(Idea) Athabasca Oil - A Potential Double Or More
We’ve owned Athabasca Oil (ATH:CA) on and off since 2018. Over our holding period, we’ve watched the market narrative shift from considering ATH an overleveraged, poorly-managed, sub-scale oil sands operator to a high-quality growth E&P that distributes 100% of its copious free cash flow to shareholders.
While the new and improved perception among investors has boosted the share price, we believe there’s more upside to come. We expect ATH’s high-quality production growth and shareholder-friendly capital allocation to double its share price over the next three years at US$80 per barrel WTI.
An Impressive Q2 Performance
ATH continues to execute superbly on the operating and financial front. On July 24, it reported strong second-quarter results, with no blemishes or surprises.
During the quarter, ATH’s funds from operations per share came in at $0.29, and total corporate production at 37,621 boe/d. Both were in line with consensus expectations, while capex of $48 million was 3% below consensus expectations of $50 million. Total production was 98% liquids.
ATH continues to allocate 100% of free cash flow to share repurchases, and it spent $173 million during the quarter to repurchase 34.7 million common shares at an average price of $4.99. Even after the recent market turmoil, they currently trade at $5.15.
Management increased the mid-point of full-year 2024 guidance from 35,500 boe/d to 36,500 boe/d.
Bitumen production increased to 33,765 bbl/d, up from 31,536 in the previous quarter and 29,016 bbl/d year-over-year. Of total bitumen production, ATH’s Leismer SAGD operation produced 26,423 boe/d and its Hangingstone SAGD operation produced 7,342 boe/d.
The bitumen assets generated $115.3 million of free cash flow during the quarter. On ATH’s current market cap of $2.8 billion, its bitumen operations alone delivered an annualized free cash flow yield of 16.5%.
The company’s new Duvernay Energy joint venture produced 3,856 boe/d—2,699 boe/d net to ATH—of which 80% was liquids. Duvernay Energy’s production was up 99% from 1,934 boe/d in the previous quarter. The increase was mainly attributable to new wells commencing production.
Duvernay Energy generated $2.0 million of free cash flow, not bad for a young operation investing heavily in growth.
The biggest news of the quarter was the company’s decision to sanction the growth of its Leismer asset to 40,000 boe/d. Leismer is ATH’s flagship SAGD asset that underpins the company’s superior economics. The capacity increase comes after ATH completed Leismer’s expansion to 28,000 boe/d in February.
ATH expects to invest $300 million in the expansion, equivalent to $25,000 per flowing barrel. Production is expected to commence in 2026. Management believes Leismer can sustain 40,000 boe/d of production for fifty years.