Is a Turnaround in Sight for Athabasca Oil?


Athabasca Oil [stock_market_widget type="inline" template="generic" color="default" assets="ATH" markup="(TSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] has been reduced to a penny stock in the past few months as investor confidence in the company has taken a big beating thanks to lower oil prices. That’s not surprising as the oil pricing weakness has wrecked the company’s financial profile as its latest results indicate.

Let’s take a closer look at Athabasca’s performance for the fourth quarter of 2018 and for the full year, and see if there’s any hope for a turnaround going forward.

A Forgettable Performance for ATH

Athabasca’s fourth-quarter petroleum and natural gas consolidated production averaged 37,984 barrels of oil equivalent per day, down from 42,064 BOE/day in the prior-year period. Though the production decline wasn’t a big one, Athabasca swung to an operating loss of $53 million during the quarter as compared to a profit of $65 million a year ago.

That’s because the oversupply in the Canadian energy industry led to extremely high differentials in Western Canadian Select (WCS) heavy and Edmonton light differentials, which rose to record levels of $55 per barrel and $35 per barrel last quarter. So, the lack of egress capacity in the Canadian energy space sent the price of oil and other energy commodities spiraling, and this negatively impacted Athabasca.

In fact, Athabasca’s operating netback per barrel of oil equivalent fell to a negative $14.80 as compared to a positive figure of $17.25 in the prior-year period. For the full year, the company’s operating netback fell to $6.52 per barrel of oil equivalent as compared to $14.06 in the prior-year period.

Athabasca will be more disciplined this year, though that doesn’t guarantee a turnaround.

The lower netback also impacted Athabasca’s funds flow profile as the company’s capital expenditure wasn’t scaled back enough to counter the low prices. As a result, the company recorded adjusted funds flow of just $6.2 million as compared to the prior-year period’s figure of $102.1 million. Not surprisingly, Athabasca will be more disciplined this year, though that doesn’t guarantee a turnaround.

More Weakness Ahead

Athabasca plans to spend between $95 million and $110 million as capital expenses this year to clock production between 37,500 and 40,000 barrels of oil equivalent per day. That’s quite impressive considering that Athabasca produced 39,203 BOE/day last year with a capital budget of $194 million.

So, Athabasca’s production will remain consistent year over year even though the company will substantially cut its capital outlay. That should allow the company to spend within its means and generate positive funds flow.

However, the unintended effects of the Alberta government’s mandated production cuts don’t guarantee a recovery at Athabasca. Though the government’s directive of reducing production by 325,000 bpd has narrowed the pricing differentials, it has also led to a halt in shipments of crude by rail to the U.S.

So there’s a chance that the Alberta government’s move might backfire and the oversupply in the Canadian oil market persists. In that case, Athabasca won’t be turning around this year. However, the Alberta government is taking steps to boost shipments of crude oil by rail, which will come into effect later this year.

If those plans work, there’s a chance that Athabasca will benefit from an improvement in oil prices. But it would be advisable for investors to wait for concrete signs of a turnaround before taking a call on Athabasca.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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