August 22, 2011 - 7:01pm EST by
2011 2012
Price: 12.02 EPS $0.00 $0.00
Shares Out. (in M): 399 P/E 0.0x 0.0x
Market Cap (in $M): 4,800 P/FCF 0.0x 0.0x
Net Debt (in $M): -1,113 EBIT 0 0
TEV (in $M): 3,688 TEV/EBIT 0.0x 0.0x

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Pitch:  Athabasca Oil Sands is a well-capitalized E&P (ie land development company) that contains several undeveloped world scale oil sands projects that appeal to Majors and International Oil players.  The stock is favorably priced to the upside, with a potential scenario of C$20-22/share and a hard cash downside value of C$7.50/share.


How We Came to This Point:  Athabasca Oil Sands was founded in September 2006 and after a couple rounds of capital raises ($350MM total) they acquired and delineated several large blocks of oil sands assets.  PetroChina struck a deal with ATH for $1.9Bn for 60% of two of their large asset blocks (out of 7 ATH owns) in August 2009 before any project approvals were filed.  Additionally, ATH setup a put/call option for the other 40% of those assets (allowing them to sell their assets once the environmental/regulatory approval is granted) for another $2Bn pre-tax.  Prior to their C$1.35Bn IPO in April 2010, ATH issued a special dividend of $1.3Bn to the pre-IPO investors.  ATH is sitting currently on $1.1Bn of net cash as they are pushing their projects through delineation and regulatory approval (a two year process in the oil sands).  With the large capital base, they have begun to use the idle cash to drill quick rate of return light oil wells in Canada (the Eagle Ford equivalent up in Canada, but not as good).


Why the opportunity?  Zero revenue land development company in market turmoil.  This is a longer tail story than what most people like to see (high sensitivity to the discount rate), first oil from the first production phase isn’t expected until 2014 and serious oil production isn’t until 2017.  These projects will require significant capital, and in an environment of fear, despite the development capital on the balance sheet, these long dated projects get revalued down to very minimal valuations.


As ATH has demonstrated before, this land has significant value ($4Bn valuation for 5Bn Barrels of contingent oil to PetroChina, or $0.80/Bbl), especially in large chunks that can create the 400MBbl/d type projects a large company is looking for.


Currently the company believes outside this JV with PetroChina, they have another 8BnBbl of Oil Sands assets, second only to Suncor (7.5BnBbl of that is spread through 4 world scale sized projects).  Of the 7.5BnBbl, there is some skepticism around ATH’s 2.9BnBbls of carbonate reservoirs (carbonates are a different type of reservoir and haven’t been commercially produced in the oil sands region).  ATH believes the reservoir can be produced with a form of heating (either the typical SAGD used in the oil sands or another method they are evaluating presently). 


Upside Case:  The company currently has C$2.80/diluted share of net cash on its balance sheet, however if you loop in the Puts to PetroChina, this number is more like C$7.54/share.  Assuming the Puts become exercised, the remaining company will need to be valued seperately (Doesn’t make sense for them not to exercise it unless they get incremental value beyond the Put price.  But in that case PetroChina could be incentivized to exercise their call at the same price unless they can’t operate the asset.  In that scenario, it doesn’t matter too much as PetroChina will lend ATH up to $1.1Bn in a secured loan).  ATH has two options for the remaining assets:


Sell the Company Piecemeal/Entirely: PetroChina transaction comp (C$0.80/Bbl) for their remaining 7.5BnBbl results in a C$22/share stock price (C$7.54/share in cash/Put + C$14.52/share for the remaining assets + no value for the light oil assets or the Grosmont assets).  Transaction comps have been roughly around C$1.00/Bbl when it comes to larger transactions (last year Devon bought a piece of BP’s Kirby asset for C$1.18/Bbl and Total bought UTS for C$1.00/Bbl), which can add another C$4/share.  The big question is how valuable the carbonate resources are (2.9BnBbl of the 7.5BnBbl are carbonate + Grosmont carbonates).  Until it is proven how easily those resources will flow, people may discount these reserves (~C$4/share).


Go alone:  Many banks have done NAV calculations on ATH developing all their own resources, resulting in a C$20/share NAV (assuming very little value for their carbonate reserves).   


Extra Optionality/Catalysts: 1) The current production tests on the carbonate resoures work really well (currently doing a pilot using reservoir heating called TAGD), 2) development or financial acceleration, 3) delineation increases oil sands reserve estimates (this is probably played out as asset sizes are already quite large), 4) their light oil plays are better than expected (ATH paid C$100MM for the land earlier this year), 5) oil prices (I am hesitant to use this as a lever since higher oil prices usually results in more capital cost inflation, negating the benefits of higher oil prices, and conversely on the downside)


The Incentives:  The primary owners of ATH are private equity investors (including the Chariman) and insiders.  This is why you saw that massive dividend pre-IPO which cashed out investors over 100% of their investment.  The CEO owns over 13MM shares and the chairman controls over 25MM shares.  Management’s actions have been clear: create large blocks of leases, delineate the resources and then sell/JV the asset before spending large amounts of capital.  The first (and currently only) transaction is the August 2009 PetroChina deal, which took almost $2Bn off the table, and potentially $4Bn if they put the asset back to PetroChina (equity capital raised upto that point was less than $400MM).  ATH still owns the other projects and since this transaction, the management purchased Excelsior Energy in 2010 to add critical mass to their Hangingstone project to push that into a mega scale project size.  Currently they have 4 potentially large oil sand projects + a large light oil land position.  The large cash position ensures they don’t get cornered like other large land owners that can’t fund asset development if the assets don’t get sold.


Downside Risk:  The company currently has C$2.80/diluted share of net cash on its balance sheet, however if you loop in the Puts to PetroChina, this number is more like C$7.54 as a hard cash downside number (32% downside).  Currently the stock is trading at C$12.02/share, implying C$1.85Bn for the remaining assets (or C$0.25/Contingent Bbl assuming no value for their light oil assets or the Grosmont long tail assets).  Realistically, these assets should have some baseline value of C$0.10/Bbl worst case (or C$9.35/share, 22% downside).



Expected Value: 

50% - Sell themselves – C$22/share

20% - Develop their assets themselves – C$20/share

30% - Downside case – C$9.35/share


Expected value = $17.81 (or 48% upside)


JV or sale of the other assets

Carbonates work better than expected

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