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Athabasca Oil Corporation has reported strong operational and financial performance in the first quarter of 2019. With its resilient business model, the Company is well positioned to generate free cash flow in 2019 and beyond.
2019 First Quarter Highlights
Consolidated Quarterly Results
- Production of 39,206 boe/d (86% liquids)
- Operating income of $76 million (excluding hedging)
- Adjusted funds flow of $42 million ($0.08/share)
- Free cash flow of $10 million with positive contributions from both Light Oil and Thermal Oil
Thermal Oil - Low Decline Production
- Production of 27,494 bbl/d, in-line with Government mandated curtailments
- Operating income of $45 million with a netback of $18.50/bbl
- Leismer L7 sustaining pad rig released in February with first production expected in Q4 2019
Light Oil - High Margin Liquids Rich Returns
- Production of 11,712 boe/d (54% liquids), representing 12% growth year over year
- Operating income of $31 million with a top decile netback of $29.67/boe
- Encouraging Duvernay results at Kaybob West (IP30 ~750 bbl/d) and Two Creeks (IP90 ~400 bbl/d)
- Liquidity of $400 million (cash and available credit facilities)
- Net debt of $263 million; 2019e net debt to funds flow of 1.2x (US$65 WTI & US$17.50 WCS diff)
Uniquely Positioned for Current Market Fundamentals
- Annual capital guidance remains unchanged at $95 - $110 million
- Annual production guidance remains unchanged at 37,500 - 40,000 boe/d
- Funds flow forecast of $205 million; free cash flow ~$100 million (US$65 WTI & US$17.50 WCS diff)
- Future flexibility to direct free cash flow to debt reduction, share buy backs or capital projects
Athabasca is a liquids-weighted intermediate producer with exposure to Canada's most active resource plays (Montney, Duvernay, Oil Sands). The Company's high quality, long life assets provide investors with unique exposure to free cash flow which, combined with focus on strong margin opportunities, drives shareholder returns.
In December, the Alberta Government announced mandatory industry production curtailments starting in January 2019 to alleviate the high differential situation until additional egress is added. Following the announcement, the Western Canadian Select ("WCS") heavy oil pricing outlook has significantly improved. WCS prices averaged C$56.62 in Q1 2019, a 123% increase from C$25.36 in Q4 2018. Athabasca remains supportive of these actions and views them as a necessary step to normalize pricing and provide a bridge to permanent market access initiatives.
Industry and government crude by rail remain an important factor in managing differentials and Alberta inventories. Rail capacity continues to increase and base line utilization is expected to build through 2019 as long term contracts are operationalized.
The global heavy oil market continues to tighten with supply declines in Venezuela and Mexico, OPEC cuts and growing petrochemical demand. These changing dynamics are supporting heavy oil pricing benchmarks with US refineries in the PADD II and III regions requiring a heavier feedstock. The majority of onshore North American liquids production growth is light or condensate spec and slated for export to the international market. Athabasca is well positioned for this changing global supply dynamic with its Thermal Oil weighted production and long life reserve base.
Q1 2019 production averaged 11,712 boe/d (54% liquids), representing 12% growth year over year. The business division generated record operating income of $31.3 million a with top decile netback of $29.67/boe. Capital expenditures for the quarter were $8.6 million (net of capital carry) with free cash flow of $22.6 million.
The liquids rich Montney at Greater Placid (70% operated working interest) is positioned for flexible and efficient development. Robust project economics are supported by strong initial liquids yields (200 - 300 bbl/mmcf), low lifting costs and a ~200 well high graded inventory. The Company has a completion ready pad (seven wells) that was drilled last winter.
Activity in the Greater Kaybob Duvernay (30% non-operated working interest) remains robust and the partnership is planning to execute a jointly approved 2019 budget of ~C$280 million gross (~C$20 million net of capital carry). Activity is focused on volatile oil delineation at Two Creeks, Kaybob East and Kaybob West. The partnership remains encouraged by appraisal results from the first well at Two Creeks 4-21-64-18W5 which had a facility restricted IP90 of ~400 bbl/d (condensate). Athabasca drilled this shorter horizontal well in 2015 for land retention and a future resource appraisal test. Two additional multi-well pads were drilled and completed this winter at Two Creeks with production tests to commence post break-up. A significant northern step-out at Kaybob West 16-25-65-20W5 had a facility restricted IP30 of ~750 bbl/d (condensate). By the end of this year Athabasca believes the majority of the Duvernay acreage (six areas across ~200,000 gross acres) will be de-risked from a resource appraisal perspective and the partnership will be in a position to high-grade development opportunities thereafter. Athabasca remains protected into 2020 with a current capital carry balance of $60.5 million.
Q1 2019 production averaged 27,494 bbl/d, in line with mandated Government Curtailments. The business division generated operating income of $45.1 million with an operating netback of $18.50/bbl ($21.97/bbl at Leismer and $11.39/bbl at Hangingstone). The Company's realized bitumen price after blending averaged $42.56/bbl and is the highest quarterly realized bitumen price in corporate history. Capital expenditures for the quarter were $23.1 million with free cash flow of $22.0 million.
Athabasca is taking deliberate steps to manage reservoir performance and maximize long term profitability at Hangingstone and Leismer. At Leismer operations will focus on production and steam optimization across the field ahead of the start-up of the L7 sustaining pad. The L7 pad was rig released in February and facility construction is underway with steaming anticipated to commence this summer and first production in Q4 2019. This pad is expected to support productive capacity of approximately 20,000 bbl/d. The Company estimates a low average 44% recovery factor on existing wells to date with recoveries expected to reach 65% - 70% long-term. The Company is conducting field and facility maintenance at both assets throughout April and May.
Risk Management and Balance Sheet
Athabasca has prudently protected a base level of capital activity through its risk management program while maintaining cash flow upside to the current pricing environment. The Company has hedged 14,000 bbl/d of apportionment protected volumes for the remainder of 2019 with a WCS floor price of approximately C$53.50, in line with profitable levels realized in Q1 2019.
The Company has access to 130,000 bbl of storage at Edmonton to manage and optimize product sales. Athabasca has secured long term egress to multiple end markets with 25,000 bbl/d of capacity on TransCanada Keystone XL and 20,000 bbl/d of capacity on the Trans Mountain Expansion Project.
Athabasca maintains a strong financial position with funding capacity of $460 million (cash, available credit facilities and Duvernay capital carry) and liquidity of approximately $400 million (cash and available credit facilities). The Company's existing term debt is in place until 2022 with no maintenance covenants.
Outlook and Drive to Free Cash Flow
Athabasca's guidance for 2019 capital remains unchanged with activity levels designed to maintain base production and a strong balance sheet.
The Company is maintaining its $95 - $110 million capital program with production guidance between 37,500 - 40,000 boe/d. Forecasted funds flow for 2019 is estimated at $205 million (US$65 WTI & US$17.50 WCS differential for the balance of 2019) with resulting free cash flow of approximately $100 million.
Delivering consistent free cash flow will afford Athabasca flexibility to direct free cash flow to debt reduction, share buy backs or future capital projects.
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