Athabasca Oil Corporation (ATH) Earnings Call Transcript & Summary

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?

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. You may vote for any accounting firm -- or I'm sorry, you may not vote for any accounting firm other than Ernst & Young LLP. We will now wait about 1 minute to allow shareholders 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 I am voting upon 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 the voting, I now declare the number of directors of Athabasca is fixed at 7. The 7 director 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 her office is earlier vacated. And Ernst & Young LLP is appointed as the auditor of Athabasca until the next annual meeting and the Board of Directors is authorized to fix its remuneration. A final report to be furnished by the scrutineers 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 their questions. Mr. Danyluk, have we received any other questions?

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. And now I'd like Rob Broen to provide an update on the business. Rob?

Well, thank you, Ron, and good morning, everyone. And I want to thank you for dialing into our virtual AGM this morning. My name is Rob Broen, and I'm the CEO of Athabasca Oil. It's a very exciting time to be a shareholder of Athabasca. Our company has undergone a remarkable transformation over the last few years. We've established a track record of strong operational performance and are now in the strongest financial position in our corporate history. The market has recognized our performance over the last 2 years. We were added to the TSX Composite Index in 2022 and were recognized for being in the TSX 30, one of the top-performing companies on the TSX in the last 3 years. This year, we're continuing that momentum, focusing on providing outsized performance for our shareholders. As our investors on this call know, Athabasca has a diverse asset base. Our assets are characterized as low decline and large resource, underpinned by our thermal oil assets and they're complemented by high-return, short-cycle time assets in Light Oil, Montney and Duvernay. We are intentionally oil-weighted, resulting in exceptional cash flow in today's environment. And our assets have performed remarkably well, maintaining a very strong and stable production base, and these assets also provide a deep inventory of opportunities and are the basis for a long period of significant cash flow generation. Our financial position is strong and resilient. In late 2021, we refinanced our debt position, specifically designed to allow us to redeem debt using free cash flow. We set a target of paying down 50% of our debt position, and we have now paid down 54% of the original principal years ahead of expectations. We now have the lowest absolute debt in our corporate history. Our net debt position is only $57 million, and that includes a $260 million liquidity position with almost $175 million of cash. We also have approximately $3 billion of valuable tax pools, allowing for no tax payable for many years into the future. This capital structure provides resilience to macro volatility and sets the stage for a robust return of capital program, which I will describe shortly. Yesterday, after market close, we released our Q1 results. So some highlights included. Our production was approximately 34,700 BOE per day with 93% liquids. We have started this year strong and we expect that we'll be well within our annual corporate guidance of 34,500 to 36,000 BOE per day as we execute our exciting capital programs, particularly at Leismer. Our annual operating income was $57 million in the quarter. Now the quarter was impacted by onetime hedging and financial adjustments that do not change or impact our future outlook. As you will see in a few slides, we expect cash flow to grow significantly through the balance of 2023 and in 2024, even with conservative oil price assumptions. Netbacks have improved significantly since the volatility that we saw in Q1, and this momentum will be reflected in future quarters. I also want to provide a short update on the recent wildfire situation in Alberta as it pertains to our company. Our Greater Kaybob operations were temporarily affected by the Alberta wildfires. And as a precautionary measure, we temporarily shut in 2 facilities last weekend, and we resumed operations earlier this week. At this time, we are not aware of any damage to our well sites or infrastructure. Our Placid and Saxon production was not effective, and there has been no impact to our thermal oil operations. Although certainly a significant issue in our operating area, it has not had a material impact on our operations. I want to thank our staff and those from the province who are protecting our people, our assets in this province of Alberta. I would like to say a few words on the company's views on commodity prices and specifically heavy oil. Global oil benchmarks have been supported by improving demand and structural supply deficits. Athabasca maintains a constructive outlook on oil prices supported by years of industry underinvestment and demand trends moving higher. Canadian WCS heavy differentials have historically been volatile due to a lack of egress. This is no longer the case and should continue to improve with the start-up of the 590,000-barrel-a-day Trans Mountain pipeline expansion that happens in early 2024. Now the differential temporarily widened through the latter half of 2022 and early 2023 as a result of unprecedented U.S. strategic petroleum reserve heavy barrel releases, TC Energy's Keystone Pipeline leak in December 2022 and some other factors. But pricing has significantly improved as these transitionary headwinds have eased. Differentials are currently trading at approximately $14 to $15 compared with an average of $25 -- almost USD 25 in the first quarter of 2023. The supply/demand outlook for heavy barrels is expected to strengthen WCS prices into the back half of this year and in 2024. And Athabasca is a go-to name for exposure to heavy oil production, with every $5 move in WCS impacting our annual cash flow by $80 million. Our differentiated long-life reserves has unparalleled exposure to this improving commodity price environment. Our near-term strategic priority is to manage for strong cash flow. You can see in the graph on this slide in the top right-hand side that we do expect to grow our production by 5% to 7% each year through 2025. This growth is from expansion plans at Leismer and a modest capital spend in Light Oil. Activity is within our capital guidance and enhances our ability to generate free cash in the near term. The bottom graph shows how our cash flow grows at various oil prices. We expect to generate almost $1 billion of free cash flow over the 3-year period from 23% to 25%. That assumes an $85 oil price and a $5 WTI move is approximately $50 million in free cash flow. And as already mentioned, the $5 move in WCS is approximately $80 million. As I will describe in a moment, in 2023, we are implementing a share buyback program. On these graphs, you can see the compound effect on production and cash flow per share when we are growing cash flow and also reducing our share count. It is our belief that this will continue to generate superior returns for our shareholders. Athabasca's capital allocation framework balances material near-term return of capital initiatives for shareholders with a strong multiyear growth trajectory of cash flow per share. The company sees tremendous intrinsic value not reflected in the current share price. In 2023, we are allocating a minimum of 75% of excess cash flow, defined as adjusted funds flow less sustaining capital to our shareholders. Athabasca has in place a normal course issuer bid program that provides the ability to purchase up to 10% of the company's float per annum. This program started in April, and I'm pleased to report that we've already completed $20 million in repurchases and canceled 6.2 million common shares as of May 10. Additional excess cash flow allocation in 2023 and 2024 will be commodity price dependent with the flexibility to do additional buybacks, opportunistic debt reduction or high-return growth projects. And the company retains excellent exposure to commodity price upside. Our risk management program provides for 25% of corporate price hedges targeting [ wide ] collars. Our current collars provide protection to $50 WTI with upside to $106 WTI. I would like to highlight the value of the thermal oil assets in our portfolio. Our thermal oil assets provide unparalleled long-life reserves with low decline rates. Our assets are all brownfield, meaning the large capital expenditures associated with infrastructure and delineation are behind us. In our company, we now have 1.2 billion barrels of 2P reserves with production that can be maintained with very low capital cost. It is also worth mentioning one significant financial advantage that Athabasca has on its thermal assets. In Alberta, royalties are paid to the crown. The amount of royalties paid are much lower when the assets are still in pre-payout status to account for the cost of the initial investment. Our assets are expected to maintain the status to 2028 and beyond, allowing for the company to continue to benefit from very low Crown royalty rates of 5% to 9% for the foreseeable future. This is a distinct advantage Athabasca assets have compared to most other thermal projects that are now in post-payout phase with royalties of 25% to 40%. Leismer is a top-quality oil sands project, and this is our largest producing property. We have focused the majority of our capital spend on this property, which will be approximately $105 million in 2023. Our most recent activity was drilling a 5-well Pad in 2022 on the northern part of the field at Pad L8. This was our second set of wells off this pad site. Steaming of these wells commenced in February this year, and the wells are ramping up production with an expected plateau of 6,000 barrels a day by the end of 2023 similar to the first set of wells. Drilling in 2023 is expected to commence in June with an expected 12 additional sustaining and infill wells. Additionally, we are expanding our oil treating capacity at the central processing facility, and we expect to exit 2023 with a production rate of 24,000 barrels a day and achieve 28,000 barrels a day by mid-2024. This will provide the bulk of corporate growth at a very competitive capital efficiency of $14,000 per flowing barrel per day and a $5 per barrel margin enhancement due to the increased operating scale. We are continuing to progress with carbon capture and sequestration. We have a letter of intent finalized with Entropy who -- Entropy Inc., who will fund modular carbon capture technology and then share in the carbon credits are generated by our emissions reduction. Leismer also has the advantage of being in close proximity to the pipeline corridor of the Pathways project for sequestration. Our intent is to move this project to final investment decision once federal and provincial government regulatory and fiscal policies have been finalized for CCUS investments. Switching to Light Oil. Our Light Oil assets consist of both Montney and Duvernay development areas. Through several years of derisking and development, we now have an inventory of approximately 850 future locations. These assets have very established in compelling economics as can be seen by the single well economics on this page. It is also an area seeing significant competitor activity around our assets. The Duvernay volatile oil window at Kaybob East and Two Creeks in particular has demonstrated compelling extended rate production history. The company has many wells in the area that have consistently supported tight curve expectations with IP 365s averaging 550 BOE per day per well and 85% liquids on the most recent wells. The last -- the land in these areas have no near-term expiries and it's ready for future development. We are really excited about the results in this area, its competitive economics and our operated infrastructure position across the region. Our light oil areas will be targeted for development in the near future. Yesterday, we were very pleased to publish our 2023 ESG report. The report is aligned to leading ESG standards and frameworks and can be found on our website. At Athabasca, we believe that responsible energy we produce here in Alberta makes people's lives better. In this year's report, we outlined the company's strong track record in all areas of ESG performance. We are utilizing technology to lower emissions intensity, and we have achieved a 24% reduction in emissions intensity since 2015 and are targeting a 30% reduction by 2025. Our safety culture is deeply embedded, and we continue to demonstrate industry-leading numbers with a 2022 total recordable injury frequency of 0.08 per 200,000 manhours and no recordable injuries in 2023 to date. We also have not had a reportable hydrocarbon spill in the last 4 years, and we're very proud of that. You can see and read about our plans for carbon capture and storage at Leismer that will take emissions even lower than our stated targets. We have a robust corporate governance policy, many policies, and our ESG strategy and performance is fully integrated at the Board level. The world needs more Canadian energy, not less. So I hope this overview has helped you with why you should invest in Athabasca. And I want to thank our outgoing Board member, Tom Ebbern, for his dedication, his support and his guidance over the past 5 years. I would also like to welcome our newest Board member, Marnie Smith. We are fortunate to have such qualified and engaged Board members as we plan for our future. And finally, I want to say a special thank you to the staff of Athabasca for their dedication and hard work. I'm very proud to work with such talented people. This concludes my presentation, and we would be happy to take any questions.

This concludes the meeting. You may now disconnect, and have a pleasant day.

Thank you.