Athabasca Oil Corporation (ATH) Earnings Call Transcript & Summary

Good morning. Welcome to Athabasca's Annual Shareholder 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. In light of the coronavirus pandemic and to help ensure we comply with travel and social distancing measures, we thank those shareholders that have voted by proxy and are viewing by the live webcast. Recent health orders in the province of Alberta have restricted gatherings to no more than 15 people in 1 indoor location with mandated physical distancing of at least 2 meters between attendees. We are conducting this meeting within the limits of the public health orders, and a recording of the webcast will be available on our website following the meeting. I will now call the meeting to order. On the agenda today is the formal business described in the Notice of Meeting which accommodate our Management Information Circular. After we take care of the formal business, I will ask Rob Broen, Athabasca's CEO, to give a short corporate update on the company's recent activities and strategic objectives. Shareholders viewing the webcast will not be able to vote virtually through the webcast. However, you will be able to ask questions following the formal business of the meeting by following the instructions on the online platform. In light of the public health orders, in addition to myself, the only other Board nominee joining me in person today is Rob Broen, and the Board nominees attending through the webcast are Bryan Begley, Anne Downey, Tom Ebbern, John Festival, Carlos Fierro. I would like to take a moment to recognize Marshall McRae who will be retiring and will not be standing for reelection this year. We'd like to thank him for his 10-year service on the Board and the Audit Committee, his business expertise and wisdom. I would also like to welcome John Festival to our Board. So let's get started with the formal part of the meeting. Andrea Whyte, partner at Osler, will act as secretary of the meeting, and Laura Stone from Computershare will act as Scrutineer. To get through the formal part of today's meeting efficiently, we have arranged for certain shareholders to move and second certain motions. I've been advised that the notice calling this meeting, along with the Management Information Circular and the form of proxy were mailed on April 9, 2020 to the registered shareholders of record as of the close of business on April 2, 2020. And so with the consent of the meeting, I will dispense with reading the notice calling this meeting. I've been provided the Scrutineer's Report. At this meeting, there are 54 persons holding or representing by proxy 235,607,328 shares or 45% of the common shares entitled to vote at this meeting. This represents a quorum of shareholders. Therefore, I declare this meeting regularly called and properly constituted for the transaction of business. Voting for the main motions will make up formal business of the meeting and will be conducted by ballot. The first item of business is the presentation of the company's financial statements for the period ended December 31, 2019 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 7. Mr. Taylor, may I have a motion for this?

Thanks, Ron. I move that the number of directors of the company to be elected at the meeting to be fixed at 7.

Ms. Ingoldsby.

I second the motion.

The Scrutineers have advised that the resolution has been approved by a majority of votes. I declare the resolution carried. The next item of business is the Election of Company's Directors. I believe Mr. Taylor has a motion on this matter.

Thanks, Ron. I nominate each of the following individuals as directors of the company to hold office until the next Annual General Meeting or until his or her successor is duly elected or appointed, unless his or her office is earlier vacated: Bryan Begley, Robert Broen, Thomas Ebbern, Ronald Eckhardt, Anne Downey, John Festival and Carlos Fierro.

Thank you. No other nominations have been made in the time frame specified in the company's advance notice bylaw. Accordingly, I declare that the nominations are now closed. As the Scrutineers report that a sufficient number of votes in favor of electing each nominee were cast at the meeting, I declare that the 7 nominees are duly elected as directors of the company to hold office until the next annual meeting or until his or her successor is duly elected or appointed. The last item of business is to appoint Athabasca's Auditors. Mr. Taylor, may have a motion for this.

Thanks, Ron. I move that Ernst & Young LLP, chartered accountants, be appointed Auditors of the company until the next Annual General Meeting and that the remuneration as such be fixed by the Board of Directors.

I second the motion.

The Scrutineers report that this resolution has also been approved by a majority of votes. I declare the resolution carried. That concludes the formal part of the business as set out in the Notice of the Meeting. 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 will now declare this meeting closed, and I would like to invite Rob Broen up to provide an adequate -- or an update on the business, following which we will open up the line website for questions.

Okay. Thank you, Ron, and good morning, ladies and gentlemen. Thank you for dialing into our virtual AGM this morning. My name is Rob Broen, and I'm the CEO of Athabasca Oil. I know it's a difficult time as we are all dealing with COVID-19, and it's a particularly challenging time for investors. Over the next few minutes, I want to give you an overview of Athabasca oil and talk about what we're doing to get through this crisis and prepare for our future. As the investors on this call would know, Athabasca has a diverse asset base. We have Light Oil assets in West Central Alberta. These include our Placid area, where we've been developing liquid-rich Montney resource and our Duvernay acreage at Kaybob, where we now have derisked a large development fairway. We also have a significant thermal asset base, including our high-quality producing property at Leismer and a very high-quality asset at Corner that is fully delineated with regulatory approvals to 40,000 bbl/d. We also have a producing property at Hangingstone that we recently suspended due to low oil prices. So our asset base is complementary. We produce gas and condensate in Light Oil, and we utilize those products in Thermal Oil. We have a low decline, long-life reserve base and short-type cycle time growth assets. These are the basis for a long period of cash flow generation and growth. Our asset base is supported today by a significant liquidity position of $352 million, and that includes $270 million of cash. Yesterday, after market close, we released our Q1 results. Some highlights include: We had production of approximately 36,600 boe/d with 91% liquids. This was supported by very strong performance at Leismer of 19,800 bbl/d after bringing on our newest 5-well pad in Q4 of 2019. That asset has now seen a reduction in SOR to 3.4 with excellent new well performance and also natural gas co-injection across the field. In Light Oil, we brought on 10 Montney wells at Placid for our winter program. These wells were flowed at restricted rates last month in April for cleanup, and we are encouraged with the rates and the wells have now been shut in until oil prices recover. And in the Duvernay, we've seen strong continued results in the oil window. These results are comparing very favorably to the East Shale basin and actually most plays across North America due to lower capital costs and sustained liquid rates. The play is now derisked and the land is held, providing flexibility for future development. This is exactly what we intended when we decided to JV our land base. Our operating income was $1.1 million, and our financial results were negatively impacted by COVID-19, particularly in March, as prices fell dramatically. However, we've been able to maintain a healthy liquidity position, as I previously mentioned. I will speak more to the impact of COVID-19 in the next few minutes. Before I talk specifically about the impact of COVID-19, I thought it might be helpful to describe a little bit about the transformation the company has been undertaking. Over the last 5 years, we've done a series of transactions and completed many development programs in order to generate significant value. These included our $486 million JV in Light Oil that, as previously mentioned, has now seen $1 billion invested in our Duvernay land base. We purchased a high-quality thermal asset base from Statoil for $560 million. This acquisition has proved to be very opportunistic and has paid out in approximately 2 years, and that includes the subsequent $265 million infrastructure sale. We've now completed $470 million worth of contingent bitumen royalties. These have been extremely constructive deals that have provided liquidity for our company. All of these transactions were done to transform the company to one that has disciplined operations, is underpinned by a strong balance sheet and has a compelling future growth platform. In fact, in 2019, we not only held our production by spending within cash flow, we had our first free cash flow of $15 million in our history. You can see in the graphs on this page that our production growth has been large and our improvement in asset netbacks over that time period has also been significant. Unfortunately, though, in 2020, we have now seen the most significant interruption to our industry actually in history with the COVID-19 virus. Very briefly on the macro, I don't think I need to spend too much time explaining what's happened with COVID. But in March, the outbreak was declared a pandemic by the World Health Organization. And of course, we've now seen that, that pandemic has caused material disruption to the global economy. Commodity prices have declined significantly ever since. The decrease in oil demand has been unprecedented, with an estimated 23 million bbl/d off-market in April of this year. Additionally, Saudi Arabia and Russia could not agree on extending production cuts in March and that's resulted in a supply increase. Global inventories have reached all-time highs recently, including North America. The result of this has been a WTI price drop from about $58 in January to $16 in April. And in fact, I think everybody saw the negative prices that we saw last month. The physical markets have been impacted by inventory balances and the underlying commodity price differentials, including WCS, Western Canadian Select heavy oil is -- continue to be volatile. In April, OPEC and non-OPEC countries agreed to supply cuts. And that amounted to about 10 million bbl/d in response to this oversupply situation and along with other global producer curtailments. Industry has responded, and we're seeing self-curtailment driven by the economic environment. Very recently, while it appears that storage is still very full, it may not actually reach its maximum limit. Alberta storage has been constant at 32 million to 33 million barrels. And we've seen significant curtailments occurring in North America, both here in Canada and in the United States. And we've seen that evidenced by 0 apportionment on major pipeline egress systems, including the Enbridge Mainline. While this period of low prices is not over and there's still certainly a significant oversupply, Athabasca does expect improving global oil fundamentals through the back-half of this year and into 2021. Our top priority today is to ensure that this company can withstand the downturn and get to that better day. So specifically, I want to talk about the actions that we've taken in response to COVID-19. We took a swift 3-pronged approach. The first, of course, is the safety of our workforce. We enacted our business continuity plan. We developed site-specific plans within Alberta Health services guidelines. And then we transitioned our Calgary staff to working remotely, and that's actually all worked rather well. Second of all, we focused on maximizing funds flows and stemming the cash bleeding. First, we made an early decision to shut in our Hangingstone asset. The Hangingstone asset simply doesn't have the scale or cost structure to produce at these prices. We've also found a way to reduce OpEx. We worked with our vendors and suppliers to find ways to achieve lower costs during this time period. We think we found about $15 million of cost savings through the end of the year, and that's significant. Also, we've cut our G&A costs. We've been able to trim about $6 million through the end of the year across the company, and that includes working -- Calgary workforce working at 80% workweek. We've taken additional temporary curtailment measures at Leismer and in Light Oil, and I'll talk about those in a minute. And then the last part of this is maintaining our corporate liquidity. We immediately halted our capital program, and that saw us reduce our capital projection by $40 million. We -- and this -- we recently just announced last week, we upsized our contingent bitumen royalty and that was an immediate $70 million cash injection. We've offloaded some future financial commitments on KXL, and we also have a reasonably strong hedge book. We have 18,000 bbl/d hedged at a $42.5 WTI with strip being closer to $20. The result has been a balance sheet that now has $352 million of liquidity, and as I said before, that's $270 million of cash and the rest being undrawn credit facility capacity. Finally, I want to mention that we're continuing to explore other opportunities, and that includes support from the federal government through the recently announced EDC programs. It is too early to report anything specific to shareholders, but we are advancing that opportunity. I want to take a brief minute to explain the contingent bitumen royalty, and as I said, we announced this last week. We received an additional $70 million of cash. That has brought the total raise through this structure to $467 million since 2016. The way these royalties work is on producing existing properties, no royalty is paid below $60 WCS in U.S. dollars, net of transportation and storage cost. That's the equivalent of a $75 oil price with a $15 differential. It ensures there's no draw on cash flow at these prices. At USD 60 WCS, it triggers a 2.5 royalty -- percent royalty payable. Then there's a sliding scale, and it maxes out at 15% royalty when oil hits USD 100 WCS oil price. That's the equivalent of $115 WTI when differential is 15. At these prices, the assets will clearly have cash flow to support the royalty payments with very limited impact on future expansion economics. There's no commitments for future development phases and even -- there's even in a higher pricing threshold on our greenfield assets. We're very proud of these deals. We think they're the gold standard for royalty deals, and they've been extremely constructive for all our stakeholders. Now I'd like to spend just a few minutes on each of our core assets. The first asset is Leismer. Leismer is a top-quality oil sands project. It currently produces 20,000 bbl/d and has regulatory approval for 40. Our most recent drilling activity was a 5-well pad at L7 on the south end of the field, and that came on stream in Q4 of 2019. You can see in the production graph that, that pad has maintained our production at 20,000 bbl/d and has helped drop our SOR to 3.4x. During this period of low oil prices -- sorry, the asset also has an operating breakeven of approximately $23 WCS, and that would be the equivalent of a $35 WTI at a $12.50 WCS differential, which is about where strip is for the rest of this year. During this time period of low oil prices, we've actually seen single-digit WCS prices. So therefore, it's our objective to curtail production, minimize our cash losses and save our production for a better price environment. We have the flexibility at this asset, and we think we can go as low as 8,000 bbl/d. And we're going to take very careful -- a very careful approach in doing this, as we do not want to risk any reservoir damage. There's ways that we can do this. So first of all, we'll ramp down our production in stages along with steam injection. We will continue steam injection, though, and also natural gas co-injection to maintain our temperatures and pressures in the reservoir. We now have a water disposal well, and that project was completed in Q1. And that can help us balance volumes and reduce our OpEx. And finally, the asset actually has a history of curtailments, including during Q4 of 2018 when we were required to curtail. And that has given us a history to learn from. Our current production is about 15,000 bbl/d, and we expect to manage down to the 8,000 bbl/d by June. The duration of these curtailments will be dictated by pricing. And I've mentioned what our breakeven is on this asset. So we'll be watching this very closely. So this asset has a long future ahead of it. We're actually prepared for the next drilling projects, including the new pad at L8, and you can see that in the map on the top, northern part of the asset. And in fact, this past winter, we drilled 4 delineation wells offsetting that pad. And we've confirmed that the reservoir is indeed superb. The next asset is Hangingstone. Hangingstone is an asset that has a productive capacity of about 9,500 bbl/d. It has a slightly higher SOR at 4.5x. Unfortunately, the asset doesn't have the scale or the cost structure for production at recent prices. We made the decision very early to shut in the asset, and during this current crisis and avoid large cash losses. The reservoir is mature. It has over 5 years of steam injection, and the facilities have now been laid up in a fashion that will allow us to commence production at a future date. And I want to remind people that the reservoir here has produced less than 5% of its recoverable resource. There is an analog reservoir that we've looked at carefully, which is currently operated by Greenfire, and this is the former JACOS Hangingstone asset, just to the south of us. It was suspended for approximately 30 months, after which time it was successfully brought on stream with production rates back to its previous decline. So we're going to carefully monitor temperatures and pressures in the reservoir at this asset and we'll make a future determination without -- about resumption of production when oil prices recover. Switching to Light Oil. This slide is our Placid Montney. And Placid is an operated asset for Athabasca. It currently has a productive capacity of about 8,500 bbl/d, and there's about 40 wells that produce in this field. The area has 80,000 acres that are prospective, and we have 200 high-graded wells in our development inventory. The wells come on stream at about 800 to 1,000 bbl/d and high liquid yields, initially at 200 to 300 barrels per million. And you can see the well results in the graph on this page in the bottom right corner. The most recent D&C costs were about $5.9 million per well. The 2019 operating netback in this area was $22 a BOE and that's one of the best in our peer group, and it provides for very economic production and development. This past winter, we drilled 2 pads of 10 wells, and you can see those on the map. The wells are all tied in, and we flowed them at restricted rates on cleanup for a short period of time this last April. We've now shut in that production, and we're going to save that early time higher rate production for a better price environment. We're planning to flow our production base in the near-term and expect to maintain production in this asset at about 3,500 bbl/d net. We are not planning any further capital in 2020. The last asset that I want to talk about is our Kaybob Duvernay asset. So in the Duvernay, this is a very large asset base for us. There's approximately 220,000 acres of resource, and we are estimating about 700 future locations. We have now drilled about 80 locations in this field, and we consider it largely derisked. Our Q1 production was 4,250 boe/d with a 72% liquid yield. And a significant portion of this -- these liquids is condensate. This has driven exceptional netbacks. And in 2019, they averaged $30 a BOE, and I believe that is industry-leading. After a busy winter drilling season, we will see approximately 16 new wells tied in, in 2020. I'm happy to report that we are seeing some of our best results recently. In the eastern part of the play, we hold contiguous blocks of land at Kaybob East and Two Creeks. We now have at least 8 wells on stream that have established initial production over 3 months. The rates are exceeding R-type curves with IP30s averaging about 1,000 bbl/d and liquid yields of 88%. We're seeing now sustained rates over a longer period of time, and you can see that on the graph on this page. This area is particularly exciting to us as it is in a shallower part of the reservoir, where we've seen D&C costs already at $7.5 million, with line of sight to reduce long-term costs with pad drilling. We believe this play will compete very well against other plays in North America. On our joint venture, we designed the joint venture to see a significant amount of capital investment in order to derisk the asset and actually hold the land base. As I've mentioned, we've seen $1 billion invested over 4 years, and Athabasca's capital contribution was only $75 million during this time period. The area is now largely derisked and the land held for longer term development, and the capital carry obligations from our partner is now complete. Athabasca is pleased with this -- was very pleased with this outcome, and the asset has an excellent future in front of it. I would be remiss if I did not discuss an important part of our company and industry. Our company believes that we produce energy to make lives better. The world needs Canada's energy to improve environmental performance and provide a better quality of life around the globe. With COVID-19, we see that now more than ever in our developed economy, probably especially in our developed economy, we depend on it for life. Canada's economy also needs our industry. We are a responsible producer, and we've worked hard at all our environmental, social and governance objectives. This slide demonstrates our environmental performance and is highlighted by a continuous improvement in CO2 emissions intensity. The fact that our oil sands projects rank very high against world projects in different parts of the globe, our liability management rating is one of the highest in industry in Alberta, and our water recycling rates in Thermal Oil are over 95%. We take responsibility seriously, and I encourage you to visit our website and find out more on the information -- more information on the things we are doing to both measure and improve our performance on all ESG measures. I would like to close with this slide. This is Athabasca's value proposition. First of all, we have financial capacity to continue to navigate volatile energy markets. I've mentioned the $352 million of liquidity, including the cash balance of $270 million. Our high-yield debt has term until 2022. We have low corporate declines. And that means we can minimize the capital required to hold our production. And I think we've demonstrated our creative ability to access capital. Second, we feel we have top-tier assets with significant long-term growth profile. We are a liquids-weighted company, no doubt, at over 90% oil. We have an extremely flexible development plan and long life reserves in Thermal Oil. In fact, over -- about 1 billion barrels at Leismer and Corner of reserves. We have almost 900 locations in inventory in Light Oil in both the Montney and the Duvernay. The third point is one that I haven't mentioned yet, and it's very important to our company. Long-term egress to high-value markets will drive significant value. Our future value will be realized in a significant way when long-term egress to world markets is complete out of Western Canada. This will dramatically increase realized prices for our product, and we believe the world will need our Canadian oil production. So we've made our bets. In fact, we have 7,200 bbl/d on Keystone. We have 10,000 bbl/d commitment on KXL, Keystone XL, and we have 20,000 bbl/d on the Trans Mountain pipeline project. These projects now have the backing of Canadian governments. TMX is owned by the federal government, and KXL now has a financial backstop from the Alberta provincial government. The lines are both under construction. So it might have taken a crisis, but it feels like we're finally getting some long-overdue certainty on access to world markets. I also want to mention that we are somewhat unique in this space. We have long-term contracts that will generate huge value, but we are not an investment-grade company. And that requires us to post significant financial assurances, and we've done that. We have $110 million, in fact, in a cash account posted for financial assurances. We are asking the large pipeline companies to work with us to access that liquidity in what is surely a crisis right now. And finally, I would say we are positioned for the recovery. A $5 move for us is $80 million of cash flow. We are more sustainable than we've ever been. Our breakeven of $40 at a $12 differential, that's an operating breakeven, is as low as it's ever been. And of course, our goal will be to refinance this company at lower debt levels in the future. We are focused on navigating current prices, and it's going to be -- continue to be difficult. But we also have an eye to the future and when we can once again produce free cash flow in a recovering price environment. That concludes my presentation, and I want to thank you for listening this morning. I also want to say a very special thank you to the Board who have been supportive. Thank you to Marshall McRae, who's leaving our Board, and a warm welcome to John Festival, who is just joining our Board. And also a very special thank you to our staff who work so hard at this company. With that, we are now going to go to Q&A, and this is Q&A for investors. Okay. So we do have a list of questions, and I just want to mention that in the room with me is the executive team. So Matt Taylor, Karla Ingoldsby and Mike Wojcichowsky are with me. And so we'll do our best to answer the questions that come in.

So the first question is, it says, in the past, it was mentioned that there might be share buybacks. Any news on that? So we've been very clear that we don't currently have any plans to buy back shares, and we've been clear that when we have sustainable free cash flow, that is an option we would consider. That is currently not the case today, clearly. And so we don't have any plans to buy back shares in today's environment. The second question has to do with -- well, I'll just read it. It says, will the low current differentials and conde prices allow some production to return to offset fixed processing and transportation costs at Leismer? I'll just quickly mention, I mentioned what the breakeven costs are at Leismer, the operating breakeven costs. It was about $23 WCS, and that would assume a $35 WTI and a $12.50 differential. The strip going forward is still about $12 to $13. However, today it's narrower than that. And it's actually more like $6 or $7. So of course, we're watching it closely. An asset like Leismer is not something you can turn on and off on a dime. So we are very -- being very careful, and that's why we're doing it in stages, carefully, taking it down. But our full intention is when the prices are recovering and we can cover all our costs, we're going to produce that asset. Second question is about our bonds, and they've been trading at a significant discount. And the question specifically is, what is liquidity for trading these bonds? And I'm going to ask our CFO, Matt Taylor, to answer that question.

Thanks, Rob. So good question. Our bonds are actually -- we've got a fairly concentrated holder base. So the liquidity is fairly thin. However, there typically are a few trades per day. And when we look at trading volumes, it's usually a few million dollars of face value that get traded on a daily basis.

Thank you, Matt. And I think the next 2 questions are for you as well. The first one is about debt obligations. And just the question is, can you review the debt -- company debt obligations, maturities, interest costs, the status of this year's debt review by lenders?

Sure. So quickly, I'll just go through our capital structure. So we have a $120 million reserve-based facility. We currently have approximately $40 million of letters of credit drawn on that facility. The RBL gets redetermined twice a year. That is pretty standard for these facilities. We are just kicking off that process right now and expect to have it completed by the end of May. There is a 364-day term out feature on the RBL. The second instrument in our capital structure is our high yield debt. We have a $450 million instrument with a 9.8750% coupon. We have no financial or maintenance covenants for this instrument. It has term until February 2022. And so approximately 20 months from today. And the last part of our capital structure is cash and liquidity. So we currently have $200 million of cash as of the end of Q1. Recently, we closed a royalty deal for an incremental $70 million. So our current cash position pro forma is $270 million And then the next part of the question was, what are you doing in terms of the bonds, how are you going to take advantage of current trading prices and the maturity that's coming up? When we take a look at our capital structure, our primary goals right now are, first, maintain sufficient liquidity to weather the current macro volatility. The second is going to be to address the term. So we currently have 20 months. So these bonds are not due next quarter or in the next 6 months. So we do have a bit of time. We do believe oil prices will strengthen into the future, and pipelines are also right around the corner. Our goals are also to lower the quantum of debt outstanding and our interest payments. I can assure you that we will look at all options when we go into a refinancing to maximize value for shareholders.

Okay. Thank you, Matt. If there's any other questions, please ask them now.

All right. Ron Eckhardt here. Again, I want to thank everybody for joining us today and the staff at Athabasca, and all the support we've had in getting this done through a very difficult number of months. So that will conclude our meeting. Thank you.