ATHABASCA OIL CORP ATH
December 26, 2013 - 3:31pm EST by
hao777
2013 2014
Price: 6.25 EPS -$0.27 -$0.22
Shares Out. (in M): 424 P/E 0.0x 0.0x
Market Cap (in M): 2,648 P/FCF 0.0x 0.0x
Net Debt (in M): 160 EBIT -117 -109
TEV: 2,808 TEV/EBIT 0.0x 0.0x

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  • Discount to NAV
  • Asset Sale
  • Settlement
  • Canada
  • Commodity exposure
  • Oil Price Exposure
  • Litigation
  • E&P
 

Description

Athabasca Oil Corp. (ATH CN, herein ATH) is the worst-performing stock in its comparable set of mid-sized Canadian E&Ps, down 40% YTD. In this carnage lies opportunity, as ATH’s asset base – much of which will eventually be handed over to the company in cash – is worth 60-100+% more than the current stock price. The market is giving us this opportunity after a series of improbable legal decisions and management’s misguided promises have left investors pessimistic and questioning the company’s credibility. The counter to this pessimism is that the legal decisions and resultant delays have only a minor impact on fair value of ATH, and in management’s defense, the series of events witnessed in 2013 was essentially unprecedented and of such a low likelihood that they could not assume them as base case scenarios. The company has reacted and has put forth a “Plan B” budget for 2014 which retains financial flexibility, and in our view, the issues which have hampered the stock should alleviate over the next two quarters.

Description and Background

ATH is a mid-cap with extensive oil sands holdings and a relatively large conventional and developing E&P portfolio, all located in Alberta, Canada. The company is currently producing (6000-6500 boe/d guided for Q1) and is developing an oil sands project, named Hangingstone (Project 1 is the first stage) which should add over time 12,000 boe/d – first “steam” is expected in Q4’14. Over its three phases, the plan is to develop production of >80k boe/d at Hangingstone (2017 and beyond). The company’s other major oil sands development is Dover West Sands which will eventually target 275k boe/d (and which may incorporate co-development with the potentially more productive, but longer-term, Dover West Carbonate).

In terms of the potentially more lucrative light oil opportunity, ATH’s jewel asset is arguably its Duvernay acreage – 350k prospective net acres, including 200k high-graded acres – in what is considered a world class resource. Indeed, majors Chevron and Shell have been promoting their recent results in the region and much of their acreage is contiguous or near ATH’s. In October, CVX said:

Chevron Canada Limited successfully concluded the initial twelve well exploration drilling program in the liquids-rich portion of the Duvernay shale play…The company’s acreage is well positioned in the condensate-rich and volatile-oil portion of the play. Liquids yield for the completed wells range from 30 to 70 percent with initial production rates up to 7.5 million cubic feet of natural gas per day and 1,300 barrels of condensate per day.

“Early results of our Duvernay exploration program are encouraging,” said George Kirkland, vice chairman of Chevron Corporation. “This discovery creates a foundation for future growth in Canada.”

“Well performance and condensate yields exceeded our expectation and strengthen our plans going forward….

In addition to the Duvernay, ATH holds a valuable position in the Montney play (200k total prospective, 100k high-graded acres). These wells, while cheaper than the Duvernay ($4-7mm vs $10-15mm cost) also have a lower NPV, though neither play has been fully optimized yet. For approximate estimates, mgmt. assumes a ~$7.5mm per well NPV for the Duvernay, and $2mm for the Montney. The Duvernay acreage is currently subject to a JV bid process as management seeks ways to accelerate development.

History and the Dover Put

ATH was incorporated in 2006 to focus on oil sands development. The largest owners of the stock at the IPO in April 2010 – remaining so today - were the Ziff family (65mm shares as of today, 16.3% of the company, under ZAM Investments) and insiders (the CEO Svarte Sveinung controls 13.7mm shares while Chairman Bill Gallacher owns 13.2mm – making them the 3rd and 4th-largest owners, respectively). ATH had raised ~$800mm as a private company and announced a JV agreement with PetroChina just prior to the IPO related to the company’s MacKay and Dover assets (60% working interest in both projects for $1.9bn). The JV agreement also included a put/call option for the remainder of each of these assets – which factors mightily into the under-performance we have seen in 2013. The transaction for the 40% of MacKay River was closed in March 2012, while Dover remains outstanding.

The IPO for 19% of the company was priced aggressively at $18/share. The IPO of $1.35bn – most of which was used to build up the light oil portfolio and begin development of the oil sands projects - was the largest Canadian IPO over the prior decade, but subsequently performed poorly, breaking price on its opening day (closing at $15.70). It surpassed its IPO price once, in March 2011, but the chart since then suggests a slow decline, bringing us to today ($6.25, with low close of the year in May at $5.74). What has created ATH’s stock price weakness over the last year? Put simply, there is doubt as to whether ATH will be able to exercise its final put – the 40% of Dover (aka Brion), for $1.32bn, or 50% of its current market cap – to PetroChina, due to a dispute with the natives living in the area of the deposit, the Fort McKay First Nations…the first oil sands project they have objected to since 1993.

To frame the discussion, this was an issue that was supposed to originally be finalized in the spring of 2013 with final approval for the project likely to come in the summer, a necessary precondition before PetroChina could pay for the part of Dover that it did not already own. From the March 21, 2013 Q4 call: “…we don't know exactly the full reasons for the statement of concerns which have been filed. We won't know that before that group has done its filing next week. But we are in constant dialogue with the other party, and concerning the project, keep a good relationship. And depending on the outcomes on those dialogues, a public hearing maybe held late April. As you know, hearings are formal parts of the excellent regulatory system in Alberta. And if it takes a hearing to achieve regulatory approvals, we will go through that hearing. This is nothing new, and something most large oil sands projects have gone through before. And if such a hearing takes place, it would be end of April so it's finished early May. And then, ERCB has 90 days to - before they have to come up with their ruling. So we will probably then get ERCB approval late July to early August.”

However, what soon transpired cast that timeline into doubt. The first day of the hearing, on April 23, saw ATH stock fall 15%. Typically, cases of public opposition to developments usually result in conditional approvals, according to the Energy Resources Conservation Board (renamed the Alberta Energy Regulator), but this situation seemed more problematic and no settlement was forthcoming, a surprise to the company. The issue at stake is the so-called buffer zone, with the First Nations seeking 20 km free of development with the company apparently offering only 5 km. With the hearing concluded on April 29, investors were told that the AER would consider the arguments for approximately 90 days, and the company expressed confidence that with that wrapped up, the matter would move to the provincial cabinet, which would issue approval and allow the put to be exercised in Q4. That is to say, well before year-end, ATH was supposed to be $1.32bn richer.

That approval did indeed arrive, on August 6 – so far, the company’s proclamations appeared back on track and the stock at one point that following day was up 22% (opening at $9). From there, the path appeared clear, and the company (and analysts) indicated that an appeal was highly unlikely as it would only be heard on constitutional grounds, and those seemed absent in this case. Regardless, the FMFN did appeal in early September, but not many gave the appeal any chance…until time kept dragging on with no word. Finally, on October 18, to the market’s surprise, an Alberta court did indeed accept the appeal on a very narrow constitutional issue, causing one (final, we hope) capitulation move downwards. The other overhangs included the fact that cabinet approval was supposed to be independent and happen in parallel…but as that approval was to come from an elected body, they appear to have taken a wait-and-see approach (our conversations indicating that once the issue with the FMFN is resolved, this can move forward). Finally, given the need in northern Canada to drill only in the winter when the ground is firm enough, PetroChina would have needed the asset transferred by the beginning of December in order to undertake a winter drilling season, and that was missed. Analysts questioned what incentive there was for PetroChina to transfer funds until the following winter in late 2014.

So, where does that leave us?

Per management’s public comments and our checks, we understand that Brion is in final settlement negotiations with the FMFN.

We know that PetroChina has publicly stated their intent to honor their contract. And, we also know that post the Nexen transaction (CNOONC was the acquirer) in December 2012, the Canadian government unveiled foreign investment guidelines to prevent future takeovers of oil sands companies by state-owned companies, except under “exceptional circumstances.” Said a different way, the grandfathered Dover deal is likely to be the last deal we see in the Canadian oil sands by a Chinese state operator unless the rules are changed, which appears unlikely. PetroChina wants these assets.

Lastly, the company has provided us a “Plan B” 2014 capex budget of $460mm (release on December 17). This budget allows them to move Hangingstone forward and take important steps on their light oil portfolio. They also gave themselves breathing room by selling a 50% interest in their Kaybob area (Duvernay) light oil infrastructure to a third party for $145mm of cash. This should tide them over until, worst-case, they go to hearing in March and finally settle this issue in Q2/Q3 2014.

Our conclusion, however, is that well before the March hearing, Brion (ATH and PetroChina) will settle with the FMFN, and the cabinet will move forward with approval either before that or soon after, and PetroChina will honor the put agreement as soon as all preconditions are met, and ATH will be in receipt of $1.32bn of cash within two quarters. Once this sequence of events occurs, ATH can appreciate to its fair value, which by our reckoning is at or close to its NAV.

Upside = NAV

ATH today -

Share price: 6.25

FD shares out: 423.8

Market cap: $2,648mm

Net debt: $159.8mm

Enterprise value: $2,808mm

There are a number of ways to value E&Ps, with NAV being the most consistent though it is helpful in earlier stage producers to analyze acreage values, particularly in emerging plays. To the extent you did that with JUST the light oil assets of ATH, you would see that the current valuation arguably captures only those assets, and none of the oil sands, and certainly not the $1.32bn put. Specifically, with the Duvernay at $9,500/acre (200,000 high-graded net acres = $1.9bn) and Montney at $7,500/acre (100,000 high-graded net acres = $750mm), one can roughly derive a valuation of $2.65bn, just shy of the current enterprise value.

For a sanity check, please refer to Trilogy Energy (TET CN), a major Duvernay and Montney player, which trades at an EV north of $17,000/acre of developed land ($3.95bn EV, 226k acres of developed land).

Using a more traditional NAV build-up which in this case is much less generous on the value of the light oil assets (but more generous on the oil sands projects, using strip pricing), it is clear that there is significant upside (in this case, north of $17):

 

 

 

 

Strip Pricing

 

W.I.

Risking

Reserves   (mmboe)

$/BOE

PV   AT $m

$/Share

 

 

 

 

 

 

 

Conventional Reserves (10% AT)

 

 

 

 

 

 

Proved

100%

100%

11

$11.78  

$130

$0.32  

Probable

100%

100%

11

$11.27  

$123

$0.30  

Conventional Total

 

 

22

$11.53  

$254

$0.61  

 

 

 

 

 

 

 

Oil Sands (9% AT)

 

 

 

 

 

 

Hangingstone

 

 

 

 

 

 

Phase   1

100%

80%

131

$2.86  

$376

$0.91  

Phase   2

100%

70%

329

$1.37  

$449

$1.09  

Phase   3

100%

60%

583

$0.73  

$426

$1.03  

Hangingstone Total

 

 

1,043

$1.20  

$1,252

$3.03  

 

 

 

 

 

 

 

Dover West

 

 

 

 

 

 

 Phase 1

100%

70%

131

$1.72  

$227

$0.55  

 Phase 2

100%

60%

438

$1.39  

$609

$1.48  

 Phase 3

100%

50%

438

$1.05  

$462

$1.12  

 Other contingent

100%

100%

2,061

$0.50  

$1,030

$2.50  

Dover West Total

 

 

3,068

$0.76  

$2,328

$5.64  

 

 

 

 

 

 

 

Dover

 

 

 

 

 

 

 Phase 1

40%

60%

175

$0.87  

$152

$0.37  

 Phase 2

40%

50%

219

$0.40  

$89

$0.21  

 Phase 3

40%

40%

219

$0.28  

$61

$0.15  

 Other contingent

40%

40%

744

$0.50  

$60

$0.14  

Dover Total

 

 

1,358

$0.27  

$361

$0.88  

Dover Option Value

 

 

 

 

$1,320

$3.20  

 

 

 

 

 

 

 

Other contingent resource

 

 

 

 

 

 

 Birch - clastics

 

 

2,111

$0.50  

$1,056

$2.56  

 Dover West - carbonates

 

 

3,001

$0.10  

$300

$0.73  

 Grosmont - carbonates

 

 

418

$0.00  

$0

$0.00  

Other contingent resource total

 

 

5,531

$0.25  

$1,356

$3.29  

 

 

 

 

 

 

 

Duvernay

 

 

192

$2,500  

$480

$1.16  

Undeveloped Land - Light Oil Division

 

100%

2,628

$100  

$263

$0.64  

Option Proceeds ($mm)

 

 

 

 

$157

$0.38  

(Net Debt)/Cash (3Q13)

 

 

 

 

-$160

($0.39)

 

 

 

 

 

 

 

Core NAV

 

 

 

 

$2,689

$6.52

Core +   Risked Upside NAV

 

 

 

 

$7,249

$17.57

 

Suffice to say, there is a significant margin of safety in this idea that will be catalyzed by the receipt of 50% of its market cap in cash. To the extent that the put is some way is completely eliminated – in our view, a miniscule probability – ATH’s asset valuation remains intact and could be haircut by 60% or more before you saw downside from the current stock price and even in a fire sale with competitive bidders, we would view this as unlikely. We view ATH as worth $10-15 depending on what discount to NAV the market is willing to ascribe to the enterprise.

Catalysts and Risks

The key catalyst will be a settlement with the FMFN. This is the key that unlocks ATH value, as it should be followed by cabinet approval / order in council, which then unlocks the AER approval, which then satisfies all of the conditions for the put to be exercised. Once ATH receives the put proceeds, it can ramp its capex in order to fully realize its NAV. And, at that point, it may become an attractive takeover candidate. In the meantime, we should also hear about the parameters of a Duvernay JV, as the data room is currently open and per the company, there are a number of interested bidders. This will help frame the light oil valuation and is an important marker.

Risks:

1)      Oil price, and oil price differentials in Canada. As an E&P it goes without saying that there is some commodity risk. This may eliminate the idea as a “value stock” for some purists, but there are obviously many ways to hedge oil price risk.

2)      Further delays through the court system to the extent no settlement is achieved. In this case, assuming steady oil prices, I would expect the stock to languish or even weaken further in the absence of positive updates.

3)      Is ATH considered a distressed seller and will this impact the Duvernay valuation achieved in the JV? Possibly.

4)      Both the Duvernay and Montney are early-stage plays and there is still a lot to learn about actual recoverable reserves and costs.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

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    Description

    Athabasca Oil Corp. (ATH CN, herein ATH) is the worst-performing stock in its comparable set of mid-sized Canadian E&Ps, down 40% YTD. In this carnage lies opportunity, as ATH’s asset base – much of which will eventually be handed over to the company in cash – is worth 60-100+% more than the current stock price. The market is giving us this opportunity after a series of improbable legal decisions and management’s misguided promises have left investors pessimistic and questioning the company’s credibility. The counter to this pessimism is that the legal decisions and resultant delays have only a minor impact on fair value of ATH, and in management’s defense, the series of events witnessed in 2013 was essentially unprecedented and of such a low likelihood that they could not assume them as base case scenarios. The company has reacted and has put forth a “Plan B” budget for 2014 which retains financial flexibility, and in our view, the issues which have hampered the stock should alleviate over the next two quarters.

    Description and Background

    ATH is a mid-cap with extensive oil sands holdings and a relatively large conventional and developing E&P portfolio, all located in Alberta, Canada. The company is currently producing (6000-6500 boe/d guided for Q1) and is developing an oil sands project, named Hangingstone (Project 1 is the first stage) which should add over time 12,000 boe/d – first “steam” is expected in Q4’14. Over its three phases, the plan is to develop production of >80k boe/d at Hangingstone (2017 and beyond). The company’s other major oil sands development is Dover West Sands which will eventually target 275k boe/d (and which may incorporate co-development with the potentially more productive, but longer-term, Dover West Carbonate).

    In terms of the potentially more lucrative light oil opportunity, ATH’s jewel asset is arguably its Duvernay acreage – 350k prospective net acres, including 200k high-graded acres – in what is considered a world class resource. Indeed, majors Chevron and Shell have been promoting their recent results in the region and much of their acreage is contiguous or near ATH’s. In October, CVX said:

    Chevron Canada Limited successfully concluded the initial twelve well exploration drilling program in the liquids-rich portion of the Duvernay shale play…The company’s acreage is well positioned in the condensate-rich and volatile-oil portion of the play. Liquids yield for the completed wells range from 30 to 70 percent with initial production rates up to 7.5 million cubic feet of natural gas per day and 1,300 barrels of condensate per day.

    “Early results of our Duvernay exploration program are encouraging,” said George Kirkland, vice chairman of Chevron Corporation. “This discovery creates a foundation for future growth in Canada.”

    “Well performance and condensate yields exceeded our expectation and strengthen our plans going forward….

    In addition to the Duvernay, ATH holds a valuable position in the Montney play (200k total prospective, 100k high-graded acres). These wells, while cheaper than the Duvernay ($4-7mm vs $10-15mm cost) also have a lower NPV, though neither play has been fully optimized yet. For approximate estimates, mgmt. assumes a ~$7.5mm per well NPV for the Duvernay, and $2mm for the Montney. The Duvernay acreage is currently subject to a JV bid process as management seeks ways to accelerate development.

    History and the Dover Put

    ATH was incorporated in 2006 to focus on oil sands development. The largest owners of the stock at the IPO in April 2010 – remaining so today - were the Ziff family (65mm shares as of today, 16.3% of the company, under ZAM Investments) and insiders (the CEO Svarte Sveinung controls 13.7mm shares while Chairman Bill Gallacher owns 13.2mm – making them the 3rd and 4th-largest owners, respectively). ATH had raised ~$800mm as a private company and announced a JV agreement with PetroChina just prior to the IPO related to the company’s MacKay and Dover assets (60% working interest in both projects for $1.9bn). The JV agreement also included a put/call option for the remainder of each of these assets – which factors mightily into the under-performance we have seen in 2013. The transaction for the 40% of MacKay River was closed in March 2012, while Dover remains outstanding.

    The IPO for 19% of the company was priced aggressively at $18/share. The IPO of $1.35bn – most of which was used to build up the light oil portfolio and begin development of the oil sands projects - was the largest Canadian IPO over the prior decade, but subsequently performed poorly, breaking price on its opening day (closing at $15.70). It surpassed its IPO price once, in March 2011, but the chart since then suggests a slow decline, bringing us to today ($6.25, with low close of the year in May at $5.74). What has created ATH’s stock price weakness over the last year? Put simply, there is doubt as to whether ATH will be able to exercise its final put – the 40% of Dover (aka Brion), for $1.32bn, or 50% of its current market cap – to PetroChina, due to a dispute with the natives living in the area of the deposit, the Fort McKay First Nations…the first oil sands project they have objected to since 1993.

    To frame the discussion, this was an issue that was supposed to originally be finalized in the spring of 2013 with final approval for the project likely to come in the summer, a necessary precondition before PetroChina could pay for the part of Dover that it did not already own. From the March 21, 2013 Q4 call: “…we don't know exactly the full reasons for the statement of concerns which have been filed. We won't know that before that group has done its filing next week. But we are in constant dialogue with the other party, and concerning the project, keep a good relationship. And depending on the outcomes on those dialogues, a public hearing maybe held late April. As you know, hearings are formal parts of the excellent regulatory system in Alberta. And if it takes a hearing to achieve regulatory approvals, we will go through that hearing. This is nothing new, and something most large oil sands projects have gone through before. And if such a hearing takes place, it would be end of April so it's finished early May. And then, ERCB has 90 days to - before they have to come up with their ruling. So we will probably then get ERCB approval late July to early August.”

    However, what soon transpired cast that timeline into doubt. The first day of the hearing, on April 23, saw ATH stock fall 15%. Typically, cases of public opposition to developments usually result in conditional approvals, according to the Energy Resources Conservation Board (renamed the Alberta Energy Regulator), but this situation seemed more problematic and no settlement was forthcoming, a surprise to the company. The issue at stake is the so-called buffer zone, with the First Nations seeking 20 km free of development with the company apparently offering only 5 km. With the hearing concluded on April 29, investors were told that the AER would consider the arguments for approximately 90 days, and the company expressed confidence that with that wrapped up, the matter would move to the provincial cabinet, which would issue approval and allow the put to be exercised in Q4. That is to say, well before year-end, ATH was supposed to be $1.32bn richer.

    That approval did indeed arrive, on August 6 – so far, the company’s proclamations appeared back on track and the stock at one point that following day was up 22% (opening at $9). From there, the path appeared clear, and the company (and analysts) indicated that an appeal was highly unlikely as it would only be heard on constitutional grounds, and those seemed absent in this case. Regardless, the FMFN did appeal in early September, but not many gave the appeal any chance…until time kept dragging on with no word. Finally, on October 18, to the market’s surprise, an Alberta court did indeed accept the appeal on a very narrow constitutional issue, causing one (final, we hope) capitulation move downwards. The other overhangs included the fact that cabinet approval was supposed to be independent and happen in parallel…but as that approval was to come from an elected body, they appear to have taken a wait-and-see approach (our conversations indicating that once the issue with the FMFN is resolved, this can move forward). Finally, given the need in northern Canada to drill only in the winter when the ground is firm enough, PetroChina would have needed the asset transferred by the beginning of December in order to undertake a winter drilling season, and that was missed. Analysts questioned what incentive there was for PetroChina to transfer funds until the following winter in late 2014.

    So, where does that leave us?

    Per management’s public comments and our checks, we understand that Brion is in final settlement negotiations with the FMFN.

    We know that PetroChina has publicly stated their intent to honor their contract. And, we also know that post the Nexen transaction (CNOONC was the acquirer) in December 2012, the Canadian government unveiled foreign investment guidelines to prevent future takeovers of oil sands companies by state-owned companies, except under “exceptional circumstances.” Said a different way, the grandfathered Dover deal is likely to be the last deal we see in the Canadian oil sands by a Chinese state operator unless the rules are changed, which appears unlikely. PetroChina wants these assets.

    Lastly, the company has provided us a “Plan B” 2014 capex budget of $460mm (release on December 17). This budget allows them to move Hangingstone forward and take important steps on their light oil portfolio. They also gave themselves breathing room by selling a 50% interest in their Kaybob area (Duvernay) light oil infrastructure to a third party for $145mm of cash. This should tide them over until, worst-case, they go to hearing in March and finally settle this issue in Q2/Q3 2014.

    Our conclusion, however, is that well before the March hearing, Brion (ATH and PetroChina) will settle with the FMFN, and the cabinet will move forward with approval either before that or soon after, and PetroChina will honor the put agreement as soon as all preconditions are met, and ATH will be in receipt of $1.32bn of cash within two quarters. Once this sequence of events occurs, ATH can appreciate to its fair value, which by our reckoning is at or close to its NAV.

    Upside = NAV

    ATH today -

    Share price: 6.25

    FD shares out: 423.8

    Market cap: $2,648mm

    Net debt: $159.8mm

    Enterprise value: $2,808mm

    There are a number of ways to value E&Ps, with NAV being the most consistent though it is helpful in earlier stage producers to analyze acreage values, particularly in emerging plays. To the extent you did that with JUST the light oil assets of ATH, you would see that the current valuation arguably captures only those assets, and none of the oil sands, and certainly not the $1.32bn put. Specifically, with the Duvernay at $9,500/acre (200,000 high-graded net acres = $1.9bn) and Montney at $7,500/acre (100,000 high-graded net acres = $750mm), one can roughly derive a valuation of $2.65bn, just shy of the current enterprise value.

    For a sanity check, please refer to Trilogy Energy (TET CN), a major Duvernay and Montney player, which trades at an EV north of $17,000/acre of developed land ($3.95bn EV, 226k acres of developed land).

    Using a more traditional NAV build-up which in this case is much less generous on the value of the light oil assets (but more generous on the oil sands projects, using strip pricing), it is clear that there is significant upside (in this case, north of $17):

     

     

     

     

    Strip Pricing

     

    W.I.

    Risking

    Reserves   (mmboe)

    $/BOE

    PV   AT $m

    $/Share

     

     

     

     

     

     

     

    Conventional Reserves (10% AT)

     

     

     

     

     

     

    Proved

    100%

    100%

    11

    $11.78  

    $130

    $0.32  

    Probable

    100%

    100%

    11

    $11.27  

    $123

    $0.30  

    Conventional Total

     

     

    22

    $11.53  

    $254

    $0.61  

     

     

     

     

     

     

     

    Oil Sands (9% AT)

     

     

     

     

     

     

    Hangingstone

     

     

     

     

     

     

    Phase   1

    100%

    80%

    131

    $2.86  

    $376

    $0.91  

    Phase   2

    100%

    70%

    329

    $1.37  

    $449

    $1.09  

    Phase   3

    100%

    60%

    583

    $0.73  

    $426

    $1.03  

    Hangingstone Total

     

     

    1,043

    $1.20  

    $1,252

    $3.03  

     

     

     

     

     

     

     

    Dover West

     

     

     

     

     

     

     Phase 1

    100%

    70%

    131

    $1.72  

    $227

    $0.55  

     Phase 2

    100%

    60%

    438

    $1.39  

    $609

    $1.48  

     Phase 3

    100%

    50%

    438

    $1.05  

    $462

    $1.12  

     Other contingent

    100%

    100%

    2,061

    $0.50  

    $1,030

    $2.50  

    Dover West Total

     

     

    3,068

    $0.76  

    $2,328

    $5.64  

     

     

     

     

     

     

     

    Dover

     

     

     

     

     

     

     Phase 1

    40%

    60%

    175

    $0.87  

    $152

    $0.37  

     Phase 2

    40%

    50%

    219

    $0.40  

    $89

    $0.21  

     Phase 3

    40%

    40%

    219

    $0.28  

    $61

    $0.15  

     Other contingent

    40%

    40%

    744

    $0.50  

    $60

    $0.14  

    Dover Total

     

     

    1,358

    $0.27  

    $361

    $0.88  

    Dover Option Value

     

     

     

     

    $1,320

    $3.20  

     

     

     

     

     

     

     

    Other contingent resource

     

     

     

     

     

     

     Birch - clastics

     

     

    2,111

    $0.50  

    $1,056

    $2.56  

     Dover West - carbonates

     

     

    3,001

    $0.10  

    $300

    $0.73  

     Grosmont - carbonates

     

     

    418

    $0.00  

    $0

    $0.00  

    Other contingent resource total

     

     

    5,531

    $0.25  

    $1,356

    $3.29  

     

     

     

     

     

     

     

    Duvernay

     

     

    192

    $2,500  

    $480

    $1.16  

    Undeveloped Land - Light Oil Division

     

    100%

    2,628

    $100  

    $263

    $0.64  

    Option Proceeds ($mm)

     

     

     

     

    $157

    $0.38  

    (Net Debt)/Cash (3Q13)

     

     

     

     

    -$160

    ($0.39)

     

     

     

     

     

     

     

    Core NAV

     

     

     

     

    $2,689

    $6.52

    Core +   Risked Upside NAV

     

     

     

     

    $7,249

    $17.57

     

    Suffice to say, there is a significant margin of safety in this idea that will be catalyzed by the receipt of 50% of its market cap in cash. To the extent that the put is some way is completely eliminated – in our view, a miniscule probability – ATH’s asset valuation remains intact and could be haircut by 60% or more before you saw downside from the current stock price and even in a fire sale with competitive bidders, we would view this as unlikely. We view ATH as worth $10-15 depending on what discount to NAV the market is willing to ascribe to the enterprise.

    Catalysts and Risks

    The key catalyst will be a settlement with the FMFN. This is the key that unlocks ATH value, as it should be followed by cabinet approval / order in council, which then unlocks the AER approval, which then satisfies all of the conditions for the put to be exercised. Once ATH receives the put proceeds, it can ramp its capex in order to fully realize its NAV. And, at that point, it may become an attractive takeover candidate. In the meantime, we should also hear about the parameters of a Duvernay JV, as the data room is currently open and per the company, there are a number of interested bidders. This will help frame the light oil valuation and is an important marker.

    Risks:

    1)      Oil price, and oil price differentials in Canada. As an E&P it goes without saying that there is some commodity risk. This may eliminate the idea as a “value stock” for some purists, but there are obviously many ways to hedge oil price risk.

    2)      Further delays through the court system to the extent no settlement is achieved. In this case, assuming steady oil prices, I would expect the stock to languish or even weaken further in the absence of positive updates.

    3)      Is ATH considered a distressed seller and will this impact the Duvernay valuation achieved in the JV? Possibly.

    4)      Both the Duvernay and Montney are early-stage plays and there is still a lot to learn about actual recoverable reserves and costs.

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Messages


    SubjectWhere are these numbers coming from?
    Entry12/29/2013 12:47 PM
    Memberaagold
    This might be an interesting opportunity, but in my opinion this write-up brushes over important topics much too quickly. 
     
    For example, if the $1.32B for the Dover put gets exercised, does that cause "Dover West Total" and "Dover Total" to decrease?  Or are those valuations only for the portion maintained assuming the put gets exercised? Also, what does "Core NAV" mean and how are you calculating it exactly (i.e., what's being included or excluded)?
     
    Was this NAV analysis done by you, or is it publicly disclosed by the company, or is it coming from some sell-side research report you haven't mentioned?  Since you haven't given any detail on how this NAV was derived, and it would be a huge amount of work to calculate all of this stuff, I'm guessing you're just copying this from some sell-side research report, is that correct?  Personally I don't think that's ok for VIC; if you're just going to cut-and-paste someone else's work you should say so and reference the source.
     
    When were these strip prices determined?  What are the assumptions about reference prices vs. realized prices? What was the assumed drilling plan?  Is it true that none of this is booked as "Proved" other than $0.32/share listed at the top?  Why are the "probable" reserves being "risked" at 100% rather than 50% (since they only have a ~50% chance of being recovered according to Canadian O&G rules).  Similarly, why are the contingent resources being haircut so lightly?
     
    Also, I don't understand your Trilogy Energy comp.  You wrote that it trades at $17,000/acre of *developed* land.  Did you mean to write *undeveloped*?  Developed assets are normally discussed using EV/boepd or EV/boe of reserves, not EV/developed acre.  You can't compare Trilogy with ATH just based on undeveloped acreage, you also have to consider current production and proved reserves.
     
    The basic thesis here is kind of interesting - i.e., the $1.32B put - but I don't know what to make of the rest of this analysis.
     
    - aagold
     

    SubjectRE: Where are these numbers coming from?
    Entry12/31/2013 09:25 AM
    Memberhao777

    AAGold - thank you for the questions.

    Yes, I could have added some more clarifying assumptions and explanations on the NAV; however, putting in the 10 years of the DCFs for each play seemed overkill. This should help:

    Core NAV = Dover put ($1.32bn) + Conventional Reserves ($254mm) + Hangingstone Phase 1 ($376mm) + bottom section of Duvernay / Undeveloped Land - Light Oil / Options $ / Net Debt

    Core + Risked = all of the above + the next 2 phases of Hangingstone + Dover West + other contingent resources

    Dover West is a separate project to Dover and that is why I mentioned that separately in the description of the ongoing assets. The company discusses it at length in their literature (see pages 15-19 at the following link: http://www.atha.com/upload/media_element/35/23/ath-corporate-update-december-2013.pdf). As for how it is treated in the NAV build-up, I show the full value for each phase and it's included in Core + Risked Upside. In terms of Dover, the $361mm assumes they developed the asset on their own, while the line below that, which is the amount included in both totals, is obviously the put value - I put the "Dover Total" in for illustrative purposes and it is there in case someone wanted to test a scenario where PetroChina walked away (highly unlikely).

    Strip prices have moved down a little bit since I updated the NAV, but here are the pricing assumptions:

    Strip   Pricing Assumptions

    2013

    2014

    2015

    2016

    2017

    2018

    2019

    2020

    2021

    2022

    FX Rate

    C$/US$

    0.97

    0.94

    0.93

    0.93

    0.93

    0.93

    0.93

    0.93

    0.93

    0.95

    WTI

    US$/b

    101.87

    99.23

    90.09

    85.20

    82.89

    84.55

    86.24

    87.96

    89.72

    91.52

    Brent

    US$/b

    109.58

    107.27

    99.57

    94.29

    91.39

    93.22

    95.08

    96.98

    98.92

    100.90

    Edmonton   Light

    C$/b

    99.95

    100.02

    91.08

    86.21

    83.92

    85.70

    87.52

    89.38

    91.28

    93.10

    WCS

    US$/b

    76.40

    74.43

    67.57

    63.90

    62.17

    63.41

    64.68

    65.97

    67.29

    68.64

    NYMEX

    US$/mcf

    3.68

    3.94

    4.13

    4.25

    4.36

    4.44

    4.53

    4.62

    4.71

    4.81

    AECO

    C$/mcf

    3.28

    3.54

    3.78

    3.92

    4.21

    4.30

    4.40

    4.50

    4.60

    4.69

    The proved portion at the top refers to the conventional reserves and excludes the oil sands reserves (e.g. Hangingstone 1). The debate about how to treat "probable" oil sands reserves vs "proven" oil sands reserves is a tricky one that I have seen pondered for the last 15 years, and partly hinges on whether or not a development plan is approved or not. Obviously, the oil is there whether or not the Board of a company sanctions the project in the year-ahead capex plan, and so a full / typical 50% haircut to those reserves seems punitive for an oil sands producer. I am happy for others to debate this point but the Canadian rules suffer to an extent by being challenging to producers who have the deposits but do not want to drill for a core sample nor have a close offset well - defining most oil sands SAGD or mining projects.

    I feel the contingent resources are being haircut appropriately but would appreciate more color if you believe $0.10-0.50/BOE is unreasonable.

    I realize the handicap in using a producer in Trilogy as a comp, but note that I am using a highly discounted acreage value vs that comparison. I listed it to show what a very close comp trades at, and while they are producing 32,500 BOE/d for 2013E in Kaybob, I don't view ATH as that far behind and in the private market / for JV purposes, Trilogy is an important reference point as its Duvernay acreage is literally right next to ATH's. I did mean to write developed and appreciate the thoughts on how they are normally discussed - obviously, you cannot compare a pre-production asset to a producer on BOE/d, but you are correct in that we can determine valuation based on reserves. In this comparison, TET trades at $42/BOE P+P, which would equate to $923mm for ATH's light oil P+P reserves (just shy of what I am assuming in the NAV shown in the write-up for total light oil / conventional - $996mm). ATH fares fine in this respect.

    One final comment - I have been a member of VIC for over a decade and I almost always enjoy the spirit of debate on these forums. Constructive thoughts and questions on analysis are always welcome and are what make the VIC community what it is. The rest of it, and I am specifically referencing your tone and non-constructive comments / questions - are needless and belong elsewhere. I understand it may take time for newer members to adopt the culture that VIC promotes, but a measure of judgment and decorum is always helpful.


    SubjectRE: RE: Where are these numbers coming from?
    Entry12/31/2013 09:37 AM
    Memberaagold
    I do apologize for the tone, hao777. I haven't read your whole reply yet, but I just saw your final comment at the bottom.  I did realize after I posted my comments that I went a bit overboard, especially after I did a search and saw that you have a very good track record and have been a VIC member for a long time.  So having said that, I'll now read the details of your reply.
     
    - aagold

    SubjectRE: MSCI Canada Index possible removal
    Entry02/11/2014 03:53 PM
    Memberhao777
    I just saw your qs from last week and will get to them soon. Apologies for the delay. As for MSCI, one of the Canadian banks said:
     

    Competitors are saying that it will be announced tomorrow that ATH will be kicked out of the MSCI standard index by IPL. We do not believe that this is the case based on what our MSCI representative told us last week. (See below.) If we are wrong, then our clarification from MSCI is incorrect. We believe IPL will be added because it converted to a corporation from a partnership in September. Were IPL currently in the small cap and greater than the upper buffer level for additions, it would kick something out below the Standard Market Size-Segment cutoff. However, as explained below, new companies added during a QIR that were not previously part of the equity universe are treated similarly to Ongoing Event-Related Changes. Ie, the segment number of companies is increased.

     

    ATH could be a candidate for deletion during the next SAIR (Semi-Annual Index Review) in May. The equity universe will be refreshed and the buffers are tighter.


    SubjectRE: Follow up Questions
    Entry02/11/2014 04:22 PM
    Memberhao777
    Thanks for your comments on ATH and DDC...I don't know if "deceptively concise" is a compliment or put-down, but it certainly captures my VIC write-up strategy so I will accept it either way.
     
    To your questions:
     
    1) According to the company, "sterilization" of a certain % of the reserves due to the 20km buffer zone WILL NOT impact the put option proceeds. I have no view on the incremental costs that Dover might incur in developing the asset with a larger buffer zone, but frankly, since I assume ATH puts the asset, I don't really care. For what it's worth, I have heard through the rumor mill that the buffer zone is off the table in the negotiations - take with a grain of salt.
     
    2) I have NOT counted the tax pools in my NAV. These project NAVs are on after-tax cash flows and while I calculate the tax pools, I have not given them explicit credit. Good catch.
     
    3) If you ask the company, they justify the CFO's departure by pointing out a few facts: he was originally from a pipeline/midstream business and so is returning to what he knows best; he recruited his former colleague to take over his role, implication being that they are friends and he would not recruit a friend for a questionable role; and, IPL CN is much larger than ATH CN market cap, so theoretically a larger role. Ironic that IPL has now hurt the company's stock twice...
     
    4) I think you are mistaken here. The largest holders remain ZAM Investments (the Ziff family) - they were investors in the private enterprise pre-IPO and have purchased shares since, at higher prices than current. Furthermore, the #3 and #4 holders are insiders (CEO and Chairman). As for capital allocation, you have to consider that this enterprise was created from scratch, and they redeployed IPO proceeds into their light oil strategy. Part of my thesis is that there is signficant upside in the Duvernay, so the story still needs to be written, but if it works, it can potentially be considered a great compounder. You have to keep in mind the fact that this successful move by the FMFN is virtually unprecedented, and they've worked on dozens of permits in the region historically - mgmt was blindsided. They expected the cash, had every right to expect the cash, and so had to change their tune when circumstances changed. I am purposely avoiding the debate of whether ANY cash-flow sucking E&P can create value long-term...but in this case, I do not believe mgmt can be considered "poor" capital allocators.
     
    5) I unfortunately do not have access to that report. Even if I did, my technical expertise is probably on par with yours...at best...

    SubjectSettlement Announced
    Entry02/21/2014 03:33 PM
    Memberhao777
    For those who may have missed it, ATH just announced a settlement with the First Nations group. This should lead to provincial approval, put proceeds, and a new capex plan for 2014. In my opinion, the risk / reward has just shifted materially higher as you have de-risked them getting >$3/share in cash this year. We still like it here.

    SubjectRE: Settlement Announced
    Entry02/21/2014 03:39 PM
    Memberotto695
    what multiple do you feel is fair on the $3/share in cash this year?
     
     

    SubjectRE: RE: RE: Settlement Announced
    Entry02/21/2014 03:51 PM
    Memberotto695
    actually, i think i misunderstood your initial post.  i  assumed you meant they would get to over $3 in cash earnings.  i see now you mean the put option will bring them over $3 in cash....

    SubjectRE: RE: RE: Settlement Announced
    Entry04/11/2014 10:31 AM
    Memberoldyeller

    Very interesting.   I was also wondering why the stock was not up a lot more on the news. 

    Turns out Ziff has been selling ~30% of volume traded pretty much every day (according to Bloomberg, 113mm shares have traded since the deal was announced, and Ziff has sold 30.9mm through yesterday).   Normally that would have me very concerned when a key backer is blowing out of their stock.  In this case, Ziff has recently announced they are shutting down so it actually makes sense. 

     

    My guess is the stock would be a lot higher without them selling such a large stake, and once they’re done all else being equal the stock’s moving up. 

     

    http://www.newswire.ca/en/story/1337731/zam-investments-luxembourg-s-a-r-l-disposition-of-common-shares-of-athabasca-oil-corporation


    SubjectRE: Phoenix
    Entry07/31/2014 03:33 PM
    Memberhao777
    I assume Phoenix does not default, and per my understanding, Phoenix has umbrella guarantee from PetroChina International. At the least, all of PTR's assets in Canada would be at risk of seizure. There are two routes for remedy if they attempted to not close, which is NOT my base case: 1) arbitration, 2) Alberta court system. I presume arbitration is less likely given some of the language in the Put/Call Agreement regarding dispute resolution (see Section F).
     
    For what it's worth, the only two public quotes from Chinese officials (Chen Shudong of Brion and Mao Zefeng of PTR) have said they anticipate closing per the original terms (or similar language...yes, enough wiggle room in any statement).
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