Athabasca Oil Corporation (TSX:ATH) (“Athabasca” or the “Company”) is pleased to announce the closing of the previously announced light oil joint venture with Murphy Oil Company Ltd. (“Murphy”) in the Kaybob Area (“Murphy Transaction”). The transaction right sizes the Company’s capital risk profile and puts it in a strong position to align its capital structure and operating plans over the mid-term.
“This transaction is pivotal to the future long-term health and success of Athabasca,” said Rob Broen, President and CEO of Athabasca. “The partnership with Murphy advances our strategic goal of transitioning the Duvernay to commercial development and enabling scalable Montney growth while giving Athabasca a more appropriate capital risk profile. The fact is, developing the Duvernay requires significant capital investment beyond our own balance sheet capability. This partnership gives shareholders a funded growth profile and material long term upside while bolstering our financial position.”
Athabasca sold a 70% interest in its Greater Kaybob area assets and a 30% interest in its Greater Placid area assets for gross proceeds of $486 million, including closing adjustments. Athabasca received cash consideration of $267 million and an additional $219 million capital carry commitment whereby Murphy will fund 75% of Athabasca’s share of Duvernay development capital up to a maximum five year period. Murphy will assume operatorship of the Greater Kaybob area assets and Athabasca will retain operatorship of the Greater Placid area assets. Joint development agreements are in place that are intended to preserve the value of the Company’s interests, ensure strategic alignment on Duvernay growth and provide flexibility to accelerate activity in Greater Placid where the Company has established a core operated position.
Strategic Update
Over the past two years and under its new leadership Athabasca has taken steps forward to reduce capital spending, improve its cost structure and grow a track record of strong operational results. Now in its next step, this joint venture transforms Athabasca as it establishes a well-funded growth strategy in Light Oil that is complementary to the Company’s overall corporate strategy. Athabasca’s go forward strategy now includes the following highlights:
- Defined and material Light Oil growth
- Scalable Montney position – Building on a successful five well appraisal campaign, Athabasca will operate a multi-year development plan under the Placid joint venture, with a current inventory of approximately 165 gross wells and a 70% working interest. This development is expected to have top quartile returns and is economic in today’s commodity price environment. The asset has gross production potential in excess of 8,000 boe/d (5,500 boe/d net) in 2017 and in excess of 17,000 boe/d (12,000 boe/d net) at the end of five years.
- Funded Duvernay development – The development plan under the Kaybob joint venture is structured to result in approximately $1 billion of gross investment over the first four to five years, which is expected to drive gross production potential to approximately 30,000 boe/d (9,000 boe/d net) at the end of five years. Athabasca’s net capital exposure under this development plan is approximately $75 million, following which the assets are expected to be self-funding. Athabasca retains a 30% working interest in over 200,000 gross acres and up to 1,500 gross drilling locations.
- Thermal Oil leverage to a pricing recovery
- Cash flow torque at Hangingstone – Athabasca’s Phase 1 SAGD facility at Hangingstone has recently been producing at 9,000 bbl/d and is expected to reach nameplate of 12,000 bbl/d by the end of 2016. This property requires minimal capital investment over the initial 5 – 7 years to hold production levels flat. The asset has an operating breakeven price between US$40 – 45/bbl WTI, with the potential to generate significant operating income for the Company at higher commodity prices.
- Future low risk expansion options – Hangingstone has options for phased brownfield expansions up to 80,000 bbl/d. Future phases are expected to have strong capital efficiencies by utilizing existing regional infrastructure. The Company has approximately 5.9 billion barrels (unrisked best estimate contingent resource) of future resource potential in its other thermal assets.
- Financial sustainability with a funded growth profile
- Strong balance sheet – Athabasca currently has approximately $880 million of liquidity and a net cash position of approximately $60 million. Liquidity is further bolstered by the $219 million Duvernay capital carry commitment.
- Favorable outlook – The Company remains committed to its 2016 priorities of reducing total leverage by $300 to $400 million and extending its 2017 debt maturities, steps which will further enhance Athabasca’s financial flexibility and sustainability. The Company is positioned to become free cash flow positive within the next 3 – 5 years.
Light Oil Development
Athabasca has focused the last three years on appraisal and development of its significant Duvernay and Montney land position in Greater Kaybob and Placid. The Company has drilled 26 Duvernay wells at Greater Kaybob and five Montney wells at Placid and has established a core operated infrastructure position in an area that continues to be actively developed by large industry players. Athabasca has demonstrated its operating capability with strong well results and now has a land base that is set up for larger development in an improved commodity price environment.
Placid Montney Development Plans (Athabasca operated & 70% working interest)
In the Montney play at Placid, the Company has exposure to approximately 25,000 gross acres of prospective Montney land with two separately defined Montney intervals and an estimated inventory of over 165 Montney locations. The Company has established the Placid Montney as a core operated area following a successful five well appraisal program.
The Greater Placid joint development plan with Murphy will build on this success which has delineated a liquids rich sweet spot. The initial development plan has flexibility to accelerate activity and the asset has gross production potential in excess of 8,000 boe/d (5,000 boe/d net) in 2017 and in excess of 17,000 boe/d (12,000 boe/d net) at the end of five years. For context, a single rig has the capability to drill 10 to 12 wells per year driving capital expenditures between $75 – $100 million (gross).
Greater Kaybob Duvernay Development Plans (Murphy operated, Athabasca 30% working interest)
The Murphy Transaction materially progresses Athabasca’s strategic goal of transitioning the Duvernay shale play into full development over the mid-term. It is anticipated to provide shareholders with a defined funded growth profile that will leverage off Murphy’s extensive experience in the Eagle Ford oil window. As a result of the transaction, Athabasca believes that it has now positioned itself with a capital risk profile appropriate to its size while retaining material upside in the Duvernay. The Duvernay capital carry will significantly reduce the Company’s initial capital outlay following which the assets are expected to become self-funding.
The joint development plan has been designed to assess commerciality across the land base, satisfy the majority of the land tenure requirements by the end of the intermediate term and advance the asset to the self-funding stage.
The development plan contemplates approximately $1 billion of gross investment over the first four to five years with gross production potential up to 30,000 boe/d (60% liquids, 9,000 boe/d net). Athabasca’s net capital exposure is approximately $75 million on this first $1 billion of gross investment and the Company will retain a 30% working interest in over 200,000 gross Duvernay acres. The joint development agreement provides for flexibility to adapt annual capital expenditures to prevailing commodity prices and drilling results. The agreement also provides that a minimum annual capital carry amount will be paid by Murphy, and if the annual minimum is not met through operations under the development plan, Murphy will pay the difference to Athabasca.
The development plan includes drilling approximately 100 gross Duvernay wells over the first four years, of which ~70% are planned to target the volatile oil window (extending across Simonette, Kaybob West North, Kaybob East and Two Creeks). The joint venture will leverage both partners’ extensive shale play expertise, specifically Murphy’s track record for organic growth in the Eagle Ford oil window where the company has grown gross production to in excess of 60,000 boe/d by drilling 700+ wells.
Additional details on the proposed Montney and Duvernay development plans are outlined in the latest corporate presentation on slides 9 and 14 available at www.atha.com.
Financial Position and 2016 Outlook
The Company’s 2016 capital budget is currently unchanged and at this time no additional Light Oil capital has been approved for the second half of 2016. Athabasca maintains operational readiness to accelerate development in both the Montney and Duvernay and the Company anticipates providing updated capital plans mid-summer.
Athabasca currently has approximately $880 million of liquidity and a net cash position of approximately $60 million providing a multi-year funding horizon. Liquidity is further bolstered by the $219 million Duvernay capital carry commitment. The Company remains focused on its culture of strong capital discipline demonstrated over the past two years.
Maintaining a strong balance sheet also continues to be a key priority and the Company is progressing alternatives to enhance its capital structure. Athabasca remains committed to reducing total leverage by $300 to $400 million during 2016 and to ensure necessary debt tenure and liquidity are in place to support the Company’s strategic business objectives.
Thermal Oil – Hangingstone Update
Hangingstone operations were shut down on May 5, 2016 due the regional Fort McMurray wildfires. There is currently no damage to the facility, field pipelines or well sites. The fire front is approximately five kilometers north of the assets and at this time, it has not advanced closer. The fire near Athabasca’s facilities is actively being contained. Timing for a complete restart of operations is contingent on the continued containment of the regional fires and on ensuring safe operating conditions. Prior to the shut down, production reached approximately 9,000 bbl/d. Operating Income break-evens are US$40 – 45/bbl WTI and the asset has the potential to add significant cash flow to the Company in an improved price environment.
About Athabasca Oil Corporation
Athabasca Oil Corporation is a Canadian energy company with a focused strategy on the development of thermal and light oil assets. Situated in Alberta’s Western Canadian Sedimentary Basin, the Company has amassed a significant land base of extensive, high quality resources. Athabasca’s common shares trade on the TSX under the symbol “ATH”.
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