
The company is currently targeting to produce 220,000 barrels of oil equivalent per day by the year 2020, a significant increase over the company's first quarter production of 6,100 barrels per day. However, that production growth will come in stages and will require immense amounts of capital investment and therefore, the company's shares do not necessarily represent what short-term traders scan the equity markets for- on the surface at least.
Digging deeper under the surface of the long-term investment thesis Athabasca usually represents, a short-term trader will discover that an upcoming regulatory approval for the company's Dover Oil Sands project in late July, or early August will present an outstanding trading opportunity for those willing to take on the risk.
Background of the Dover Put Option
In February 2010 PetroChina (NYSE:PTR) acquired a 60 percent interest in both the company's MacKay River and Dover Oil Sands projects for $1.9B, leaving Athabasca with a 40 percent interest in both projects. Although the agreement entailed many elements such as a loan from PetroChina, the key element of interest in the purchase agreements is the MacKay River and Dover Call/Put options.
For those not familiar with the lingo, a call option will enable PetroChina to purchase the remaining 40 percent (once regulatory approval is received) in both the MacKay River and Dover projects for $680M and $1.32B, respectively. The put option enables Athabasca to sell its 40 percent interest in both projects to PetroChina for the same amounts if it chooses to do so.
In 2011 the first phase of the MacKay River project received regulatory approval, which triggered the put/call option under the purchase agreement and was exercised on December 2011 by PetroChina who paid Athabasca $680M for its 40 percent interest in the project.
Understanding the Share Value Impact
The regulatory approval for the Dover Oil Sands project is expected any day now with the company's chief executive expecting the decision to be rendered in late July or early August. Given the positive decision for the MacKay River project and the reliance of the Albertan economy on oil sands projects for employment and tax revenue generation, it is likely that the decision for the Dover project will be positive as well, although the risk of a negative decision exists.
Once regulatory approval is granted, Athabasca has the right to sell to PetroChina its 40 percent interest in the project for $1.32B, an amount equal to 48 percent of the company's current market capitalization.
Adding the company's current cash balance of $756.58M, the company's cash on hand could reach more than 74 percent of its current market capitalization if the Dover put option is exercised.
Dover Put Option
Cash Per Share
The Dover put option and regulatory approval sets the stage for a material surge in the company's share value. As the chart bellow illustrates, once the option is exercised, the company will have a cash balance equal to 37 percent of its market capitalization even once its shares double from their current levels.
Disclosure: I am long OTCPK:ATHOF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I am long Athabasca Oil Corporation on the TSX