DBRS Confirms Athabasca Oil Corporation at B (low), Negative

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Secured Second-Lien Notes (the Senior Notes) rating of Athabasca Oil Corporation (Athabasca or the Company) at B (low). All trends remain Negative, and the Recovery Rating on the Senior Notes remains RR4. As noted in DBRS’s October 26, 2016, press release (“DBRS Takes Rating Actions on High-Yield Oil & Gas Portfolio”), the Negative trend reflects the refinancing risk related to the Company’s $550 million Senior Notes that mature in November 2017. Since that press release, Athabasca has raised $129 million in cash from the sale of an additional royalty interest on the Company’s thermal oil assets. However, DBRS notes that should the Company choose to repay the Senior Notes from its cash balance of now approximately $700 million, it may not have sufficient liquidity to fund the capital expenditures planned through to the end of 2017. The Company has indicated plans to refinance the Senior Notes before year end. If Athabasca resolves the refinancing risk by successfully executing a plan to repay and refinance the Senior Notes, DBRS will consider changing the trend to Stable.

DBRS does note that Athabasca has taken several steps this year to significantly improve liquidity, including the $486 million in net consideration received for a light crude oil joint venture with Murphy Oil Corporation and the $257 million in cash from Burgess Energy Holdings L.L.C. for a Contingent Bitumen Royalty on the Company’s thermal oil assets. In addition, the Company repaid $287 million of term debt this year.

The Company plans to significantly grow production with the (1) ramp-up of thermal oil production at the Hangingstone Steam Assisted Gravity Drainage project and (2) development of light oil and liquids-rich gas from the Duvernay and Montney resource plays in the Greater Kaybob and Greater Placid areas. Hangingstone is approximately 15 months into its production ramp-up. Design capacity of 12,000 barrels per day is expected to be reached in 2018 versus previous expectations of late 2016/early 2017. The Company expects the development of the Montney and Duvernay resource plays to drive material production growth for several years. Cash flow from operations is expected to swing from a deficit this year to modestly positive next year on the assumption that (1) the price of West Texas Intermediate oil averages USD 50.00 per barrel or higher and Alberta gas averages approximately $3.00 per thousand cubic feet and (2) the Company increases production as planned. In both 2016 and 2017, DBRS anticipates the Company will incur sizable free cash flow deficits (cash flow less capital expenditures). Any challenges or delays in increasing production volumes or a weaker pricing environment could have a material impact on the Company’s ability to become cash flow positive and thus have an adverse impact on liquidity.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.