DBRS Comments on Athabasca Oil Corporation’s Agreement to Acquire Thermal Oil Assets from Statoil ASA

DBRS Limited (DBRS) notes that on December 14, 2016, Athabasca Oil Corporation (Athabasca or the Company; rated B (low) with a Negative trend) announced an agreement to acquire from Statoil ASA and its wholly owned subsidiary Statoil Canada Ltd. its Canadian Thermal Oil assets for consideration of (1) $435 million in cash, (2) 100 million common shares of Athabasca and (3) contingent value payments on the Thermal Oil assets, which are triggered at a WTI oil price above USD 65/barrel (bbl). The acquired assets include the operating Leismer Thermal Oil Project (current production of 24,000 bbls/d), the delineated Corner lease and related strategic infrastructure in the Athabasca oil sands area of Alberta. The acquisition is expected to establish Athabasca as an intermediate oil weighted growth company with a production base estimated in 2017 of approximately 40,000 barrels of oil equivalents (boe/d). The Acquisition will have an effective date of January 1, 2017, with closing anticipated in the first quarter of 2017, and is subject to certain closing conditions and regulatory approvals.

DBRS notes that the acquisition will strengthen the Company’s business risk profile by adding long-life, low-decline oil sands production with significant low-risk growth potential, which complements the Company’s growing oil sands production from the Hangingstone project. The acquisition also adds scale to the Company’s asset base and incremental cash flow at a WTI oil price above USD 44/bbl (Company estimate).

As part of the announcement, Athabasca has indicated plans to expand its credit facilities and is in discussions with its banking syndicate to establish a new reserve-based loan facility. Additionally, the Company has amended the Contingent Bitumen Royalty (the Royalty) with Burgess Energy Holdings LLC for additional cash proceeds of $50 million. Under the amended agreement, the minimum trigger for the Royalty is USD 60/bbl for Western Canadian Select (WCS) for Hangingstone and USD 70/bbl WCS for the Company’s other Thermal assets (Dover West, Birch and Grosmont). There is no Royalty assigned to the newly acquired Leismer or Corner assets. The proposed increase to the Company’s credit facility, in combination with the additional cash from the Royalty, should assist Athabasca in managing the acquisition costs and 2017 capital expenditures (capex).

However, DBRS notes that the refinancing risk associated with the Senior Secured Second-Lien Notes (the Senior Notes) has risen as a result of the acquisition. The Company plans to fund the $435 million cash portion of the acquisition with cash on hand (the Company currently has a cash balance of approximately $760 million, which leaves less funds available to repay the Company’s $550 million Senior Notes. DBRS also notes that based on 2017 capex plans of $220 million to 250 million, the Company is expected to incur a free cash flow deficit (cash flow after capex; at a WTI oil price of USD 50 to 55/bbl) that will need to be funded with cash on hand or by drawing on the credit facilities. Consequently, the cash to repay even a portion of the Senior Notes will be limited, and DBRS is of the view the Company will need to refinance a large percentage of the Notes. The Company has signaled plans to address the refinancing issue early in 2017 and has to date received a commitment of $125 million from an anchor investor towards a new debt instrument.

Overall, DBRS recognizes the acquisition improves the business risk profile for Athabasca and is additive to cash flow, but at the same time the refinancing risk has grown considerably. Consequently, Athabasca’s Issuer Rating and the rating of the Senior Notes at B (low), both with Negative trends, remain unchanged. The recovery rating on the Senior Notes remains unchanged at RR4. Should Athabasca resolve the refinancing risk by successfully carrying through on a plan to refinance the Senior Notes, DBRS will consider changing the trends to Stable. However, should oil prices deteriorate again and cash flows prove significantly weaker than expected (placing increased pressure on the Company’s liquidity) and/or the Company is unsuccessful in refinancing the Senior Notes, DBRS would likely take a negative rating action.

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 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.

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