October 05, 2014 - 9:31pm EST by
2014 2015
Price: 5.12 EPS nm nm
Shares Out. (in M): 402 P/E nm nm
Market Cap (in $M): 2,057 P/FCF nm nm
Net Debt (in $M): -563 EBIT -120 0
TEV (in $M): 1,495 TEV/EBIT nm nm

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  • Energy
  • Western Canada
  • Canada
  • Shale
  • E&P
  • Oil
  • Mid cap
  • Sum Of The Parts (SOTP)
  • Potential Asset Sales


I believe that Athabasca Oil (ATH CN) is one of the most attractive risk reward investments out there. There are several factors that have made this investment extremely attractive. This is a company with tremendous asset value that investors are not yet giving credit for with over 100% upside to the stock price. Let’s break out the company into the Light Oil division / Balance Sheet / Heavy Oil.


Light Oil: Value $6.10/share

On the light oil side the company’s most attractive asset is the land position it holds in the Duvernay Shale in Western Canada. The company holds approx. 200k high graded acres in this play. This play is being compared to the Eagle Ford by the industry for quality of shale and depth. Capital expenditures are increasing by over 70% from 2014 to 2015 by players such as Shell, Exxon, Encana, and Chevron as the play moves  into commercial development from appraisal. If one looks back to the evolution of the Eagle Ford it was at this critical junction of moving into commercial development that valuations exploded. The play currently is broken up into 3 main areas; Saxon/Simonette, Kaybob West, and Kaybob East. ATH holds 53k acres in Saxon/Simonette, 52k acres in Kaybob West, and 110k acres in Kaybob East. The last notable transaction in the Duvernay was done at the end of 2012 as a JV between Petrochina and Encana at a value of approx. $9.5 - $10k/acre. Two aspects to note is that this transaction was done prior to the lion share of current wells being drilled which have proven economic to the tune of over $13mm/well NPV.  These NPVs will continue to rise as the Majors start to employ well pad drilling which will bring well costs down from approx. $15mm to $10mm per well. Also, the transaction value per acre was an average of what many have speculated were more liquids rich land in Saxon/Simonette/Kaybob West area with land to the south that was more dry gas – so the comparable valuation for the lands that ATH owns in Saxon/Simonette/Kaybob West are closer to $18-$20k/acre based on that transaction. The market should also receive a transaction comp for acres in this area when Chevron reaches agreement on a JV in what could be the near future – current estimates for the land value are between $18-$30k/acre. If you value ATH’s 105k acres in Saxon/Simonette/Kaybob West at an average of $15k/acre – at close to a 20% discount to the low end of what expectations are for the Chevron JV that equates to approx. $3.75/share of value. I give only $2.5k/acre of value to the remaining Kaybob East acreage as this land has yet to be significantly developed  though the industry believes that wells will not only be economic in this area but could be significantly value enhancing as this land is in the volatile oil window. One only needs to look to the Eagle Ford volatile oil window to see what potential values could be.  Duvernay alone in a conservative valuation scenario laid out above is worth $4.5/share. ATH also own over 200k acres in the Montney Shale. The street assigns approx. $300 - $350mm of value for this land or $1500 - $1750/acre which may very well be extremely conservative as companies such as Delphi Energy have been producing quite profitable wells recently in the Bigstone part of the Montney play where ATH owns land. But to be conservative let us keep the value at $325mm which equates to approx. $.75/share. The company also owns approx. 2.4mm acres of “other” light oil acres that have value but are yet to be proven out so to be extremely conservative let us assume those acres are worth $100/acre which is worth another $.50/share. Lastly, earlier this year the company JV’d 50% of their interest in their infrastructure pipeline assets that run through the center of the Duvernay to Shell for $150mm. This is quite a strategic asset as ATH holds the ability to take on more production given their ability to flow it through their own pipes. As production ramps up in the region over the next several years the value of this property will expand greatly. If the rest of the Infrastructure were to be sold it would receive more than $150mm of value but for conservative valuation purposes we will assume that price which equates to another $.35/share.


Balance Sheet: Value $1.40/share

The company has approx. $575mm of Net Cash on the balance sheet which equates to $1.40/share


Heavy Oil: Value $3.50/share

The Heavy Oil division is a completely free call option. The company’s main asset in this division is the Hanginstone Phase 1 Project. ATH has spent approx. $600mm in capital to build this facility and first steam is expected by q1 2015 and fist production by mid year 2015. Applying a distressed debt analysis to this facility and valuing at cost equates to approx. $1.50/share of value. When this project produces, the street will then assign higher valuations for not only Phase 1 but for future Phases 2 and 3 and valuations should approach $1-$1.5bn for this asset alone. There are other SAGD oil sands projects abutting this facility with the same reservoir characteristics that have been successful and expectations are for Hanginstone to also be successful. ATH also owns over 8bn barrels of contingent resources through ownership in positions such as Dover West and Birch properties. Investors value Sunshine Oilsand’s contingent barrels which is thought of as one of the most distressed oil sands companies in the space at $.10 a barrel. Applying this same valuation to ATH contingent barrels equates to approx. another $2/share. So conservatively, the Oil Sands division alone is worth $3.5/share.


Conclusion: Total Value $11.00/share

All told, the company has conservatively $6.10/share of value for the Light Oil division, $1.40/share of value for net cash and approx. $3.50/share of value for their Oil Sands assets or $11.00 of value and the stock is currently trading at $5.25 or over a 50% discount. As an aside, the company has $2.6bn of tax assets that I am giving NO value for.  The biggest reason for this discount is a technical one. The investor base of the company was virtually all event driven hedge funds as these investors believed that -Petrochina would ultimately fund a cash payment to the company over the summer – it occurred at the end of August. When this event occurred these investors who are not your typical energy investor base decided to sell the stock immediately in conjunction with a very weak energy tape. This selling has begotten more selling and that is why the stock finds itself at such a distressed valuation today. I believe that over the next 3-12 months institutional investors will reemerge to take back the ownership as the company continues to prove out their Duvernay position and as the Hanginstone Project produces next year – all of this value will be realized for the stock. Not to mention that at these levels, a strategic acquirer may very well find this company as an attractive target. 

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.


- Technical selling abates
- Potential sale of the company / activism
- Further asset sales
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