DBRS Assigns Provisional Rating of B to Athabasca Oil Corporation’s Senior Secured Second-Lien Notes

DBRS has today assigned a provisional rating of B with a Stable trend to the proposed Senior Secured Second-Lien Notes (the Notes) of Athabasca Oil Corporation (Athabasca or the Company). DBRS has also assigned a provisional recovery rating of RR4 to the Notes. The proposed Notes, estimated at up to $600 million, are structurally subordinated to the proposed secured first-lien bank facility (the Bank Facility), which is to be $150 million (versus the current $25 million).

With limited production history and aggressive development plans, DBRS’s analysis will largely focus on the Company’s ability to maintain strong liquidity to fund planned capital expenditures (capex) over the next several years. Once Athabasca successfully executes its production growth strategy and makes a transition from a largely pre-production state to a meaningful commercial state, then the rating will gradually become based on free cash flow generation capability and reserve statistics. Operating cash flow is expected to become sufficient to fund the majority of capex within three years should the Company execute its plan on a timely basis. With its significant oil sands contingent resources (best estimate) at over 10 billion barrels of oil equivalent, Athabasca has the potential to continue to attract new joint venture (JV) partners. DBRS views establishing JV partnerships with investment-grade oil and gas producers to be positive for the rating, as they provide (1) upfront cash proceeds, (2) share operational and financial risks and (3) deepen operational expertise.

The rating is supported by Athabasca’s strong liquidity profile. Assuming the Company spends $1 billion in capex per annum, the Company’s liquidity (including projected cash proceeds of $1.3 billion from exercising its put option with PetroChina Company Limited) should be adequate to support capex over the next three years. Should oil prices drop significantly and no additional external funding (e.g., JVs, new equity) be available, DBRS expects the Company to conserve its liquidity by curtailing capex.

Key challenges facing the Company include the following, which are discussed in detail in the rating report: (1) timing of the $1.3 billion put/call option, (2) limited track record, (3) execution risk and (4) aggressive capex spending.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Oil and Gas Companies (April 2011), which can be found on our website under Methodologies.