DBRS Comments on Athabasca Oil Corporation’s Initiatives to Refinance Its Balance Sheet

DBRS Limited (DBRS) today notes that, on February 9, 2017, Athabasca Oil Corporation (Athabasca or the Company; rated B (low) with a Negative trend by DBRS) announced a series of measures to refinance its balance sheet, which includes plans to refinance the $550 million Senior Secured Second-Lien Notes (the Senior Notes) that mature in November 2017.

The measures include (1) agreements to issue new second-lien notes due 2022 (the New Notes) in the amount of USD 450 million with proceeds directed toward the retirement of the existing Senior Notes outstanding, (2) the commencement of a cash tender offer to retire the existing Senior Notes, (3) concurrently with issuance of the New Notes, the establishment of a new $120 million reserve-based credit facility supported by seven major financial institutions, (4) an additional Contingent Bitumen Royalty granted to Burgess Energy Inc. on the Leismer and Corner Leases for $90 million in cash under the same terms as its prior deals with a sliding scale royalty that is not triggered until the price of West Texas Intermediate (WTI) oil exceeds USD 75 per barrel (bbl) and (5) hedging of approximately 12,0000 bbls per day (bbl/d) of production for the remainder of 2017 at an average price of $52.75/bbl for Western Canadian Select and the intent to hedge at minimum 20,000 bbls/d of its 2017 corporate production to protect near-term cash flow.

Based on DBRS’s view, with an average WTI oil price of USD 50/bbl this year and incorporating the Company’s estimate of production volumes for 2017, Athabasca is expected to incur a free cash flow deficit (cash flow after capital spending) in excess of $100 million for the year. With the available current cash coupled with successful completion of measures mentioned above, DBRS notes that Athabasca now has more than adequate liquidity to fund the free cash flow deficit in 2017 and repay the existing Senior Notes. By 2018, the Company has indicated that, based on its production expectations and assuming strip pricing, it will reach a level of sustainable free cash flow.

In its December 16, 2016, press release entitled, “DBRS Comments on Athabasca Oil Corporation’s Agreement to Acquire Thermal Oil Assets,” DBRS previously commented on the high refinancing risk associated with the Company’s existing Senior Notes. With the series of measures just announced and assuming successful implementation, DBRS views Athabasca’s liquidity profile as sufficiently strengthened to alleviate refinancing risk. With successful implementation, DBRS will review the Company’s ratings and, with the alleviation of the refinancing risk, will consider changing the trends to Stable from Negative.

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

The principal 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 dbrs.com under Methodologies.

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