DBRS Changes the Trend on Athabasca Oil Corporation’s Issuer Rating to Stable from Negative and Confirms the Issuer Rating at B (low), Discontinues Rating on the November 2017 Second Lien Notes

DBRS Limited (DBRS) today has confirmed the Issuer Rating of Athabasca Oil Corporation (Athabasca or the Company) at B (low) and changed the trend to Stable from Negative. At the same time, DBRS has discontinued the rating on the Company’s 7.50% Senior Secured Second-Lien Notes (the Senior Notes) due in November 2017, as the Senior Notes were fully redeemed on March 24, 2017.

The change in trend to Stable reflects DBRS’s view that the refinancing risk associated with the Senior Notes and the Company has been addressed. As noted in the February 10, 2017, commentary “DBRS Comments on Athabasca’s Initiatives to Refinance its Balance Sheet,” with successful implementation of the Company’s refinancing plans, DBRS would review the Company’s ratings and consider changing the trends to Stable from Negative. The successful issuance of new 9.875% Senior Secured Second-Lien Notes due 2022 (the New Notes) in the amount of USD 450 million and the repayment of the existing Senior Notes have alleviated this refinancing risk.

Furthermore, DBRS has confirmed the Company’s Issuer Rating at B (low). With available cash and cash equivalents ($213 million at March 31, 2017) combined with the issuance of the New Notes and the recent establishment of a $120 million reserve-based credit facility (as of March 31, 2017, $16.6 million had been allocated to support letters of credit), DBRS notes that Athabasca has more than adequate medium-term liquidity to fund an expected free cash flow deficit in 2017 and a possible further free cash flow deficit in 2018. Based on DBRS’s base case assumption of an average WTI oil price of USD 50/barrel (bbl) this year and incorporating the Company’s estimate of production volumes for 2017 and budgeted capital expenditures of $210 million, DBRS expects Athabasca to incur a free cash flow deficit (cash flow after capital spending) for the year in excess of $150 million. By 2018, DBRS anticipates that the Company’s cash flow will increase further (assuming a base case price forecast of USD 55/bbl and additional production growth) and that the free cash flow deficit will narrow considerably. The Company’s key credit metrics over the period are anticipated to strengthen and support a B (low) rating. Based on their own projections, the Company anticipates that internally generated cash flow can fully fund capital spending requirements by 2018.

Nonetheless, the Company’s primary source of production is lower margin bitumen from the Company’s Hangingstone and recently acquired Leismer thermal oil developments in Northeastern Alberta. As a consequence, cash flow is highly sensitive to volatile oil pricing and changes in the light-heavy oil price differentials. A sustained material decline in the price of oil could cause significant pressure on the Company’s liquidity profile and key credit metrics. If such an outlook prevails, DBRS may be compelled to take a negative rating action.

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 (February 2017), which can be found on dbrs.com under Methodologies.