DBRS Confirms Athabasca Oil Corporation Ratings at B, Stable

DBRS has today confirmed the Issuer Rating and the Senior Secured Second-Lien Notes rating of Athabasca Oil Corporation (Athabasca or the Company) at B, both with Stable trends. The Recovery Rating of the Senior Secured Second-Lien Notes remains unchanged at RR4. The confirmation reflects DBRS’s expectation that Athabasca can successfully execute its growth plan over the next two years. The confirmation also reflects the expectation that Athabasca has sufficient liquidity to fund the planned capex over the next two years to achieve material, meaningful production growth. However, should there be any significant challenges and/or delays in its production ramp-up, the Company’s liquidity could be constrained by 2016, which may result in a negative rating action.

The closing of the Dover Put/Call Option (the Dover Transaction) in August 2014 has significantly strengthened the Company’s liquidity profile and provides the Company with funding for the continued development of its Duvernay and Hangingstone assets. The closing of the Dover Transaction provided the Company with $600 million in cash and $584 million in promissory notes (the Promissory Notes) issued by Phoenix Energy Holdings Limited, a wholly owned subsidiary of PetroChina International Investment Limited. The Promissory Notes will mature as follows: $300 million mature on March 2, 2015, followed by $150 million on August 28, 2015, and $134 million on August 29, 2016. The Promissory Notes are secured by irrevocable standby letters of credit issued by HSBC Bank Canada (rated AA, with a stable trend by DBRS). Athabasca’s liquidity is further supported by its existing cash and cash equivalents on hand (approximately $182 million as at the first six months ended June 30, 2014 (H1 2014)), its $125 million revolving credit facility (fully available as at H1 2014) and its USD 50 million delayed draw term loan (fully available as at H1 2014).

Athabasca plans to use its current liquidity to fund its aggressive drilling program in its Light Oil Division, with a primary focus on the Duvernay, and to complete the Hangingstone Project 1 (production capacity of 12,000 barrels per day (bbls/d)). Hangingstone Project 1 is expected to achieve first steam by the end of Q1 2015, with first production expected within four to six months thereafter. In the Light Oil Division, the Company is expected to spend $291 million in capex in 2014, with $237 million allocated to the Duvernay, and anticipates approximately $337 million to $375 million in capex in 2015. Based on current spending assumptions, the Company is expecting to begin adding material production from its 2014/2015 winter program in Q2 2015, with greater meaningful production increases in 2016. The Company’s ability to successfully ramp up production at Hangingstone Project 1 and in the Duvernay will be critical for the Company to have meaningful cash flow generation.

Notes:
All figures are in Canadian 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 methodologies are DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers and Rating Companies in the Oil and Gas Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.