With an appeal of the AER's authority to give the green light to its Dover Project getting the go-ahead from the courts, Athabasca Oil faces a long and cold winter ahead. For investors willing to shoulder a bit of risk, though, the situation is intriguing
When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at firstname.lastname@example.org
by Max Fawcett
Well, so much for conventional wisdom. The thinking among analysts in Calgary and Toronto was that the Fort McKay First Nation’s appeal of the Alberta Energy Regulator’s approval of the Dover project would be rejected in due course. Instead, the court granted the appeal, throwing the company’s near-term prospects – and maybe even its entire future – into uncertainty. The provincial government could still grant an “order in council” approval for the project, but that seems highly unlikely given the obvious political cost of treading on an ongoing appeals process. As a result, Athabasca Oil (TSE:ATH) is going to have to let that play out in the courts, and hope it can secure the additional funding it needs to avoid running out of liquidity.
FirstEnergy has gamed out the possibilities, and they don’t look terribly optimistic for the company given that the appeal may not even be heard for six months. It expects the company to shift into survival mode, cutting cap-ex in all non-essential areas and drilling only as many wells as it needs to maintain the rights to its acreages. It will also enter into negotiations – increasingly urgent ones, obviously – over a possible joint-venture for its Duvernay land. “Although ATH‘s bargaining position would seem somewhat weaker given that they appear to have even more motivation to get a deal done sooner than later now,” FirstEnergy noted in a report today, “it has indicated that there is a high level of interest from numerous parties.”
Even with those measures, though, the company is going to have to go deep into the red to survive. “Under a scenario where Athabasca does not receive Dover put/call proceeds, and does not monetize any other assets aside from the 50 per cent interest in its light oil infrastructure ($145 million), our updated forecasts suggest that Athabasca will need to begin drawing on its $200 million available credit line by the end of 1Q14e, and for that line to be fully drawn and spent by mid 3Q14e.” And if the Dover put isn’t received by then? A worst-case scenario values the company’s oil sands leases and other assets at just $3.74 per share, while a “mid-case sum-of-parts” one ascribes a per-share value of $14.14 – and that with a valuation of $5,000 per acre for its Duvernay holdings, a substantial discount to recent transactions that have seen similar land packages valued at over $10,000 per acre. Given that its shares are currently trading at $6 and change, that’s a lot of upside – albeit a trade that comes with plenty of risk.