On the Money: Why Alberta Oil Sands shouldn’t be trading at its cash value
Is the company being mispriced?
by Jody Chudley
The chart you see here is not the kind that creates happy shareholders. It is, however, the kind of chart that I’m drawn to in the hopes of finding a company that everyone has given up on but that is being mispriced. And Alberta Oil Sands looks to me like it’s being mispriced in a major way.
First, a bit of background. The company went public in 2004 and initially was focused on redeveloping existing conventional oil-producing assets. But in 2007, AOS decided on a significant change of course and aggressively shifted its focus to the oil sands. AOS sold conventional assets and used those proceeds (and equity financing) to lock up a good sized portfolio of oil sands leases. From 2007 to 2012, the company spent its time delineating some of the oil sands resource that it controls, as well as submitting applications for regulatory approval to begin production.
But early in 2012 some dissident shareholders who were tired of the lack of progress on those two fronts pushed for the replacement of several members of the AOS board of directors along with the company’s management. They got their wish, too. That new leadership has marked the start of a new era for the company, and over the past year it has diversified its operations by adding an international asset base in Africa to complement its oil sands assets.
And on July 26, 2013, the company’s ongoing turnaround story got even more interesting. That was the day that the province of Alberta announced it was allocating 55,000 acres of Crown land to the regional municipality of Wood Buffalo. In order to do that, it had to cancel a bunch of oil sands leases – including AOS’s Clearwater property. Under current legislation, that means AOS is entitled to compensation for the cost of acquiring its lease, including annual licence and application fees, wasted exploration and development expenditures, reclamation costs and related interest charges. To date, AOS has spent approximately $51 million in the acquisition and development of Clearwater. The company currently has 211,482,057 issued and outstanding common shares, which means it will have $0.27 per share in cash with a share price that (as of this writing) is half that.
Better still, it also has a bunch of other assets that the market isn’t valuing. Its Grand Rapids project is just as large as its Clearwater project, if not quite as potentially prolific. It’s located 30 kilometres west of Fort McMurray and has 119 million barrels of contingent resource which could produce as much as 30,000 barrels per day for 40 years. The company hasn’t started any work on Grand Rapids yet, given that Clearwater is the first project in the development pipeline. Then there’s Algar Lake, a large area of land with 51 sections that AOS acquired in 2007. Earlier this year AOS sold a 75 per cent interest in this property to Crescendo Resources in exchange for the new partner paying AOS $2 million in cash and covering the cost of drilling five wells on the site. The attraction of Algar Lake for Crescendo is that it might be suitable for cold flow production, which would require only 25 per cent of the capital that a SAGD operation would need. If cold flow is a go, Algar Lake could offer very profitable production. Canadian Natural Resources’ Pelican Lake property, which is hugely economic, is to the south and west of Algar Lake and is the largest cold flow heavy oilfield in Alberta.
The African assets, meanwhile, were bought using very little cash.
In total AOS spent about $3 million on the properties (which are located in Zambia and Namibia), with the remainder of the cost being paid using company shares. The company’s strategy in Africa is to hold off on drilling until companies in nearby properties with deep pockets drill up their adjacent blocks. Successful exploration wells next to AOS properties will make bringing in partners much easier and the terms much more favourable. In other words, the value of the AOS properties could increase significantly without AOS actually doing anything in the near term.
The Namibian assets are particularly attractive, given that its offshore geography is similar to that of both Brazil and Angola – regions that have a combined 30 billion barrels in discovered reserves. In Namibia, only 16 wells have been drilled over the last 20 years, and most of those were shallow shelf wells. The big elephants, in other words, are still out there waiting to be found. But the thing that makes Alberta Oil Sands truly interesting to me is not this specific compilation of assets. It is that at the current stock price,
I get these assets for free. That’s right – for free. AOS is valued by the stock market at a price that only recognizes the cash that the company has on its balance sheet (it has no debt). If anything good happens with any of its other assets, AOS is going to work out very well for shareholders who have bought shares at the current valuation. And if it finds one of those elephants? Well, they’ll be able to pay for a trip to Namibia to go look for a few with the profits.