Athabasca Oil Corporation (ATH) Earnings Call Transcript & Summary

Yes, Mr. Chairman, we received some questions that will be addressed in the -- following the formal portion of the meeting.

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?

Well, thank you, Ron, and good morning, everyone. My name is Rob Broen, and I'm the CEO of Athabasca Oil. And thank you for dialing in to our virtual AGM this morning. 2023 was an outstanding year for our company. We have established a track record of strong operational and financial performance from our top tier assets. Our strong free cash flow generation allowed us to deliver a return of capital strategy to our shareholders that has resulted in tremendous cash flow per share growth. I'm pleased to say that we had the top share performance in our energy peer group during 2023. And in fact, we were at the top of the energy complex on the TSX with a share price return of 73% in 2023. In 2024, we are continuing that momentum, focusing on providing outsized returns for our shareholders, and I'm pleased to discuss that strategy this morning. Athabasca is uniquely positioned as a midsized energy company. Our production base is 98% liquids, with a large resource base of over 1.2 billion barrels of 2P reserves and an additional almost 1 billion barrels of contingent resource. Our low corporate decline of less than 10% from our top-tier assets allows us to generate significant free cash flow. Our thermal oil assets underpin our strategy with strong predictable performance from an unparalleled 80-year reserve life and resource. The heavy oil production also positions us very well for today's pricing environment. And on the light oil side, we've repositioned our portfolio. In 2023, we sold our noncore Montney assets at Placid and Saxon and created Duvernay Energy Corporation, a pure-play private subsidiary. These assets are positioned in the liquids-rich fairway of the prolific Kaybob Duvernay. The company is debt-free and ready for self-funded growth with over 500 future locations, and I'll talk more about our assets later. And as you can see on this slide, our financial position is clean and resilient. At the end of the first quarter, our balance sheet was in a $90 million net cash position with $435 million liquidity and $305 million of cash. We expect to generate substantial free cash flow this year, and I will speak more to that shortly. We also have approximately $2.6 billion of valuable tax pools allowing for a tax-free horizon for many years into the future. Yesterday, after market close, we released our Q1 2024 results. Some highlights included production of almost 33,000 or approximately 33,500 BOE per day with 98% liquids. We've started the year strong, and we expect that we will be within our annual corporate guidance of 35,000 to 36,000 BOE per day, and that includes Duvernay Energy volumes as we execute our exciting capital programs on both sides of our business. Our adjusted thermal oil fund flow was $84 million in the quarter with free cash flow of $42 million. We expect this to grow substantially into the back half of the year as we increase operating scale with the support of strong heavy oil pricing. So there's been recent positive structural changes for Canadian heavy oil. Global oil benchmarks have been supported by strong demand and structurally tight supply. And Athabasca maintains a constructive outlook on oil prices supported by years of industry under investment and continued strong demand. Historically, Canadian WCS heavy differentials have been volatile due to a lack of egress. And with the commencement of operations on the new TMX pipeline in May, Canada is moving to an excess egress situation. The TMX pipeline is providing up to 590,000 barrels a day of new contracted egress to new markets for Canadian liquids. We are anticipating this to create a strong demand for our product to continue to supply to existing markets in the U.S. Midwest and Gulf Coast. We are seeing heavy oil differentials narrow significantly now with stability. Strip prices for the rest of 2023 are in the range of $11 to $13 a barrel, and these are tremendously improved and we believe, structurally stable for many years to come, and the impact to our company is tremendous. A USD 5 per barrel improvement in WCS heavy oil prices translates into $85 million of incremental cash flow for our company. We are a go-to name for exposure to heavy oil production as our differentiated long-life reserves have unparalleled exposure to this improving commodity price environment. So our near-term strategic priority is to maintain and manage for strong cash flow. You can see in the graph on the top right-hand side on this slide, that we expect a 3-year compound annual growth rate just on production of 7% and a 15% on a production per share basis through 2026. This growth is from the expansion of our plans at Leismer and Duvernay Energy. And the bottom graph on this slide shows how our cash flow grows at various oil prices. We expect to generate approximately $1.2 billion of free cash flow over the 3-year period from 2024 to '26. On these graphs, you will see the power of reducing share count through a buyback program. Our continued and consistent implementation of this program compounds the returns for our shareholders. Cash flow per share is expected to have a 3-year compounded annual growth rate of 45%. We believe this formula of cash flow growth through investing in our assets with structurally improved pricing and the reduction of absolute share count is a winning formula. Very few companies have been able to deliver this type of outlook. It is our belief that this will continue to generate superior returns for shareholders with this strategy. The company continues to see tremendous intrinsic value that is not reflected in the current share price. In 2023, we promised to allocate a minimum of 75% of excess cash flow to shareholders. And in March, we fully completed our inaugural normal course issuer bid program with $225 million returned to shareholders by repurchasing and canceling 58 million shares at an average price of $3.88 per share. This represented 94% of excess cash flow returned to shareholders exceeding our target. In 2024, we have committed to allocating 100% of free cash flow to the share buybacks. We renewed our NCIB with capacity to repurchase up to 55 million shares until mid-March 2025. We are consistently in the market delivering on this commitment and have already completed $98 million of share repurchases in 2024. The company has reduced its fully diluted share count by 71 million shares or 11% since March of 2023. 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. In 2023, we sanctioned the expansion of Leismer to grow production from 20,000 barrels per day to approximately 28,000 barrels per day. And I'm happy to report that we've completed the expansion of our oil treating capacity at the Central Process facility. We've also drilled the wells required to reach our production goals, and we're in the process of speeding the reservoir in these wells and bringing them on production. We are on track to achieve 28,000 barrels a day in mid-2024 at a very competitive capital efficiency of $14,000 per flowing barrel per day, also resulting in a $5 per barrel margin improvement from pre-expansion due to the incremental scale. The company is now also operationally ready for progressive growth to 40,000 barrels per day over the next 3 years. We will implement this growth in stages in a highly economic capital efficiency of about $25,000 per flowing barrel per day, and we have all regulatory approvals in place. This growth will complement our continued return of strategy and will maximize value creation for shareholders. We have the financial capacity to deliver this growth and continue with our return of capital program. We are anticipating sanctioning the next phase of growth at the end of Q2 with a port from constructive multiyear heavy oil pricing outlook. Stay tuned for more details on that with our Q2 results. Hangingstone is our original SAGD asset that was commissioned in 2015. It also has a long reserve life with a 65-year reserve life index. The asset has seen tremendous improvement in cost structure. The implementation of CO gas injection for pressure maintenance has displaced steam, resulting in a reduced steam ratio from about 4.5x to 3.5x today. This has reduced our operating cost. It's lowered our emissions, and it's created excess steam capacity at the facility. This asset has generated over $200 million in operating income in the last 2 years with minimal capital. It continues to deliver meaningful cash flow contributions with competitive netbacks. In the summer of 2024, we are planning to spud 2 1,400-meter well pairs. Well design with extended reach laterals are expected to drive very competitive project capital efficiencies of approximately $15,000 per flowing barrel and will leverage off available infrastructure capacity, as I already mentioned. These sustaining well pairs will support base production in 2025 and beyond. We look forward to seeing this asset continue to support the cash flow generation capacity of our company. I would like to say a few words about our Corner asset. It's a top-tier SAGD reservoir in our portfolio, just offsetting Leismer. This asset is completely derisked. It has over 300 vertical well penetrations. The asset has approximately 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 in the area and potentially superior to our Leismer asset. Importantly, it has a 40,000 barrel a day regulatory approval in place for development, which is very unique in today's environment. It is also on the existing Leismer pipeline egress right away. We've recently updated our development plans for the latest well designs. We've completed disposal test in the area to confirm the central processing facility design, and we have hired a third-party engineer -- engineering firm to complete project-ready economics -- cost estimates and economics. So we can run economics. I expect we will start to explore external funding options outside of our current balance sheet later this year. Stay tuned as we look for ways to advance this incredible future project in our portfolio. So switching now to Duvernay Energy Corporation. In 2023, we sold our noncore assets in Placid and Saxon region to a private company for $160 million of cash. These assets were a mix of operated Montney assets and nonoperated Duvernay lands. The transaction was completed at attractive and accretive transaction value of almost 8x net operated income. This transaction strengthened our balance sheet and focused our portfolio. In December 2023, we announced the formation of Duvernay Energy Corporation and subsequently closed the transaction on February 6 of this year. Duvernay Energy is a pure-play privately held subsidiary of Athabasca with equity interests owned 70% by Athabasca and 30% by Cenovus. It has exposure to approximately 200,000 gross acres, including 46,000 acres of 100% working interest land in the liquid-rich windows of the prolific Kaybob Duvernay resource. The company has an estimated 500 gross future locations with extensive operated infrastructure in the area. There have been over 1,000 wells drilled in the past 10 years in this area and it's currently very active with industry peers, allowing for a very unique low-risk development outlook. The company was seeded with $40 million of cash by the equity partners, and the company has an undrawn $50 million credit facility. The plan is to allocate 100% of adjusted funds flow from the company to drive self-funded growth. We're estimating potential to reach 25,000 barrels a day with 75% liquids by the end of the decade. Our capital program for 2024 is $82 million, and that's for 4 multi-well pads and readiness capital for future activity. We recently brought on production a 2-well pad with 100% working interest at 3 of [ 186417 ] west of the fifth Meridian with an average horizontal length of 4,115 meters per well. A second 3-well pad at 2 of [ 36520 ] West of the 5 with 30% working interest is expected on stream in June. The 2024 capital program is expected to drive momentum into 2025 and we expect average production of approximately 6,000 BOE per day in 2025. So Duvernay Energy accelerates the value for Athabasca shareholders by providing a clear path for self-funded growth and we really look forward to providing further updates as our plans unfold and we deliver results in this very exciting venture. Yesterday, we were very pleased to publish our fourth annual ESG report, which 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 emission intensity. We've achieved a 21% reduction in emissions intensity since 2015 and are targeting a 30% reduction by 2025. With the development of our low-intensity Duvernay assets, we are on track to reach our goals. Our Leismer, Corner assets are very near the proposed pathways carbon trunk line corridor. We have completed operational estimates to implement TCS at our Leismer facility, and we will be ready to take the next steps once we have fiscal and regulatory certainty from various levels of government. Our safety culture is deeply embedded, and we continue to demonstrate our industry-leading numbers with 2023 total recordable injury frequency of 0.3 per 200,000 man hours, and that's much lower than the industry average. We also have not had a single recordable hydrocarbon spill in the last 5 years. We have a robust corporate governance set of policies and our ESG strategy and performance is fully integrated at our Board level. The world needs more Canadian energy, not less. This is a foundational belief that we hold at Athabasca. So in conclusion, I hope that this overview has helped you with why you should invest or you do hold shares in Athabasca, and thank you to our shareholders for your continuing to support as we deliver on our strategy. I would also like to welcome our newest Board member, Theresa Roessel. We look forward to Theresa's contributions, and I feel very fortunate to have such a qualified and engaged Board as we plan for the future. Finally, I want to say a very special thank you to the staff of Athabasca for their dedication and their hard work. I'm very proud to work with such a talented group of people. That concludes my presentation, and we would be happy to take questions.

This concludes the meeting. You may now disconnect.

We're going to take some questions, operator.

Apologies.

Rob, there are a few questions in the queue, maybe starting on the return of capital theme. This question is around buyback. It appears Athabasca has bought back 72 million shares yet the net effect of reduction was 11 million basic shares. Can you explain and whether future buybacks will reduce the float as it stands?

Yes, sure. So the reduction in our share count based on buybacks is on a fully diluted basis, and there was -- there's actually a slide in our corporate presentation and I referred to it during my presentation. So warrant exercises have influenced the impact of buybacks. And I would like to say that the warrants are now over 92% exercised and these were warrants associated with our debt refinancing in 2022 or late 2021. So future buybacks will therefore have a stronger impact on both basic and fully diluted basis. So I think it's going to be real and impactful and meaningful for our shareholders.

Second question on return on capital. I would ask about if you consider dividend.

Yes, we could ask this question a lot. Our view is that although we have a lot of free cash flow, it's really a capital allocation question. And our aim is to deliver the very best return for our shareholders. And so there's a lot of things that we can do and dividend would be one of them. Our view on the dividend is that for a company our size, it becomes quite a permanent part of our cost structure. And it's probably not something that we're looking to do right now. Also to be competitive in that space, you'd have to put in place a pretty healthy dividend. So when we look at ways to allocate our capital, we think based on our cash flow per share growth that we see coming in future years, we think the very best investment that we can do is to buy back our own shares and that is not reflected in today's share price. So that's a very good investment. And second thing I would say is we have just a vast portfolio of very economic assets to invest in. And we think both of those avenues are better than a dividend at this point in time. So that's currently our strategy.

So the next question is from our operational focus. How many wells will be drilled in the remainder of 2024?

Yes. Maybe it's easiest just to break that down by area. So first of all, Leismer. So our expansion plans to get us to 28,000 barrels per day, we've already drilled those wells. And they're in various stages of coming on stream. They're being steamed. It takes a while to steam the reservoir, get them on production and all of that is on track. In September, we are planning to spud our first set of wells on pad 10, and that's a new pad for us. And we expect we'll drill 4 well pairs on that pad this year. And those are really sustaining wells for -- to hold our production at 28,000 barrels a day and above. The second asset is Hangingstone. We are going to drill 2 well pairs at Hangingstone off an existing pad. That rig is expected to show up in July, and we'll drill those this year. So we'll probably see production from those well pairs really early in 2025. And then on the Duvernay, like I mentioned, we brought on our first pad of wells, 2 wells already this year, 3 well pad that -- we're 30% interest in and will be on stream in June. We expect there will be 2 more multi-well pads drilled this year, one will be 100% and the second one will be a 30% interest pad. Both of those will likely see production in 2025 by the time we get them drilled and completed. And it will likely be a 4-well pad that will be on 30% and probably a 4-well pad on the [ 100% ] operated as well.

Sticking to that theme, there's a question on Duvernay wells. So the first one is what our payouts for the Duvernay wealth under a type curve? And then the second question is, can you describe the development plan to play to continuate well in the vicinity of the pulse?

Yes. So I'll just -- I'll make a couple of comments, and I do have my executive team here with me, too, and I'll maybe invite Bruce to kind of add a little bit to that, Bruce Beynon. But the first question on payouts, we do have a little table in our presentation, and we give 2 scenarios. One would be a 2-well pad we're assuming capital cost is about $14 million per well. And the payout in that situation at a $85 WTI is about a 10-month payout. What we really see is the capital efficiency to go to a multi-well pad is very compelling, and you can really get the capital cost down. And if you were able to drill a multi-well pad and get capital down to $10 million per well, that's really about a 6-month payout. So we expect these wells will be strong. We think our type curve is really well established. And I expect that we will deliver on that and it's backed up by lots and lots of data and established wells in the area. On the -- I assume the second question is on seismicity.

Yes. How do you stimulate wells in the context of default?

Yes. So Bruce, do you want to tackle that one?

Yes, I mean the simple answer with the help a 3D seismic, you're going to do what you can to understand where complications could occur and avoid them as much as possible. I don't think this is an overarching answer that applies everywhere. It's very site-specific and bespoke. We're fortunate to have data that can help us avoid it. And in terms of placement and stimulation, if you thought you were close, you would usually react accordingly, and that's usually reducing some of your tonnage. So I think our simple answer, site specific, and we have a lot of data that helps us avoid and we're also in a position that we don't see as much complexity as other parts of the Duvernay play closer to the [ region ].

Yes. And I would just add, if you look historically at all the wells drilled in the area where there's been seismicity events into faults, they're generally not in our areas of operation. We're in a quieter seismic area than most of the operations.

So the next question is marketing related. Do we have any oil going into the TransCanada Keystone pipeline system.

Okay. So the question is do we have oil going into the TransCanada pipeline. And by that, I would assume what has meant is the Keystone pipeline, which actually goes to the Gulf Coast, U.S. Gulf Coast. We do have a little bit of oil that goes into that, that gives us direct access to the Gulf Coast, but it's small, just currently over 2,000 barrels a day. If the question was meant to be the Trans Mountain pipeline, which is the new pipeline that goes to the West Coast, we do not have any liquids that go into that pipeline. And if -- some of you will recall that we did have capacity, contracted capacity on that pipeline before it was fully built and we elected to sell that capacity because we felt that on a risk-adjusted basis, it was better in the hands of big producers and that we'll probably get our best price directly in [ Edmonton ] with the contracted barrels going to a different market. And I think that's playing out. So that's our current status of how we sell our oil.

You have another question. Does Athabasca have a wild fire plan in place?

Well, unfortunately, we do have a lot of experience with wildfires now on both sides of our business. So the basic answer is yes. But of course, the devil is in the details on that. And all our sites have a very robust emergency response plan. We've taken a lot of measures from past fires to ensure there's sufficient barriers around all our facilities. Our staff in the field are highly competent at reacting and proactively dealing with threatening situations. We monitor it very closely. Currently, there's nothing under threat in the province of Alberta, but I'm very confident that we'll be able to respond accordingly and that our assets will be protected.

So there's no further questions in the queue.

Good questions. We invite anybody else. If you have a question, please feel free.

This concludes the meeting. You may now disconnect.

Okay. I guess that's the meeting. Thank you very much, everyone.