Athabasca Oil Corporation is pleased to report its 2021 second quarter results that demonstrate the quality of its asset base. Athabasca is advancing the refinancing of its debt that will allow shareholders to capture unparalleled cashflow generation potential from its long reserve life, oil weighted asset base.
Q2 Highlights
- Production: ~34,650 boe/d including ~26,450 bbl/d in Thermal Oil and ~8,200 boe/d in Light Oil.
- Record Operating Income: $93 million ($31.09/boe) driven by strong oil prices and 90% liquids weighting.
- Record Operating Netbacks: $30.05/bbl in Thermal Oil and $34.23/boe in Light Oil.
- Capital Expenditures: $23 million focused on high-value Leismer projects to sustain production.
- Adjusted Funds Flow: $50 million ($0.09 per share) and record Free Cash Flow of $28 million.
Recent Operational Highlights
- Leismer: Two L6 infills and well pair L7P6 brought on production in June. Finished drilling Pad L8 with steaming to commence in Q4. The 5-well pad will ramp up to >5,000 bbl/d in 2022 and has project economics of ~$310 million NPV10 (US$60 WTI flat pricing).
- Hangingstone: Production restored to pre shut-in levels and averaged ~9,500 bbl/d during Q2. Materially improved resiliency through cost initiatives with a ~US$31 WCS operating break-even. Commissioned a truck-in terminal with capacity of ~5,000 bbl/d and is expected to generate ~$5 million in additional annual cash flow.
- Light Oil: Focused on free cash flow generation; Kaybob East & Two Creeks Duvernay wells screen as top liquids producers with IP180s and IP365s averaging 725 boe/d (85% Liquids) and ~550 boe/d (83% Liquids).
Thermal Carbon Capture: Continuing to advance a scoping study with Entropy Inc. to determine feasibility of a carbon capture module at Leismer with ongoing evaluation of local storage and carbon trunkline options.
Financial Update and 2021 Outlook (Strip Pricing July 5th)
- Cash: $153 million unrestricted cash forecasted to grow to ~$210 million by year-end; an additional $134 million of restricted cash and deposits.
- EBITDA & Cash Flow: 2021 Adjusted EBITDA of ~$235 million (~$175 million of Adjusted Funds Flow); unhedged annual EBITDA sensitivity of ~$70 million for every US$5/bbl move in oil prices.
- Net Debt: $383 million with Net Debt to 2021 Adjusted EBITDA of 1.6x.
- Production: Trending towards the upper end of 32,000 – 34,000 boe/d (~90% Liquids) annual guidance.
- Low Sustaining Capital: Unchanged $100 million capital budget funded within Adjusted Funds Flow and generating ~$75 million of Free Cash Flow.
- Underpinned by strong asset performance and cashflow generation, the Company is focused on the refinancing of its balance sheet. The Company’s goals include lowering the overall quantum of debt and providing multi-year funding certainty.
Business Environment and the Recovery from COVID-19
The COVID-19 pandemic had a significant negative impact on global commodity prices due to a reduction in oil demand as countries around the world enacted emergency measures to combat the spread of the virus. The Company took swift action in response to the pandemic and the economic crisis.
Commodity prices have improved with OPEC+ producers reducing production allowing for inventories to re-balance. Global demand is approaching pre-pandemic levels and inventories are below the 5-year average. Supply and demand fundamentals are now supporting a much stronger oil futures market. The recent OPEC+ supply agreement is expected to keep the market in deficit and guidance for higher capacity will be needed in coming years given growing under-investment (Goldman Sachs Commodity Research).
In Alberta, physical markets and regional benchmark prices (e.g. Western Canadian Select “WCS” heavy oil) have strengthened with higher WTI prices. Athabasca expects current WCS differentials to remain stable with muted industry growth and improving basin egress (including Enbridge Line 3 replacement H2 2021). There is strong demand for heavy oil from US Gulf Coast refineries as they face structural declines in global heavy oil supply (Venezuela and Mexico). Athabasca believes conditions have emerged for WCS heavy oil to be among the most valuable global crude benchmarks.
Outlook and Balance Sheet Update
Athabasca continues to advance the refinancing of its US$450 million Second Lien Notes (“2022 Notes”). The recent strength in the high yield market, improving global oil prices and the successful debt issuances of peers provide a constructive environment to complete a normal course issuance of new notes.
Unrestricted cash as at June 30th totaled $153 million providing a strong liquidity position that is expected to grow to ~$210 million at year-end (Strip Pricing July 5th). The Company also has $134 million of restricted cash and deposits. Net debt at quarter end was $383 million with Net Debt to 2021 expected Adjusted EBITDA of 1.6x. The Company is committed to allocating Free Cash Flow to debt reduction in order to achieve its long-term debt targets of <1.5x Net Debt to Adjusted EBITDA at US$55 WTI.
Athabasca’s long-life reserves provides for significant asset coverage. Under flat US$60 WTI the Company estimates a 2020 year-end Proved Developed Producing (“PDP”) NPV10 of ~$875 million (US$12.50 WCS differentials & 0.80 US$/C$ FX). Management anticipates that the 2021 Leismer sustaining capital projects will drive strong reserve bookings which will replace 2021 corporate production.
The $100 million unchanged 2021 capital program is fully funded within forecasted Adjusted Funds Flow of ~$175 million (US$68 WTI & US$13 WCS differential) and is expected to generate ~$75 million of Free Cash Flow. Capital activity is focused on sustaining production at the Company’s cornerstone Leismer asset. The Company’s operational results support the strong start to the year with production trending towards the upper end of its annual guidance of 32,000 – 34,000 boe/d (90% Liquids). The Company expects it can sustain this level of production with an annual capital program of ~$125 million.
The Company is planning a wholistic debt refinancing that will utilize cash on hand, a reestablished reserves based credit facility and a lower quantum of new notes. Athabasca will continue with its hedging policy targeting up to 50% of corporate production with an emphasis on securing funds flow to protect its base sustaining capital program.
Operations Update
Thermal Oil
Bitumen production for Q2 2021 averaged 26,433 bbl/d. The Thermal Oil division generated Operating Income of $67.6 million. Q2 2021 Operating Netbacks for Leismer and Hangingstone were a record $31.76/bbl and $27.09/bbl, respectively. Thermal Oil margins have continued to improve year to date with June Operating Netbacks of ~$35/bbl and ~$32/bbl for each asset, respectively. Capital expenditures for the quarter were $21.4 million resulting in $46.2 million of Free Cash Flow.
Leismer
Bitumen production for Q2 2021 averaged 16,986 bbl/d. Current production has increased in July following the tie-in of two L6 infills and well pair L7P6 that were placed on production in late June.
During the quarter, the Company finished drilling and completions operations of five well pairs at Pad L8. The producer wells encountered the highest quality reservoir across all of Leismer’s wells drilled to date. Athabasca anticipates completing the facility construction and initial steam circulation in Q4 2021 with first production in early 2022. The initial five well pairs on Pad L8 are expected to ramp-up in excess of 5,000 bbl/d in 2022. The existing pipeline will support future development for a total of 14 well pairs on Pad L8. The Company is preparing for a drilling program to commence this upcoming winter season with future wells to sustain Leismer’s production.
The Company is expanding its non-condensable gas co-injection (“NCG”) program across the field following successful implementation in 2020 (Pad L1 – L4) which has lowered mature pad SORs. In Q2, the Company began NCG co-injection on Pad L5 and L6.
Athabasca and Entropy Inc. are continuing to advance a scoping study to implement a carbon capture module at the Leismer central processing unit along with evaluating local storage and carbon truckline options.
Leismer has an estimated US$28 WCS 2021 operating break-even (US$12.50 WCS differential).
Hangingstone
Bitumen production for Q2 2021 averaged 9,447 bbl/d. Reservoir performance through 2021 has been strong as a result of excellent facility run time and the implementation of NCG co-injection aiding in pressure build-up and reduced energy usage. Production is expected to be supported by an additional well pair (AA03) that is currently steaming and will be placed on production in September.
In May, Athabasca amended the Hangingstone Transportation and Storage Services Agreement that resulted in a $44 million prepayment from restricted cash, a ~$5 million reduction to annual tolls and a reduction in financial assurances by ~$44 million to ~$27 million. The reduction in financial assurances unlocked restricted cash on the Company’s balance sheet that was concurrently used to fund the amending prepayment.
In March 2021, the Company executed a commercial arrangement with an industry leading marketing company to construct a truck-in terminal at no cost to Athabasca. Trucking operations commenced on schedule in July. The additional volumes are forecasted to generate ~$5 million in additional annual cash flow through a processing fee while leveraging existing volume commitments under Athabasca’s transportation agreements.
In 2021, Hangingstone will have no capital allocation other than routine pump replacements and has no sustaining capital requirements for the next several years. Management’s execution to date on streamlining Hangingstone’s cost structure has materially improved the assets resiliency and profitability. Hangingstone has an estimated US$31 WCS operating break-even (US$12.50 WCS differential).
Light Oil
Q2 production averaged 8,226 boe/d (57% Liquids) in Q2 2021. The division generated Operating Income of $25.6 million with a record Q2 Operating Netback of $34.23/boe. Athabasca’s Light Oil Netback continues to be top tier when compared to Alberta’s other liquids-rich Montney and Duvernay resource producers and are supported by a high liquids weighting and low operating expenses. Capital expenditures were $0.5 million during the quarter resulting in $25.1 million of Free Cash Flow.
At Greater Placid, the asset is positioned for flexible future development with an inventory of ~150 gross drilling locations and no near-term land retention requirements. Activity will be revisited following a successful refinancing.
At Greater Kaybob, production results have been consistently strong with wells screening as top liquids producers in the basin. Well results in Two Creeks and Kaybob East have seen average productivity of ~725 boe/d IP180s (85% liquids) and ~550 boe/d IP365s (83% liquids). Under full development, well costs are expected to be less than C$7.5 million in the volatile oil window. These results coupled with a large well inventory (~700 gross drilling locations) and flexible development timing indicate significant value to Athabasca. The Kaybob area is supported by a strong Joint Development Agreement, established infrastructure and no near-term land retention requirements.
Minimal capital activity ($5 million) is planned for 2021 with operations focused on facility maintenance and readiness for Duvernay completions on three wells in 2022.
