Athabasca Oil Corporation (ATH) Earnings Call Transcript & Summary

Hello, and welcome to the Annual General Meeting of Shareholders of Athabasca Oil Corporation. Please note that today's meeting is being recorded. It is now my pleasure to turn today's meeting over to the Chairman of the Board, Ron Eckhardt.

Good morning. Welcome to Athabasca's Annual General Shareholders Meeting. I'm Ron Eckhardt, Chair of the Company's Board of Directors. Pursuant to the company's bylaws, I will be the Chair of this meeting. This year, again, the meeting will be held in a virtual-only format conducted via live webcast. The virtual-only format provides all shareholders and duly-appointed proxy holders with an equal opportunity to participate, submit questions and vote in the meeting regardless of their geographic location. On the agenda today is the formal business described in the Notice of Meeting and the Notice and Access Notification. After we take care of the formal business, I will ask Rob Broen, Athabasca's CEO, to give an update on the company's recent activities and strategic objectives. During the meeting, registered shareholders and duly-appointed proxy holders may at any time submit questions or communicate with the Chair and the Secretary by clicking on the Q&A tab, typing in and submitting their question or comment. If you are attending as a guest, you may submit questions to be addressed by Mr. Broen following the formal meeting. No questions submitted by guests will be read or answered during the formal meeting. Given the virtual format of the meeting and in order for us to expediently address as many questions as we can, we would encourage shareholders who have specific questions on an item of business to submit their question now. If you have further questions, not specifically relating to the items of business, please feel free to submit those questions at any time, and they will be addressed at the conclusion of the meeting. I will now call the meeting to order. In addition to myself, the other Board nominees attending virtually are Angela Avery, Bryan Begley, Rob Broen, John Festival, Marty Proctor, Marnie Smith and Theresa Roessel. So let's get started with the formal part of the meeting. Cam Danyluk will act as Secretary of the meeting; and Marina St. Denis from Computershare will act as scrutineer. I've been advised that the notice calling this meeting, along with management information circular and the form of proxy were mailed on April 2, 2025, to the registered shareholders as of the close of business on March 20, 2025. Our circular and other meeting materials were made available to beneficial shareholders through the notice and access system. And so with the consent of the meeting, I will dispense with reading the notice calling this meeting. I've been provided with the scrutineers' report at this meeting. At this meeting, there are 66 persons holding or representing by proxy circa 291 million shares or 57% of the common shares entitled to vote at this meeting. This represents a quorum of shareholders. Therefore, I declare this meeting regularly called, properly constituted for the transaction of business. To facilitate formal business of the meeting, Matthew Taylor will propose, and Karla Ingoldsby will second the formal motions. At this meeting, each share held as of the record date is entitled to 1 vote. If you have voted your shares prior to the start of the meeting, your vote has been received by the scrutineer, and there is no need to vote those shares during the meeting, unless you wish to revoke or change your vote. As such, if you have already voted and do not wish to revoke or change your vote, please do not vote during this meeting. In order to streamline the voting process, we will now open the polls at any time during the meeting. Registered shareholders and duly-appointed proxy holders that are logged on or wish to vote their shares may do so by clicking on the vote tab on your screen. The polls will remain open until just before the conclusion of formal business of the meeting. If you're attending this meeting as a guest, you will not be able to vote or ask questions during the meeting. We've been advised by Computershare that based on proxies already deposited with them, enough votes have been cast to carry each of the motions. The first item of business is the presentation of the company's financial statements for the period ended December 31, 2024, and the related auditor's report. Copies are available online on the company's website. Extra copies are also available to shareholders upon request. The next item of business is fixing the number of directors to be elected at the meeting at 8. Mr. Taylor, may I have a motion for this?

I move that the number of directors of the company to be elected at the meeting be fixed at 8.

I second the motion.

A motion has been made and seconded to fix the number of directors of the company at 8. Mr. Danyluk, have we received any questions relating to this item of business?

No, Mr. Chairman, there are no questions relating to this item of business.

Thank you. You can cast your vote on this item of business until I announce that the polls are closed. I will announce the voting results of this item of business at end of all other items of business after the polls are closed. The next item of business is the election of the company's directors. Mr. Taylor, may I have a motion for the election of the company's directors?

I nominate each of the following individuals as directors of the company to hold office until the next annual meeting or until his or her successor is duly elected or appointed unless his or her office is earlier vacated: Angela Avery, Bryan Begley, Rob Broen, Ron Eckhardt, John Festival, Marty Proctor, Marnie Smith, Theresa Roessel.

I second the motion.

Thank you. No other nominations have been made in the time frame specified in the company's advanced notice bylaw. Accordingly, I declare that the nominations are now closed. Mr. Danyluk, have we received any questions relating to this item of business?

No, Mr. Chairman, there are no questions relating to this item of business.

Thank you. You can cast your vote on this item of business until I announce the polls are closed. The next item of business is to appoint Athabasca's auditors. Mr. Taylor, may I have a motion for this?

I move that Ernst & Young LLP, chartered accountants, be appointed auditors of the company until the next annual meeting and that the remuneration as such be fixed by the Board of Directors.

I second the motion.

A motion has been made and seconded to appoint Ernst & Young LLP as Athabasca's auditor and to authorize the Board of Directors to fix its remuneration. Mr. Danyluk, have we received any questions relating to this item of business?

No, Mr. Chairman, there are no questions relating to this item of business.

Thank you. You can cast your vote on this item of business until I announce that the polls are closed. You may not vote for any accounting firm other than Ernst & Young LLP. We will now wait about a minute to allow registered shareholders and duly appointed proxy holders to submit their votes, and we will then close the polls. [Voting]

The polls are now closed with respect to voting on all of the motions. Mr. Danyluk, could you please provide the preliminary voting results?

Mr. Chairman, based on the preliminary report of the scrutineer, all items voted at the meeting have received more than the number of votes required, and therefore, all items are passed. The final voting results will be posted online on SEDAR+ under Athabasca's profile.

Thank you, Mr. Danyluk. In light of the results of voting, I now declare the number of directors of Athabasca is fixed at 8. The 8 directors nominees named in the management information circular have been duly elected as directors to hold office until the next annual meeting or until his or her successor is duly elected or appointed unless his or her office is earlier vacated. And Ernst & Young LLP is appointed as auditor of Athabasca until the next annual meeting, and the Board of Directors is authorized to fix its remuneration. The final report to be furnished by the scrutineer subsequent to the meeting will be incorporated into the minutes of the meeting. That concludes the formal business as set out in the notice of the meeting. I will now give our registered shareholders and duly appointed proxy holders the opportunity to ask questions. Mr. Danyluk, have we received any questions?

No, Mr. Chairman, there are no questions.

Thank you. I will now call for a motion to terminate the meeting.

I move that the meeting be terminated.

I second the motion.

Thank you all for attending. I now declare this meeting closed. Now I would like to invite Rob Broen to provide an update on the business. Rob?

Thank you, Ron, and good morning, everyone. My name is Rob Broen, and I'm the CEO of Athabasca Oil. And thank you for joining our virtual AGM this morning. 2024 was an outstanding year for our company. Our strong operational execution underpinned record cash flow of $561 million, representing 102% per share growth year-over-year. And our free cash flow was also a record at $322 million, allowing us to continue allocating 100% of those funds back to shareholders through share repurchases. In 2025, we are continuing our track record of operational excellence and disciplined capital allocation. Even in the face of macroeconomic uncertainty and volatile commodity prices, we are positioned for providing outsized returns for our shareholders, and I'm pleased to discuss that strategy this morning. Our strategy is focused on driving value per share growth, underpinned by 3 key pillars. First, our low decline, high-quality thermal assets that have a 90-year reserve life; Second, self-funded growth through our high-returning Kaybob Duvernay oil play that has almost 450 future locations; and third, a pristine balance sheet with a net cash position supporting financial resilience and flexibility. You can see in the graph on the bottom left-hand side on this page that we expect compound annual growth on production of approximately 13% through 2029. This growth is from our expansion plans at Leismer and our Duvernay Energy activity. The middle graph shows our expected cash flow growth. With consistent execution of share buybacks, we expect to realize 20% per share compound annual growth rates on funds flow through 2029. Now we've already returned approximately $900 million to shareholders through first deleveraging and then share buybacks. Looking ahead, we anticipate generating approximately $1.8 billion of free cash flow over the period from '25 to 2029, and this represents approximately 70% of our current market cap, positioning us to continue material shareholder returns. The growth outlined assumes a long-term commodity price of $70 WTI and $12.50 differential. And I'm going to speak in a moment to the pricing sensitivities and the exceptional ability to withstand periods of volatility and still deliver strong returns. We are committed to delivering superior per share growth across production, cash flow and returns, maximizing long-term shareholder value. This slide shows our corporate snapshot. Our thermal oil assets underpin our strategy with strong predictable performance from an unparalleled 90-year reserve life resource. The heavy oil production also positions us very well for today's pricing environment. And on the Duvernay Energy side, our assets are positioned in the liquid-rich fairway of the prolific Kaybob Duvernay through our subsidiary company, Duvernay Energy Corp. That company is debt-free and ready for self-funded growth with approximately 444 future locations. And I'm going to talk more about the assets in just a moment. As you can see, our financial position is clean and resilient. At the first -- end of the first quarter, our balance sheet was in a $115 million net cash position with $438 million of liquidity, including $305 million of cash. Our 2025 guidance is also summarized on this page, and we expect to generate substantial free cash flow even as we navigate market volatility. I should also mention that we have approximately $2.2 billion of valuable tax pools, allowing for a tax-free horizon for many years into the future. Yesterday, after market closed, we released our Q1 2025 results. Some highlights included production of approximately 37,700 BOE per day with 98% liquids, that includes our Duvernay Energy volumes. Our recent production levels are even stronger at approximately 40,000 BOE per day, including Leismer at 28,000 barrels a day and Hangingstone at 8,900 barrels per day in April. We have started the year strong, and we expect that we'll be at the upper end of our annual corporate production guidance, including our Duvernay production, as we execute our exciting capital programs on both sides of the business. Our consolidated adjusted funds flow was $130 million in the quarter, which is a 63% growth on a per share basis year-over-year with free cash flow of $71 million from our thermal assets alone. You can see that our asset netbacks are very strong, an indicator of the quality and the profitability of our assets. These netbacks ranked very well compared to peers in North America. We continue to allocate 100% of thermal oil free cash flow to shareholders and have repurchased approximately 18 million shares year-to-date. And our balance sheet remains pristine with $115 million net cash position. It is fundamental to Athabasca to maintain this financial strength. Our near-term strategic priority is to manage for strong free cash flow. As I touched on earlier, you can see in the graph on the top right-hand side on this slide that we expect a compound annual growth rate on production of 13% through 2029. We have now repurchased approximately 125 million shares or 20% of our fully diluted share count over the last 2 years. And Athabasca continues to see significant intrinsic value in its shares. For 2025, we've renewed our normal course issuer bid with the capacity to repurchase up to 50 million shares until mid-March 2026. We have been actively repurchasing shares and have already completed $94 million in share buybacks this year, as I already mentioned. The bottom graph shows our substantial cash flow growth. Now these graphs, you can see the power of reducing share counts through a buyback program. Our continued and consistent implementation of this program compounds the returns for our shareholders. As mentioned previously, we are forecasting 20% annual cash flow per share growth through 2029. We believe that compounding cash flow growth with share buybacks is a winning formula, enhancing per share value in a way that few companies can match. Now we recognize the macro volatility in the energy business, and our disciplined approach ensures that we are well prepared and we remain resilient. Global oil benchmarks have softened in recent months in response to accelerated OPEC+ supply announcements and an evolving U.S. trade policy. Our strong balance sheet and our low decline assets provide resilience. This is our best insurance against unexpected events. Our production base is uniquely resilient. With activity we've already completed in 2025, we do not expect any further base decline in production this year, and we will be at the upper end of our corporate guidance. Our current operating breakeven is approximately $32 a barrel, and our growth capital program for 2025 is fully funded down to $48 a barrel. Our capital has been planned to be flexible with the progressive expansion at Leismer, allowing for ramp-off points that can be recalibrated based on the macroeconomic environment. Our capital in Duvernay Energy retains significant flexibility on the pace of its operations and is positioned with an independent balance sheet and no near-term land expiries. The TMX pipeline, which was commissioned in 2024, is providing additional egress for Canadian liquids, and it has created structural changes for Canadian heavy oil. Current heavy oil differentials are trading about $9 a barrel, well below our long-term budget assumption of $12.50 a barrel. Every $1 improvement in heavy oil differential adds $17 million of cash flow and every $1 change in WTI impacts our cash flow by $10 million. We believe as additional egress is debottlenecked that the outlook for Canadian heavy oil pricing remains strong. I'd like to now switch to our assets and talk about our exciting development programs. This slide shows Leismer, a top-quality oil sands project and our largest producing property. We recently brought on stream 6 redrills, and the asset is producing at its facility capacity of 28,000 barrels a day. We have another 4 well pairs behind pipe that will keep our production at these levels through the end of 2025. The company is focused on progressive growth to 40,000 barrels a day over the next 3 years at a total project cost of $300 million. We will implement this growth at a highly economic 25,000 flowing barrel capital efficiency. This project has interim growth targets to 32,000 barrels a day and 35,000 barrels a day before achieving the regulatory approved 40,000 barrel a day capacity. Not only does this add production in stages, as we complete the expansion, it also provides flexibility to adjust to macro environment changes if necessary. The project remains on budget and on schedule. This growth will complement our continued return of capital strategy and will maximize value creation for shareholders. We have the financial capacity to deliver this growth and continue our return of capital program. Hangingstone is our original SAGD asset that was commissioned in 2015. It has a long reserve life with a 60-year reserve life index. The asset has seen tremendous improvement in cost structure. The implementation of coal gas injection for pressure maintenance has displaced steam, resulting in a reduced steam-oil ratio from about 4.5 to 3.4x. This has reduced our operating costs, lowered our emissions and created excess steam capacity. This asset has generated approximately $325 million in operating income in the last 2 years with minimal capital. It continues to deliver meaningful cash flow contributions with competitive netbacks. In March, we brought on 2 new 1,400-meter well pairs. The new well pairs have ramped up faster than we anticipated, benefiting from warm reservoir conditions and pressure supported by offsetting wells. Early performance has exceeded our expectations, and we are averaging production from these wells of 800 to 1,000 barrels per day per well. These sustaining well pairs will support base production in 2025 and beyond. And we look forward to seeing this asset continue to support the cash flow generation capacity of our company. I'd like to say a few words about our Corner asset, a top-tier SAGD reservoir in our portfolio, just offsetting Leismer. This asset is completely derisked with over 300 vertical well penetrations. The asset has 350 million barrels of 2P reserves and another 520 million barrels of contingent resource. We believe it is a very high-quality reservoir relative to other industry projects, potentially superior to our Leismer asset. Importantly, it has a 40,000 barrel a day regulatory approval for development, which is very unique in today's environment. It is also on the existing Leismer pipeline egress right away. We are updating our development plans and finalizing facility cost estimates, including modular facility optionality. I expect we'll start to explore funding options outside of our current balance sheet once the oil prices recover from the current macro volatility. Switching to Duvernay Energy Corp. In February 2024, we finalized the formation of the subsidiary company. It has exposure to approximately 200,000 gross acres, including 46,000 acres of 100% working interest land in the liquids-rich windows of the prolific Kaybob Duvernay resource play. The company has an estimated 444 gross future locations with extensive operated infrastructure in the region. There have been over 1,000 wells drilled in the past 10 years, and the area is currently very active with industry peers, allowing for a unique low-risk development outlook. Plan is to allocate 100% of adjusted funds flow from this subsidiary company to drive self-funded growth. Our capital program for 2025 is estimated at $75 million, which is about $10 million lower than the original budget. Activity this year includes a 4-well, 30% working interest pad with 5,000-meter laterals that will be completed post-breakup. The construction of a gathering system infrastructure for operated 100% working interest assets and then the completion of a 3-well 100% working interest pad that was actually drilled in 2024. These activities will support exit production rates of approximately 6,000 BOE per day this year and drive momentum into 2026. Duvernay Energy has significant operational flexibility with no near-term land expiries and the ability to adjust spending in response to commodity price movements. So I hope this overview has helped you with why you should invest in Athabasca, and I want to thank you -- say a thank you to our shareholders for your continued support as we deliver on our strategy. And I want to say a special thank you to the staff of Athabasca for their dedication, their hard work. I'm very proud to work with such talented people. At Athabasca, we believe that responsible energy that we produce here in Alberta makes people's lives better. The world needs more Canadian energy, not less. And as you know, Canada has recently completed another federal election. Athabasca is proud to stand alongside 38 energy companies in calling for coordinated action to strengthen Canada's energy future. We outlined our plan in a letter last week to the new Prime Minister. This includes simplifying regulations, committing to firm deadlines for project approvals, growing Canadian production, attracting increased investment and incenting indigenous co-investment opportunities. Canada has the resources, innovation and talent to lead the world in responsible energy development. We will work with governments to accelerate progress and demonstrate that Canada is serious about its role as a leading energy superpower while also ensuring long-term prosperity for all Canadians. This concludes my presentation, and we would be happy to take questions. Mr. Taylor, have we received any additional questions?

Yes, we have a few.

Rob, the first one here is, does Athabasca have a wildfire plan in place?

Yes. That is a timely question. It is wildfire season in Alberta across Western Canada. I think the short answer is we are monitoring conditions closely. We're in close contact with Alberta Forestry. It is a very dry year. It looks -- the outlook is very dry. There are resources to fight fires nearby our facilities. And we have planned through activities in previous years to keep our setbacks from the forest quite far from our actual facilities, and we expect it to be a pretty low risk to any operations that we have. So that's what I would say about that.

Next question. Does Athabasca have any oil going into the TransCanada pipeline?

So I'm going to assume that, that question either means, do we have oil going into the Trans Mountain pipeline? And the answer to that is no, we don't have any volumes that go into the Trans Mountain pipeline to the West Coast. The question could mean, do we have any volumes going into the TransCanada Keystone pipeline, which goes to the U.S. Gulf Coast? And the answer to that is, yes, we do have access currently for about 3,300 barrels a day of volumes to go directly and priced in the Gulf Coast, and that is rising to 7,200 barrels a day by 2028.

Next question is for the Duvernay. How long will it take to reach the second and third payouts? Can you describe the development plan to place and stimulate wells in the vicinity of faults?

I think I'm going to turn that question over to Bruce Beynon, who's with us on the call today.

Perfect. Thanks, Rob. Yes, 2 different questions. I'll go with the second question first. Relative to stimulation in the vicinity of faults, I think our current land base, we are fortunate based on the subsurface data we have, both well and 3D seismic, that we are not in any high-risk areas of faults. And at this point in time, we do not really see any specific stimulation plan to mitigate proximate our faults. So we've been quite fortunate so far, and we don't see any warning signals on our -- any of our subsurface data, seismic or otherwise. With respect to payouts, consistent with our economics in our corporate presentation, we would suggest that something for payout 2. There's a lot of moving pieces here, mid-cycle pricing, $70 TI flat, is probably where we'd look at it, get to second payout around 60 months. Third payout would extend quite a bit longer given the decline in a shale and has a lot of uncertainties there. So it could be on the order of something closer to 160 months.

There's another operational question here. How many wells will be drilled in the remainder of 2024 (sic) [ 2025 ]?

Okay. So I think I outlined that in the presentation. At Leismer, we have 4 well pairs that we are steaming currently, and we'll be bringing those on production in the second half of the year. So those are already drilled behind pipe that have yet to show up in production. We expect to start drilling in the second half, probably Q4 in Leismer on our next pad of wells, and that would be pad 11, if you were looking at a map in our presentation. So that's Leismer. We don't expect to drill any additional wells in Hangingstone. And then in the Duvernay, I also talked about that, we have a 4-well pad that our partner is drilling in Kaybob. And those laterals are going to be 5,000 meters on average. And in fact, 3 of the 4 are already TD'ed. So we're in really good shape on that, and we expect those -- the completion will start on those in the -- right after breakup here this summer. And then we have a 3-well pad of DUCs that there are about 4,100-meter laterals on those, and we're planning to complete those in the fall this year. And so that's the activity. I think any subsequent drilling is really dependent on the macro environment and pricing. And like I said earlier, we have lots of flexibility on activity there, and our goal is to keep that balance sheet in pristine shape and not stretch the financial capabilities of that company.

The next 2 questions are related to return of capital. The first one is, would Athabasca consider a dividend?

Yes. I -- so our goal is to deliver whatever is the best return for shareholders. And there's lots of ways you can do that through your capital allocation. One is investing in your assets. You can pay down debt. We've already done that. We're in a net cash position. You could give a dividend or you can buy back stock. And our belief is, given our size and given the cash flow profile that we see generating both from the activities we're doing plus the tailwinds we've seen in heavy oil that buying back our stock is the best return, and it provides the best cash flow and free cash flow per share growth for our shareholders. And I think especially on a tax-adjusted basis, that's probably the best thing we can do. So that's what we've committed to doing for 2025. And the other thing I would say, we're actually glad we don't have a dividend right now, especially during times of volatility. It becomes a permanent part of your cost structure, and it's not something that you would ever want to cut when you have it in place. So it's not part of our capital allocation structure right now, and I don't expect it will be in 2025.

Next question is about share buybacks. It appears Athabasca has bought back 72 million shares, yet the net effect was a reduction of 11 million shares. Can you explain whether future buybacks will reduce the float as it stands? I'll take that question. We are into our third NCIB currently. Buybacks started in April 2023. And just to clarify some numbers, we've completed $570 million of total buybacks, and we've repurchased 125 million common shares. On a basic basis, our common shares have been reduced from 587 million common shares down to 502 million currently. And on a fully diluted basis, which is inclusive of any dilutive securities, including warrants that were issued in our refinancing coming out of COVID, the share count has been reduced from 649 million shares down to 517 million shares. That reflects a 20% reduction in the fully diluted share count. And we expect going forward future buybacks will continue to reduce the basic share count, and you'll see that quarter-to-quarter.

Thanks, Matt.

Rob, there's no further questions in the queue.

Okay. With that, I think we will bring it to a close. Thank you for attending today's meeting and also for your continued support in Athabasca Oil Corporation.

This concludes the meeting. You may now disconnect.