Athabasca Oil Corporation (ATH) Earnings Call Transcript & Summary

Good day and thank you for standing by. Welcome to Athabasca Oil Announces the Creation of Duvernay Energy Corporation Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to the CFO, Mr. Matt Taylor. Please go ahead, sir.

Thank you and welcome, everyone. Thanks for taking the time to dial into our conference call this afternoon. I would like to refer everyone to the advisories and forward-looking statements located at the end of today's release. All information provided today is qualified by those advisories. In the room today, I'm joined by Rob Broen, President and CEO; Cam Danyluk, GC, VP, Business Development; Karla Ingoldsby, VP, Thermal Oil; Bruce Beynon, VP, Light Oil; Mike Wojcichowsky, VP, DCS. I'll hand it over to Rob.

Thanks, Matt, and good afternoon. Thanks, everyone, for dialing in to our investor and analyst call on such short notice. The purpose of our call today is to walk through the strategic Duvernay transaction with Cenovus Energy that just hit the wire. I will provide some introductory remarks and a transaction overview. And then our new Vice President of Light Oil, Bruce Beynon will provide an update on the Kaybob Duvernay Play and Duvernay Energy's accelerated development plans. I will then conclude with the strategic outlook for our company, and then we can open it up to some Q&A from the investment community. Athabasca is continuing its tremendous transition. We are very fortunate to have outstanding assets that have low declines with deep inventories and incredibly long reserve lives. Over the years, this has provided us flexibility to manage our spending while also holding our production levels. During 2022 and following the depths of COVID, we focused on solidifying the balance sheet. We refinanced our debt position in the fall of 2021 and made a concerted effort to pay down our debt. We achieved our debt targets earlier this year and are now in an enviable net cash position of approximately $155 million at the end of 2023. In April 2023, we shifted the strategy to meaningful return of capital and commenced an inaugural share buyback program. We see tremendous intrinsic value in our shares that is not fully reflected by the market. In fact, we are on track to complete approximately $150 million in buybacks or approximately 43 million shares by the year-end. We will achieve our commitment to return a minimum of 75% of excess cash flow in 2023. And we've also pivoted to profitable growth in our top-tier assets to augment shareholder returns. Earlier in December, we announced a capital budget of $175 million and the commitment to return 100% of our free cash flow to shareholders in the form of share buybacks in 2024. We are pleased to provide growth in cash flow, coupled with the reduced share count resulting in top quartile cash flow per share growth. More detail on that can be found in our budget release from December 6 and in our investor presentation on our website. I will also summarize this briefly at the end of the call. So that takes us to the transaction we announced today. I'm pleased to announce that we have taken deliberate steps to derisk and now catalyze our Light Oil division. It's important to walk through some background to provide some context on this transaction. In 2015, we entered into a JV transaction on our expansive Duvernay and Montney land base in the Kaybob region. Our motivation was to create a funding model to derisk 200,000-plus acres in its emerging resource play and hold the land for future development. We chose a partner that had experience developing the Eagle Ford resource play that is analogous in many ways. As part of the consideration, our partner was required to spend approximately $1 billion over approximately 5 years to strategically delineate core blocks of land. We are very pleased with the results and the land tenure has been secured, and the asset is now primed for development. Earlier this year, we completed a $160 million noncore light oil disposition. We divested the gassier Placid Montney and the deeper, more expensive Saxon and Simonette Duvernay land at a very attractive multiple at approximately 8x cash flow. It was a very accretive sale on what was becoming a noncore asset in our portfolio. This focused our light oil portfolio with exposure exclusively in the liquids-rich oil window of the Kaybob Duvernay play that had extensive and very successful development by industry over the past several years. Bruce is going to talk more about that in a moment. We have entered now into a transaction with Cenovus Energy to create a new private entity called Duvernay Energy Corporation. Athabasca is contributing its 30% working interest in the joint venture that's land and production, its strategic regional infrastructure and approximately 24,000 acres of 100% working interest operated land. This new land is contiguous to the JV's Kaybob East lands and was strategically acquired by Athabasca through Crown sales over the last 18 months. Cenovus is contributing approximately 22,000 acres of 100% working interest land in the core of the play, 3 producing Duvernay wells and its working interest in area infrastructure. This land is also contiguous with our company's Kaybob East land position. Duvernay Energy will own and operate extensive infrastructure across these lands, including 2 oil batteries with direct connection to the Pembina Peace pipeline system for liquids and dual connections to both the Pembina KA gas plant and the Keyera Simonette gas plant. The high content liquids produced in this area is a quantity, and it's a really nice strategic complement for the diluent consumed in our thermal assets. The new entity, Duvernay Energy will operate as a private subsidiary company owned 70% by Athabasca and 30% by Cenovus. The company will provide our investors pure-play exposure to the prolific Kaybob Duvernay resource play. The company will have exposure to a total of approximately 200,000 gross acres, including a newly operated position of approximately 46,000 acres of 100% working interest land. These lands are largely derisked, and we estimate we have over 500 future locations. The new company will be debt free and will be seeded with a $40 million -- a $40 million of cash, along with a new $50 million undrawn RBL. Initial production will be approximately 2,000 BOE per day with about 75% liquids. And we have plans for self-funded growth at this asset that could take us up to 25,000 BOE per day by the late 2020s. Strategically, Athabasca will have 2 companies with independent strategies and capital allocation frameworks. Athabasca's thermal oil budget and return of capital commitment of 100% free cash flow will remain entirely intact. I will come back to this later in the strategic rationale. And I would like to now introduce Bruce Beynon, our new VP of Light Oil. Bruce is a geologist by background and has extensive experience in resource play development. He was most recently VP Business Development with Baytex after they acquired Raging River Resources, where he held the position of President. Bruce has been assisting Athabasca with our efforts to create this strategic opportunity, and I think many in the investment community will know Bruce. I will turn it over to Bruce, who will give a brief description of the Kaybob Duvernay Play and describe our plans for development.

Thanks, Rob, and good afternoon, everyone. The Duvernay Kaybob represents an incredible opportunity. It is rare to have such an expansive derisked land position. Over the last 10 years, the Kaybob area has seen significant drilling activity by industry and the play now has well over 1,000 wells. Thermal maturities are well established, defined and validated through production results. type curves are well established across the play with production tests that have proven the economic validity of the play, activity has recently accelerated. Athabasca's land position, combined with the Cenovus land position will now fall under Duvernay Energy. These lands are primarily located within the liquids-rich volatile oil window and have over 70 horizontal wells drilled to date, which helped define a strong type curve set. In particular, at Kaybob East and 2 Creeks 12 recent Athabasca interest wells with extended production histories have displayed strong first year average rates or IP365s of over 550 BOE per day per well and an 85% liquids content. Looking forward, we are particularly excited by some of the new 100% lands that have thick reservoir pay packages, some of the thickest net pay in the core of the volatile oil window. Like all resource plays, the learning curve will result in better and stronger wells. Newer well designs are now seeing lateral lengths up to 4,500 meters and proppant loadings averaging 2,000 pounds per foot. Well spacing varies between 300 and 500 meters depending on where we are situated in the play on rock quality. We expect future wells with the adoption of longer laterals will yield stronger initial rates, larger reserves and improved capital efficiencies. Individual well costs are estimated to be in the range of $10 million to $14 million, again, depending on pad size, horizontal length and proppant loading. As Rob mentioned, Duvernay Energy intends to execute a self-funded development plan that will target growth to 25,000 BOE per day, again with a 75% liquids weighting by the late 2020s with a deep inventory of 500 identified locations that will support development well into the future. In the short term, the 2024 development program will include 12 gross or 7.1 net wells with a capital budget of approximately $82 million. A new 100% working interest 2-well pad at Kaybob East is currently drilling and is expected to be placed on production in the second quarter of 2024. We will also drill 2 additional 100% working interest multi-well pads along with 2 30% working interest, multi-well pads on our joint venture lands. In the short to midterm, the plan is expected to drive strong production momentum with production expected to average 6,000 BOE per day in 2025. The Duvernay boasts very strong netbacks, a function of the high-value condensate and light oil production. Athabasca historical netback has consistently been in the top quartile for many years compared to other operators and other operators in liquids-rich resource plays. Netbacks are expected to be further supported by a lowering of unit costs with production growth and taking advantage of underutilized infrastructure. Long-term development is expected to be funded within cash flow and is flexible for a range of commodity prices. The plan will be weighted to activity on Duvernay Energy's 100% working interest acreage and augmented by development on its 30% working interest joint venture acreage. This 2-pronged development plan is very helpful at managing the company's risk profile. I will now hand it back to Rob for some concluding strategic remarks.

Thanks, Bruce. The strategic rationale for this transaction is to accelerate value creation for Athabasca shareholders. The 2 separate companies will have independent strategies and independent capital allocation frameworks designed for their unique asset bases. The creation of Duvernay Energy provides a clear path for accretive self-funded light oil production and cash flow growth. It is a flexible and proven asset base that we believe can grow to 25,000 BOE per day by the late 2020s. It's a tremendous opportunity. And it will not sacrifice Athabasca's ability to fund capital in its thermal oil division or impact Athabasca's existing return of capital strategy. Athabasca's Thermal Oil division underpins the company's strong cash flow outlook and low decline. At Leismer, the facility expansion to 28,000 barrels per day remains on track to be completed by midyear. The competitive advantage of high-quality thermal assets is that production can be held with modest capital, approximately $6 a barrel for many years into the future. Leismer also has regulatory approval for expansions up to 40,000 BOE per day with the ability to be very competitive and measured -- with measured continual growth. Finally, the company also has a fully derisked asset at Corner, which also has regulatory approval for 40,000 barrels a day with reservoir quality equivalent or better than Leismer. We are fortunate to have such a deep inventory of excellent quality long-term resource assets. Pro forma the transaction, Athabasca is forecasting adjusted funds flow of approximately $460 million in 2024, excluding its 70% interest in Duvernay Energy with an unchanged capital forecast of $135 million for thermal oil. That's a $40 million reduction in capital spending that previously included Duvernay development. Resulting free cash flow in Athabasca is maintained at approximately $325 million, consistent with our budget release from 2 weeks ago. Athabasca is still poised to generate over $1 billion in free cash flow over the next 3 years under a price assumption of $80 WTI and $50 heavy WCS differential in 2024 and $85 WTI, $12.50 WCS differential beyond. Clearly, we are anticipating the benefits to WCS pricing with the startup of TMX pipeline in 2024. I should also mention that our assets in thermal oil are all in pre-payout crown royalty structure with royalty rates between 5% to 7% anticipated to last until 2027. And finally, the company retains its differentiated tax pools of approximately $2.8 billion, including $2.3 billion of immediate deductible noncapital losses and exploration pools. We are maintaining our 2024 return of capital commitments outlined in the budget release earlier in December. We intend to allocate 100% of free cash flow to shareholders through share buybacks in 2024. And now we've established a separate and clear cash flow growth opportunity in Duvernay Energy with our partner Cenovus Energy. This entity will be seeded with $40 million, including $22 million from Athabasca and the cash flow from the current Duvernay assets. Duvernay Energy has momentum into 2024 with a self-funded capital spending plan that we expect can grow the company's production to 25,000 BOE per day in the late 2020s with inventory to hold it there for many years thereafter. It is our belief that this will create clear value for Athabasca shareholders that is not currently reflected in today's share price. I want to thank all our employees and our field staff for their hard work over the past number of years, and I also want to say thank you to our shareholders for their support in executing our vision and our long-term strategy. We are now ready to open it up for Q&A.

[Operator Instructions] Our first question comes from the line of Phil Skolnick from Eight Capital. Please ask your question, Phil.

Just a few questions. Just first off, when it gets to some sort of a critical math, do you -- will there be any kind of plan to spin it out?

Yes, Phil. Rob here. So -- I mean, our goal is to get this momentum going in this company and grow it self-funded. And we expect very short order it's going to grow and it will get to a critical mass. And I think at that point in time, it's going to give us all kinds of opportunities. I want to be clear, though, that this is considered a spin-out subsidiary of Athabasca Oil right now, and it's got its own strategy and its own funding model separate from Athabasca.

Yes. I guess I mean more like a publicly traded entity is what I meant there.

I think, Phil, there's going to be options on the table for us once we prove what we can do with this and get some size.

Sure. Makes sense. Also, what are the proper netbacks to assume at strip pricing in 2024 for this entity?

Sure. Just give us a second, we'll give you some numbers here.

And I guess just while you're looking for that, my final question is, is this going to roll up into your financials, the 70% of the single line item? Or is it going to be individual production, et cetera, et cetera?

Yes. So given our ownership level, we're 70% working interest and our control. Duvernay Energy will be reported on a consolidated basis. And then we anticipate we're going to provide pretty clear and segmented disclosure within the MD&A and our financial guidance.

Phil, it's Matt here. Just on your questions on netbacks at an $80 WTI price netbacks from the Kaybob Duvernay are approximately $50 and change.

Our next question comes from the line of Menno Hulshof from TD Securities. Please ask your question, Menno.

Yes, you touched -- Rob, you touched on the history of these assets at the beginning of the call. But could you just walk us through how this specific transaction came together? And how did Marathon -- sorry, Murphy factor into the conversation?

Yes, sure. So as you know, Menno, we have a joint venture with Murphy and that was established a number of years ago. And we now -- and we put this in our budget release earlier in December. We have a clear spending plan for next year, and we actually have a 5-year plan with our partner on that. Nothing will change regarding the JV that we have with Murphy. However, now what we have is we have 46,000 acres of 100% operated lands. And it's right contiguous and adjacent to the land-based and the infrastructure. So our intent is these 2 will work hand in hand and should complement each other well as we continue to build value for our shareholders. So I'm not sure if that answers your question, Menno.

Yes. Were they given the opportunity to participate?

Well, actually, the way we approach this is we wanted to establish our own 100% position so that we can be an operator in this area as well. And we approached and talked to Cenovus independently and put this deal together with Cenovus.

Okay. Perfect. And then my follow-up, a pretty simple one. What is the WTI breakeven for these assets on a sustaining capital basis?

Yes. We feel that on individual well basis, the breakeven is in the low $40 WTI and -- low to mid $40. So there's plenty of room for economic value, even at lower oil prices. We're going to be pretty focused though this is going to be self-funded, and we're going to work within cash flow of the entity. So we're -- although we're seeding it with initial capital, we'll be very mindful of watching prices and our spend level to grow this.

[Operator Instructions] I'm showing no further questions. I'll now turn the conference back to the President and CEO, Mr. Robert Broen for any additional closing comments.

Yes, I just wanted to say thank you very much for dialing in today. And I know this call was close to the holidays, and that's probably catching everybody as you're trying to get into a relaxing mode, but really important announcement for our company, and I think it's really going to prove its value over time. So thanks for dialing in, and I wish everybody a great holiday and happy New Year.

Thank you. That concludes today's conference call. Thank you for participating. You may now disconnect.