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Executives

Andre De Leebeeck - Vice President, Investor Relations and Communications

Sveinung Svarte - President and Chief Executive Officer

Rob Broen - Chief Operating Officer

Kim Anderson - Chief Financial Officer

Anne Schenkenberger - Vice President, Legal

Analysts

Mark Friesen - RBC Capital Markets

Matt Taylor - National Bank Financial

Athabasca Oil Corporation (OTCPK:ATHOF) Q4 2013 Earnings Conference Call March 19, 2014 9:30 AM ET

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Athabasca Oil Corporation’s 2013 Year End Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions) As a reminder this conference call is being broadcast live on the Internet and recorded.

I would now like to turn the conference call over to Andre De Leebeeck, Vice President Investor Relations and Communications. Please go ahead Mr. De Leebeeck.

Andre De Leebeeck - Vice President, Investor Relations and Communications

Thank you, operator. And welcome everyone to our 2013 year end results conference call. I would like to refer you to the advisories and forward-looking statements located at the end of today’s news release. All information provided today is qualified by those advisories.

Sveinung Svarte, Athabasca’s President and Chief Executive Officer will begin the call discussing the progress made in 2013. Rob Broen, Athabasca’s Chief Operating Officer will provide a summary of operations and reserves, followed by Kim Anderson, Athabasca’s Chief Financial Officer who will present a summary of the 2013 financials. Please proceed, Sveinung.

Sveinung Svarte - President and Chief Executive Officer

Thank you, Andre. Good morning to everyone. The delay of the Dover approval contributed to making 2013 a challenging year for Athabasca. However we also achieved many significant milestones as we continued our transition from a largely exploration stage company to becoming a producer.

In light oil we completed the construction of key infrastructure and achieved substantial production level. In thermal oil we made significant construction progress on Hangingstone Project 1 over 12,000 barrels per day SAGD project, Steam Assisted Gravity Drainage and we also received Alberta Energy Regulator approval for the Dover Commercial Project.

In early 2014 outstanding statements of concern from the Fort McKay First Nation were resolved. Fort McKay discontinued its appeal of the Alberta Energy Regulator’s approval of the Dover Commercial Project and that project has now received Order in Council. We do expect final regulatory approval from Alberta Environment in the coming weeks which will pave the way for exercising the Dover put option.

Highlights from 2013 include, in the Light Oil division we produced an average of approximately 6,400 barrels of oil equivalent per day during the year, an increase of 280% over the prior year. Fourth quarter production averaged approximately 6,700 barrels of oil equivalent per day which is in line with guidance. By year end we had completed 59% of the Hangingstone Project 1 with 15 producers producing wells and 10 injectors drilled at year end.

The central processing facility, well pads, pipelines and other area infrastructure are progressing. Construction is expected to finish around year end 2014 and we’re trending in line with budget. Our year end Independent Reserve and Resource Evaluation reported a 32% year-over-year increase in gross proved plus probable reserves to a total of 482 million barrels of oil equivalent. We also hold 10.5 billion barrels of contingent resource; this is best estimate as of December 31, 2013. Our commitment to Health, Safety and Environment remains a priority and Athabasca’s leadership is focused on accountability, prevention and preparedness in the HSE context.

I will let Rob Broen take you through the operational reviews and after that Kim Anderson will provide a review of Athabasca’s 2013 financial. And those of you who don’t know Kim from before, she is our new Chief Financial Officer. A great addition to the team who will play an important role in Athabasca moving forward in 2014. So Rob please go ahead.

Rob Broen - Chief Operating Officer

Okay. Thank you, Sveinung, and good morning everyone. I’ll provide an operations update for both Light Oil and Thermal Oil divisions followed by a reserves update. So as Sveinung mentioned in 2013 we continued to establish Athabasca as an operating and producing company. Our production averaged 6,397 BOE per day with 49% liquids in 2013 and that compares to 1,684 BOE a day and 42% liquids in 2012. This represents a 280% increase in production. Production in Q4 2014 averaged 6,697 BOE per day and that’s in line with our guidance of 6,500 to 7,000 BOE per day. Our production guidance for Q1, 2014 is 6,000 to 6,500 BOE per day and we’re on track to deliver.

Second quarter production is expected to be in the range of 5,500 to 6,000 BOE per day and that contemplates a scheduled shutdown of the Keyera Simonette plant that will happen in April of 2013 sorry April this year 2014. During 2013 we recognized a netback of 3,129 per BOE and that compares to 2,349 per BOE in 2012. We realized improvements in netbacks in 2013 due to increasing commodity prices, higher liquid content in our production, lower operating costs and increasing contributions from high netback Duvernay production.

The company drilled 20 and completed 22 horizontal Montney wells during 2013. So at the end of the year land tenure for over 95% of the Company’s prime Montney land had been extended into the intermediate term and that allowed us to increase our focus on the company’s extensive Duvernay position.

In the third quarter of 2013 we recommenced our Duvernay drilling program with a goal of delineating and continuing our high-graded land position in the Kaybob region. With a two rig program, one vertical well and three horizontal wells were rig released at the end of 2013. This quarter in 2014 we’ve drilled an additional two Duvernay horizontal wells.

We’re completing four horizontal wells and plan to bring all four wells on production between now and midyear 2014. I can tell you results from the drilling program so far have been consistent with our expectations in terms of reservoir quality and have largely confirmed our initial mapping. We look forward to establishing 30 day IP rates from our completed wells over the next several months.

It is important to note that drilling of these wells will continue a large portion of our 2014 land expiries with only seven additional wells required to hold 95% of our high graded 200,000 net acres in the heart of the Kaybob fairway. As you know we’ve been going through a structured process to look for options for a JV partnership to develop a large Duvernay asset position. So consistent with our corporate strategy we feel this maybe an effective way to fund the play and accelerate value for our shareholders. There is strong interest in our Duvernay assets and this process is continuing.

As previously mentioned we did sell a 50% interest in part of our Kaybob infrastructure. As part of that deal I want to mention that we’re also installing a 10-inch pipeline that connects our Kaybob West pipeline to the SemCAMs KA facility. We’re constructing this pipeline and will retain a 10% working interest at no cost to Athabasca. This continues to progress our strategy of creating future optionality and scalability for egress for our production in this area. Athabasca is very well-positioned for future growth.

I’ll now switch to the Thermal Oil side. We made significant progress in the development of Hangingstone Project 1. We continued with infrastructure and facilities construction and module fabrication and we commenced drilling our first SAGD wells. Earthworks construction, pile driving camps and the early concrete works for the central plant site are substantially complete. Module and equipment delivery continues in 2014 to support the planned mobilization of major mechanical and electrical contractors within the first half of this year.

Construction of the field pipelines and source water pipeline also started in January 2014 and will be substantially complete in the first quarter of this year. We commenced SAGD drilling with one rig in August and added a second rig in September of 2013. To-date the two rigs are meeting expected cost and schedule. By the end of 2013 15 producer wells and 10 injector wells had been drilled. During Q1 this year we finished drilling our first four pads comprised of a total of 20 producer-injector pairs.

The reservoir quality is consistent with expected results derived from Athabasca’s extensive appraisal drilling and reservoir modeling. In fact average effective wellbore length is greater than 90%. We’ve also been paying careful attention to drill the wells as flat as possible and as close as practical to the base of the reservoir. That maximizes recoverable volumes and we’ve also maintained producer-injector pairs in parallel to optimize steam chamber development.

Overall cost and progress continued to be well aligned on the Hangingstone Project. At the end of 2013 the project was 59% complete. We have secured contracts for 80% of the sanctioned value of the project and we will see peak activity levels in the field during 2014. We anticipate final construction to be complete near the end of 2014 with first steam expected towards the end of Q1, 2015, so we’ll clearly be commissioning in the first quarter of 2015.

The costs associated directly with Hangingstone Phase 1 base project have not changed and are estimated to be $565 million. As we’ve consistently described we’re focused on ensuring Hangingstone Project is a success in order to demonstrate Athabasca’s ability to execute and operate large thermal oil projects. We’ve not only focused on short term results, we’re also ensuring the project is setup for the long-term.

To that end we’re installing regional infrastructure to accommodate future expansions and the total cost have added an additional $108 million above Hangingstone Phase 1 base cost. Additionally in line with our approach to ensure optimal well placement within the reservoir through appropriate investment in detailed delineation and reservoir planning we made an operational optimization decision to drill a production assurance pad.

The fifth pad consisting of five well pairs is being drilled to enable operations to best manage production ramp-up as well as to optimize facility production. The producer laterals of that assurance pad have been drilled with results matching those of the first four base pads and it will be production ready for first steam. The cost of the production assurance pad is $35 million.

Finally I’ll now move on to 2013 reserves. Our year end Independent Reserves and Resource Evaluation reported a 32% year-over-year increase in growth proved plus probable reserves to 482 million barrels of oil equivalent. We also hold contingent resources best estimate of 10.5 billion barrels as of December 31, 2013.

Light oil now holds proved and probable reserves of 33 million barrels of oil equivalent, an increase of approximately 48% compared to the prior year. With a filing of the Hangingstone expansion regulatory application and continued development of Hangingstone Project 1 thermal oil now holds gross proved plus probable reserves of 450 million barrels and that’s an increase of 31% compared to the prior year.

So that concludes the operations and reserves update. And I would now like to turnover the conference call to Kim Anderson.

Kim Anderson - Chief Financial Officer

Thanks, Rob, and good morning everyone. I’ll provide a very brief summary of our 2013 capital funding and then provide an update on our 2013 and 2014 liquidity and funding initiatives. With respect to capital Athabasca’s total 2013 capital expenditures excluding non-cash capitalized general and administrative cost and non-cash financing charges were $762 million.

Out of this total we spend $282 million in light oil primarily on our drilling program targeting the Duvernay and Montney formations which Rob just spoke about as well as on the construction of the 32 kilometer Kaybob East interconnect pipeline. In thermal oil we spend $466 million primarily on the development of Hangingstone Project 1 including facilities and the supporting drilling program as well as for Hangingstone area infrastructure.

Turning to our liquidity position, in 2013 we took a number of steps to enhance our liquidity to meet our future commitment. On December 16, 2013 Athabasca entered into an amended and restated $350 million credit facility with the syndicated financial institution to replace its previous $200 million credit facility. The amended and restated facility consist of a $200 million revolver which is available on a revolving basis until December 31, 2014 and which maybe extended for an additional 364 days. It also includes an additional $150 million which will be reduced to $100 million on August 1 to $50 million on November 1, with the balance mature on December 31, 2014.

As Rob mentioned in late December we also sold a 50% interest in part of our Kaybob area infrastructure to a third-party for gross proceeds of $146 million recognizing a gain of $69 million in our financial statements. Despite our reduced holding remain the operator of the jointly held infrastructure and have also maintained sufficient pipeline capacity to meet our future light oil production growth expectations.

At December 31 we had a strong liquidity position of approximately $673 million including cash and cash equivalents, short term investments, and our undrawn credit facility. Athabasca continues to focus on capital discipline. During 2013 we undertook a comprehensive review of our priorities with a view to balancing capital expenditures with our near term funding sources.

Accordingly the completion of Hangingstone Project 1, preparation for Hangingstone expansion and a targeted Duvernay drilling and completion program are our key priorities going forward. Our initial 2014 capital budget of $460 million excluding capitalized general and administrative cost and interest which was approved by our Board late last year was determined based on these priorities and has been allocated as follows, $348 million for thermal oil, $106 million for light oil, $6 million for corporate initiatives.

The corporation has also approved the 2014 capital budget of $20 million for Athabasca’s 40% interest in the Dover joint venture. As previously mentioned in early 2014 the outstanding statement of concern from the Fort McKay First Nation was resolved and Fort McKay discontinued its appeal of the Alberta Energy Regulator’s approval of the Dover Commercial Project. The project has also now received Order in Council and we expect final regulatory approval from Alberta Environment in the very near term.

Upon receipt of Alberta Environment’s approval we will exercise our put option to sell our remaining 40% interest in the Dover project and expect to yield net proceeds of approximately $1.23 billion after estimated closing cost. Receipt of these proceeds is expected in Q2, 2014. Upon receipt of the Dover sales proceeds affirmation of the productivity of our new Duvernay well and determination of the outcome of our ongoing Duvernay joint venture process we expect to be in a position to revise the 2014 capital program and anticipate issuing an updated 2014 budget in July.

To further enhance our liquidity position in 2014 we will also pursue potential joint venture opportunities for our thermal oil portfolio and will look at refinancing options for our current credit facility. As you can see we believe we’ve developed a financially responsible plan and are committed to pursuing a disciplined and measured approach to growth going forward.

I would now like to turn the call back over to Sveinung for some closing remarks.

Sveinung Svarte - President and Chief Executive Officer

Thank you, Kim. So looking forward our objectives for 2014 we got supported by our (indiscernible) capital budgets are clear. First the completion of Hangingstone Project 1, second, the preparation for Hangingstone expansion and then a targeted Duvernay drilling and completion program.

We’re encouraged by the interest from potential Duvernay joint venture partners and consistent with our corporate strategy, we feel this is potentially an attractive way to fund the play and accelerate value for our shareholders, while allowing us to progress than many of the material projects in Athabasca. We continue to evaluate these options and will strive to finalize our Duvernay strategy by the beginning of July.

We will also by that time have longer term test from four new Duvernay wells and we look forward to receiving the Dover put proceeds. We’re putting in place the pieces which will enable the company toe realize its full potential. I’d like to thank everyone at Athabasca for their continued dedication and hard work, the patience and ongoing commitment and our shareholders for their support. They’re working hard to build the top performing oil company everyone can be proud of.

So with that, I think we’re ready to take questions. Operator, please announce the first question.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen we will now conduct the analyst question-and-answer session. (Operator Instructions) Your first question comes from Mark Friesen from RBC Capital Markets. Please go ahead.

Mark Friesen - RBC Capital Markets

Three quick questions from me. And you just mentioned that the expected proceeds of the Dover put is going to be $1.23 million implying $90 million of closing cost. Can you maybe mention what those closing costs include and might that any settlement with the Fort McKay First Nation?

Kim Anderson

Sure, Mark, it’s Kim Anderson. I’m happy to take that question. My first comment with respect to this is that it’s a very large and complex transaction and it has been ongoing for sometime so as you could imagine there will be some adjustments. The purchase price for the Dover transaction is $1.23 billion that we referred to previously and the difference which is approximately $85 million is really reflecting of our current best estimate of the closing cost will incur for the transaction. That could include working capital adjustments as well as the true-up for our portion of our capital and other obligations associated with the project as well as fees…

Mark Friesen - RBC Capital Markets

Is there any inclusion of settlement proceeds for the Fort McKay?

Kim Anderson

Mark when we have a final number we’ll be in a better position to give you more detail on some of these numbers.

Mark Friesen - RBC Capital Markets

Okay.

Sveinung Svarte

A lot of our working capital adjustments in there Mark and obviously we won’t know those exactly before we know the timing of the close, but this is the best estimate so far.

Mark Friesen - RBC Capital Markets

Okay, thanks. With respect to Hangingstone you mentioned that it remains on budget, you also mentioned the incremental well pad cost of $35 million. Is that $35 million included in the original budget or would that be an extra piece?

Rob Broen

Yes Mark its Rob here. And that additional assurance pad is included in our original budget and it’s something that we’ve included the whole way along.

Mark Friesen - RBC Capital Markets

Okay.

Rob Broen

Just – yes just to give you a little perspective on that. When we look at theoretical production profile we really think 18 wells can hit our 12,000 barrels a day. But in our view when we look at competitor data in the region that these production profiles can be optimistic. So we increased our well count by 10% to 15% to ensure that. And then further rigorous planning despite rigorous planning operations we can statistically expect one wellbore may require a long-term intervention and finally there maybe any one well at any given time that’s down. So as we’ve always said it’s important for us to show we can successfully deliver this project, it’s our show home and we intend to reach full capital of that plant and that’s the reason we have 25 well pairs to ensure delivery of this project and those costs have always been included.

Sveinung Svarte

Mark.

Mark Friesen - RBC Capital Markets

No, again I think that’s good practice to have that extra pad. Do you have sufficient steam to steam in as well?

Rob Broen

Yes. The plant is designed for the 12,000 barrels a day. We have sufficient steam or SORs design is 3.5, theoretically we need 3.2. So we have sufficient steam. And that project is on track in terms of budget and design.

Sveinung Svarte

I think Mark that we always said that we’re going to build this project with excess steam and excess capacity to make sure we deliver the 12,000 and this philosophy of having more wells than we need is in line with that. We probably will not end up steaming all those five wells but we’ll decide that as we do the final modeling over the next couple of months because we do have reserved our data from all the wells, (indiscernible) complete drilling them. So in the next phase we’ll probably decide how many we will steam finally.

Mark Friesen - RBC Capital Markets

Okay. The schedule mentioned in Q4 release mentioned first steam by the end of Q1 in the Q3 release you mentioned first steam by the end of Q4. Can you mention why that’s changed?

Rob Broen

Yes, sure, Rob here. So again our focus on that project is to make sure it’s on budget, on cost and we’re making great progress on that. So for example there is 51 different modules that needed to be built, all 51 modules are on site. The major construction milestones are being hit. We could take the tack of trying to accelerate that timeframe and the plant will still be done by the end of 2014, we’ll be commissioning in at early 2015. We’re suggesting steam towards the end of Q1, but our focus remains on cost. And so that’s our priority and we’re not going to increase our budget to try to accelerate that timeframe. So that’s why we’re guiding towards end of Q1 steam date in all – in the bigger picture that it’s not a significant variance from what we’ve been saying in the past.

Mark Friesen - RBC Capital Markets

Okay, that makes sense. I think earlier this year at some industry conferences you mentioned possible Duvernay JV timing expected by the end of Q1. Are you still thinking of that schedule or can you update that expectation?

Sveinung Svarte

Yes, I’ll answer that one, Mark. I think I said that we expected to have the bids in by the end of Q1. And we still – we’re not a firm be a deadline on this and we hope that the parties have the proposal by end of Q1. What is important for us now is to let these parties who are involved to get the chance to obtain the new well tests. We’re getting now and integrate them into the evaluations. We’ve drilled five new horizontal Duvernay wells. So far we’ve completed three of them and we’re now tying in these wells to get longer term flow rate. So the exact timing when they put the proposal forward will depend on when they can budget those wells. I think for us as well we need – we will need Q2 to finalize our strategy for Duvernay and we will strive to have that ready for let’s say early July. By that time we will also ourselves have the results from these four Duvernay wells long-term test and we should also receive the put proceeds and we will also have then time to evaluate the responses we will get. So this is the time we can really put the pieces together and come out with our strategy for Duvernay early July roughly.

Mark Friesen - RBC Capital Markets

Okay, yes. That makes sense. And then just finally it may just be housekeeping, but what was the rationale behind the amendment to the Corporate By-laws regarding the Board of Director nomination?

Anne Schenkenberger

Hi, Mark. It’s Anne Schenkenberger, I am Vice President, Legal. This is just good corporate governance process and it’s something that’s commonly recommended by shareholder advisory groups. Can you hear me okay?

Mark Friesen - RBC Capital Markets

Yes.

Anne Schenkenberger

Okay. So what you’ll have seen is that we added some provisions that require certain minimum notice be given to shareholders. If the directors are going to be nominated for election at either a special or an Annual General Meeting. And this is just an order to ensure that shareholders have sufficient information about director nominees in order to make informed decisions when they vote to elect the directors. You’ll also see that we increased our quorum for shareholder meetings. So we’ve doubled the amount of shareholdings that are required to have quorum at a shareholders meeting. And then we removed the Chairman tiebreaking vote at Board and shareholder meetings. So it’s just – it’s good governance practices.

Mark Friesen - RBC Capital Markets

Okay. What is the notice required now for nomination?

Anne Schenkenberger

Well it’s between I think its 30 and 60 days, Mark, I can’t remember the exact number of days. But it’s in line with what other companies are doing in terms of shareholder notice. So it’s just to make sure that shareholders are not caught off-guard at a AGM or special meeting of the shareholders.

Mark Friesen - RBC Capital Markets

Right. Okay.

Anne Schenkenberger

So I can get back to you with a specific timing on that if you like.

Mark Friesen - RBC Capital Markets

If you won’t mind give me a call I’d appreciate it.

Anne Schenkenberger

Sure.

Mark Friesen - RBC Capital Markets

That’s it from me. Thanks very much.

Operator

(Operator Instructions) Your next question comes from Matt Taylor from National Bank Financial. Your line is open.

Matt Taylor - National Bank Financial

Hi, Mark touched on a few of my questions. Just one follow-up. The working capital adjustments for the McKay put were on a much smaller scale. So would that be fair to say that the $85 million in adjustments that Kim was talking about, would the majority of that be a payment to the First Nation?

Kim Anderson

Hey Matt, it’s Kim again. I think I refer you to our previous response and that is being working capital and other capital true-up adjustments. From my perspective even though the transactions were similar, different times, different complexities associated with them.

Matt Taylor - National Bank Financial

Thank you. And one follow-up question to that. Do you guys expect to receive the payment in one lump sum payment from PetroChina?

Kim Anderson

That’s our current expectation.

Sveinung Svarte

That’s what the contract stipulates too.

Matt Taylor - National Bank Financial

Great. Thanks guys.

Operator

(Operator Instructions) This concludes the analyst Q&A portion of today’s call. We will now take questions from members of the media. (Operator Instructions) Mr. De Leebeeck, there are no further questions at this time. Please continue.

Andre De Leebeeck - Vice President, Investor Relations and Communications

Right. So thank you for joining us today. Our call is now complete.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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