Athabasca Closes $350M Senior Secured Notes Financing

Source: 10/25/2021, Location: North America

Athabasca Oil Corporation has closed the issuance of US$350 million of Senior Secured Notes and the syndication of a $110 million reserve based credit facility.

Athabasca’s strategy is to position itself as a low leveraged company that will generate significant free cash flow through its low-decline, oil weighted asset base. The refinanced capital structure provides certainty to shareholders of the Company’s ability to utilize free cash flow to further reduce debt and enhance long-term resiliency. The Company is focused on utilizing its free cash flow to increase margins and provide superior shareholder returns.

Balance Sheet Refinancing
- New Notes: The US$350 million Senior Secured Second Lien Notes (“New Notes”) have a coupon rate of 9.75% and a 5-year term until 2026. The New Notes provide Athabasca the ability to further reduce debt in the near-term by utilizing 75% of free cash flow semi-annually to retire notes at 105% of face value. The notes offering included the issuance of 79.4 million warrants with a strike price of $0.9441 per warrant and a cashless exercise feature that reduces future equity dilution by issuing new common shares for only the in-the-money value of the warrant.
- Existing Notes: Net proceeds from the New Notes offering along with cash on hand will be used to redeem the Company’s existing US$450 million Senior Secured Second Lien Notes. The redemption date is November 6, 2021.
- New Credit Facility: A $110 million reserve-based credit facility unlocks the remaining $46 million of restricted cash that was securing letters of credit for transportation agreements. In 2021, Athabasca has now unlocked $165 million in restricted cash and long-term deposits through a series of market egress transactions along with the new credit facility. The Company maintains its $40 million unsecured letter of credit facility that is supported by a performance security guarantee from Export Development Canada. Pro Forma Positioning: The Company estimates 2021 year-end liquidity of ~$265 million (including ~$195 million of cash) with a 2021 net debt to adjusted EBITDA of 0.8x (US$67.50 WTI & US$12.50 Western Canadian Select “WCS” differentials). The Company is targeting to be in a net cash position in 2023 as it implements further debt reductions in the current commodity price environment.

“Athabasca has taken deliberate steps to reposition the portfolio over the past number of years,” said Robert Broen, President and CEO. “We are in an enviable position in the current environment. The refinancing provides the Company significant strategic flexibility. We remain steadfast in our capital allocation priorities and disciplined hedging will provide certainty on strong free cash flow and a path to net zero leverage in 2023. Reduced cash flow volatility, consistent operational execution and a best-in-class balance sheet is expected to unlock significant shareholder value through this time period and beyond.”

Corporate Positioning
Athabasca’s unique portfolio of Thermal and Light Oil assets result in strong free cash flow generation and position the Company competitively in the market with the following attributes:

- Predictable, Low Decline Thermal Oil: The assets have an established history of highly reliable operations and performance. The Thermal division has a decline rate of less than 10% with ~365 mmbbl of Proved1 and ~1,185 mmbbl of Proved plus Probable1 reserves. The division’s operating cash flow break-even is approximately US$43 WTI (US$12.50 WCS differential and 0.80 C$/US$ FX) with annual sustaining capital requirements of ~$5/bbl.
- De-Risked Light Oil with Capital Flexibility: ~850 gross locations across the Montney and Duvernay provide a deep inventory of short-cycle time, high-returning investments. The Light Oil assets have an established track record of top decile margins and netbacks. Athabasca has flexibility in capital spending to develop these assets with no near-term land expiries and a predictable program over the next 5 years.

Strategic Outlook
Athabasca’s strategy to maximize shareholder value is based on its competitive strengths and includes the following principles:

- Managing for Strong Free Cash Flow: Athabasca intends to maximize free cash flow while maintaining its production base. In 2021, the Company forecasts ~$90 million in Free Cash Flow (US$67.50 WTI & US$12.50 WCS differentials) and >$600 million in free cash flow (US$70 WTI & US$12.50 WCS differentials) during the 3-year timeframe of 2022-2024.
- Maintain Annual Corporate Production: The portfolio of long reserve life assets under-pins a low corporate decline rate of ~10%. Athabasca requires low sustaining capital of ~$125 million annually to maintain production. The Company retains a large portfolio of future investment opportunities.

Direct Free Cash Flow to Debt Reduction: The Company plans to maintain low leverage, both in terms of debt quantum and debt metrics. Athabasca will direct at least 75% of future free cash flow towards achieving a total outstanding term debt target of US$175 million (50% reduction) in the medium term, while maintaining a strong cash liquidity position. The Company is targeting to be in a net cash position in 2023.

Strong Risk Management: Athabasca has commenced its 2022 hedging program which includes 13,500 bbl/d of fixed WCS swaps at an average price of ~US$54 (implied WTI of ~US$66.50 assuming a US$12.50 WCS differential). These swaps fully protect the sustaining capital program down to ~US$50 WTI. Athabasca intends to hedge up to 75% of its forecasted production, net of its internal Light Oil production, for the next 18 months to ensure it meets its strategic objectives of protecting a sustaining capital program and achieving free cash flow to meet its debt targets. Additional hedges are anticipated to include a combination of swaps, collars and puts to strategically balance downside protection while maintaining upside exposure to the current price environment. Achieving these objectives will build significant shareholder value and provide future strategic flexibility.

Disciplined Operations and Continuous Improvement: The Company continues to actively optimize its operations and cost structure to strengthen margins and resiliency. Athabasca has a well-established track record reducing operating costs, including non-energy operating expenses by ~40% at Leismer and ~70% at Hangingstone since 2016.

Commitment to ESG: Athabasca’s management has a long-standing commitment to ESG initiatives as evidenced in its inaugural 2021 ESG report released in May. Since 2015, the Company has reduced its net GHG emission intensity by 20% and is targeting a 30% net reduction by 2025 using established technologies. The Company is also progressing its partnership with Entropy Inc. to explore the application of Carbon Capture and Sequestration at Leismer.

Athabasca’s strategy is to position itself as a unique high liquid yield company with low leverage. The Company has tremendous upside through its low decline, long life reserve asset base. The refinanced capital structure provides the strategic leverage to ensure it can utilize free cash flow to increase margins and maximize shareholder return.

Goldman Sachs acted as lead active bookrunner to Athabasca in connection with the New Notes offering. The syndicate included ATB Capital Markets (“ATB”) as Co-Lead Joint Bookrunner and BMO Capital Markets as Joint Bookrunner.

ATB acted as lead arranger and sole bookrunner to Athabasca in connection with the syndicated reserve-based credit facility.

Norton Rose Fulbright Canada LLP served as legal advisor to Athabasca on all transactions.

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