- Athabasca Oil needs $45 WTI to break even.
- The current oil price will give the company a massive break and the cash flow will be pouring in.
- Despite this, I'd rather be a creditor than a shareholder.
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2020 was a difficult year for most oil producers, but oil companies operating in capital intensive oil sands with a high net debt load like Athabasca Oil (OTCPK:ATHOF) were suffering more than others. Fortunately the current high oil price will be a tremendous help to the company to increase its free cash flow while it should also make refinancing the debt easier.
Athabasca Oil has its main listing on the Toronto Stock Exchange with ATH as its ticker symbol. The average daily volume in Canada exceeds 4M shares, so the liquidity is clearly better in Canada. As the company also reports its financial results in Canadian Dollars, I will use the CAD as base currency throughout this article, and I will refer to the Canadian share price. There are currently 530.7M shares outstanding and at the current share price of C$0.54, the market capitalization of Athabasca Oil is just over C$285M.
The 2020 results were disastrous, and that hardly was a surprise
During 2020, Athabasca Oil produced an average of 32,500 barrels of oil-equivalent per day of which about 9,740 barrels were considered light oil and the remaining 22,750 barrels were bitumen (heavy oil recovered from oil sands). The average production was about 10% lower than in 2019 but that’s mainly due to lower output in the first portion of the year as the production picked up again in the final quarter as oil prices recovered. In Q4, Athabasca produced an average of 34,200 boe/day, consisting of 9,400 boe/day of light oil and about 24,800 boe/day of bitumen.
Source: full-year update
Due to the low average oil price, the total revenue in 2020 collapsed to just over C$460M. Fortunately the company benefited from the hedges it had in place which provided a very welcome boost to the top line. Including hedge benefits, the total reported revenue came in at C$504M.
Source: financial results
However, as Athabasca’s operating expenses ballooned to C$1.13B, the pre-tax income dropped to a negative C$625M. A brutal pre-tax loss, but a large portion could be explained by a C$472M impairment charge, C$5.7M restructuring expenses and a C$22.4M exploration and asset expense. Excluding these factors, Athabasca would still have been loss-making, but at a rate of C$100M in 2020 which isn’t too bad considering it reported a negative netback on its bitumen production during the year, while generating a netback of in excess of C$9/barrel in Q4.
Looking at the cash flow statements, the situation isn’t much better as Athabasca continued to spend a substantial amount on capex as it’s not easy to take swift actions on oil sands operations. The total operating cash flow in 2020 was a negative C$34M and after deducting the lease payments of C$2.6M, the total negative operating cash flow was a minus C$36.5M.
Source: financial results
Considering the total capex was C$111M, Athabasca Oil’s free cash flow was a negative C$148M. Fortunately the company was able to sell C$70M worth of assets which helped to soften the blow but it still ended the year with a cash position approximately C$89M lower than in 2019 and a net debt of around C$394M compared to C$305M as of the end of 2019.
But again, the negative free cash flow was predominantly caused by the exceptionally low oil price in the second quarter. In the final quarter of the year, for instance, the company generate an average netback of almost C$10/boe.
Source: company presentation
2021 is shaping up to be better, and refinancing the debt is priority No. 1
There’s no way to sugarcoat it for Athabasca Oil: 2020 was disastrous, and the company should focus on 2021. Thanks to the current high oil price, things are looking up and whereas the operations were loss-making in 2020, the current oil price is a massive tailwind for Athabasca Oil.
According to a December update, Athabasca is aiming for a stable output this year of around 31-33,000 boe/day. About 1/3 rd of the output in Q1 has been hedged based on a WTI oil price of US$45/barrel so Athabasca won’t be able to fully benefit from the current upswing, but I hope the management will take advantage of the current oil prices to start locking in the WTI price for the remainder of the year. I don’t think there’s anything wrong with locking in 50%-75% of the 2021 production at the current oil price. Subsequent to the December update, Athabasca Oil has sold call options for about half the expected output using a US$55/barrel WTI oil price, and I agree with this approach although I hope the company also thinks about hedging the downside risk instead of just capping the upside potential. I expect the hedge book to evolve to a zero-cost three collar hedge, pretty much like what the Q1 hedges are looking.
Source: company presentation
The anticipated capex was originally C$75M but due to the recent oil price increase, Athabasca has upscaled this to C$100M which will help to support the production levels in 2022 and beyond.
The high oil price should help Athabasca Oil to refinance its US$450M bond. The maturity date of the bond is in 2022, but Athabasca’s management has indicated it's an issue it wants to tackle this year, and I expect the management to capitalize on the current oil price by refinancing the debt as it needs to kick the maturity date further down the road.
Source: company presentation
At US$55/barrel, Athabasca Oil is guiding for an adjusted funds flow of approximately C$125M and this indicates the company should return to a positive free cash flow. Even after recently hiking the capex guidance to C$100M, about C$25M in net free cash flow should hit the balance sheet. For every US$5/barrel oil price increase, Athabasca is guiding for a C$70M EBITDA increase which will pretty much entirely translate into C$55-60M increased free cash flow as there will be hardly any additional operating or capital expenses associated with the higher EBITDA.
This makes Athabasca an interesting case. I currently don’t have a position as I’d like to see Athabasca’s plan to refinance the existing debt. And while I’m a bit underwhelmed by the free cash flow guidance at US$55 WTI, Athabasca’s financial performance is leveraged to the oil price. At the current spit price, the free cash flow result would come in about 5-6 times higher at C$150M+ compared to the current guidance of C$25M at US$55 WTI.
If anything, I’d be interested in buying the bonds which are currently trading at just around 80% of the par value. Despite the high oil price, I’d prefer to be a creditor than a shareholder.
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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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 have no position in Athabasca Oil, but will give the 2022 bonds a closer look.
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