DBRS Comments on Athabasca Oil Corporation’s Grant of a Contingent Bitumen Royalty Interest for $129 Million

DBRS Limited (DBRS) today notes that on June 20, 2016, Athabasca Oil Corporation (Athabasca or the Company; rated B (low) with a Negative trend) announced the grant of a Contingent Bitumen Royalty interest to Burgess Energy Holdings L.L.C. (Burgess) on its thermal assets for a total consideration of $129 million in cash. Concurrently, the Company has repaid the USD 221 million first-lien term loan (TLB) which was due to mature as early as May 2017.

The Bitumen Royalty will be calculated on a sliding scale ranging from 0% to 6% of Athabasca’s realized bitumen price (net of diluent, transportation and storage costs) for each thermal asset. The royalty has been structured so that the assets will not be encumbered at lower pricing levels. As an illustration, the Company highlighted that at the Hangingstone Thermal project, oil prices would have to reach approximately USD 75 per barrel of West Texas Intermediate before the first 1% royalty is triggered. The royalty is not expected to materially impact the economics of future Hangingstone expansions nor the economics of additional thermal development projects.

The monetization of a portion of the Company’s thermal assets, coupled with the recently received cash proceeds of $267 million from the close of the Murphy Oil Corporation Ltd. (Murphy) joint venture, has enhanced the Company’s liquidity position. Athabasca’s current liquidity (after repayment of the TLB and excluding cash collateralized for letters of credit (LOCs)) is estimated at $630 million. The Company’s credit facilities, based on agreed amendments between the Company and its lenders, have been restructured to (1) a revolving credit facility of $45 million (currently undrawn) and (2) a $110 million cash collateralized LOC facility that secures the Company’s long-term transportation agreements. At March 31, 2016, there were $100.5 million of LOCs outstanding. Previously, the Company had a $125 million facility that at March 31, 2016, backstopped the LOCs.

However, the Company is expected to generate negative free cash flow (cash flow net of capital expenditures and dividends) in 2016 and through 2017.The Hangingstone project is in a ramp- up phase and oil prices are not sufficiently strong enough for the Company to produce positive cash flow. As a consequence, DBRS expects the Company will have to draw down its available cash resources through 2017.

Funds realized from the recent transactions have alleviated one source of refinancing risk with the repayment of the TLB. Nevertheless, as cash is reduced over the course of the next year, nearer-term risk still remains with regard to refinancing or repayment of the Company’s $550 million of senior secured second-lien notes that mature in November 2017. DBRS notes the positive strides that the Company has taken to improve its financial position but at the same time recognizes that challenges remain to be addressed.

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

The applicable methodologies are Rating Companies in the Oil and Gas Industry (September 2015) and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers (March 2016), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.