Athabasca Oil Corporation reported its operating and consolidated financial results for the three months ended June 30, 2020. The second quarter was defined by unprecedented moves in commodity prices due to the COVID-19 pandemic and resulting oil demand destruction. Athabasca responded swiftly to mitigate the impact of these unexpected events. The Company entered 2020 with a strong liquidity position allowing it to withstand the economic impact on its low decline, long reserve life assets.
Resiliency Measures Taken in Response to COVID-19
- Reduction to Capital: 2020 budget of $85 million reflecting a $40 million reduction.
- Production Curtailments: Temporary curtailments; assets returning to productive capacity in Q3.
- Contingent Bitumen Royalty: $70 million for an upsized Royalty at a very attractive cost of capital.
- Reduced Future Financial Commitments: Reassigned 15,000 bbl/d of Keystone XL transportation.
- Risk Management: ~$45 million in realized hedging gains in H1 2020.
- Q2 Production: ~27,100 boe/d including ~17,600 bbl/d from Thermal Oil & ~9,500 boe/d from Light Oil. Volumes were temporarily curtailed in response to unprecedented pricing.
- Leismer: Production temporarily curtailed to ~15,000 bbl/d and now restored with July averaging ~18,500 bbl/d. The asset has an estimated operating breakeven of US$23/bbl WCS (using a $12.50 WCS differential). Non-condensable gas co-injection across mature pads is proving successful with a field SOR of 3.4x in July.
- Hangingstone: The asset was shut-in on April 2. A planned facility turnaround has now been completed. With recent improvements in pricing, the asset will be brought back on production in September 2020. - Corporate hedges have been implemented to protect downside volatility.
- Placid Montney: 10 new well start-ups were deferred until early July and are now all on stream.
- Kaybob Duvernay: Well results continue to screen as top liquids wells in the Basin with Kaybob East IP90s averaging 840 boe/d (85% liquids). 16 wells have been brought on stream in 2020.
Balance Sheet and Financial Highlights
- Balance Sheet: $170 million in liquidity, of which $167 million is unrestricted cash.
- Capital: $5.8 million during Q2; minimal activity for the balance of 2020 (~$25 million in H2 2020).
- Financial Results: Q2 Operating Income of $6.2 million with financial results impacted by realized price declines related to the onset of the COVID-19 pandemic.
- RBL renewal: The credit facility was renewed at $41 million which reflects the outstanding letters of credit for long term transportation contracts and is secured by the Company’s cash balances.
Business Environment and the Impact of COVID-19
In March 2020, the COVID-19 outbreak was declared a pandemic by the World Health Organization. Global commodity prices declined significantly as countries around the world enacted emergency measures to combat the spread of the virus. The decrease in oil demand has been unprecedented with an estimated peak demand impact of 20 MMbbl/d in April 2020 (Goldman Sachs Global Investment Research). Since April, global demand has improved while OPEC and North American producers have cut production. Global inventories have begun to moderate with economies reopening and leading to a partial recovery and stabilization in oil prices.
In Alberta, physical markets and regional benchmark prices (e.g. Western Canadian Select “WCS” heavy oil) have materially strengthened with WTI prices and tighter differentials as a result of curtailed volumes. Athabasca expects WCS differentials to widen from current spot levels (US$7.79/bbl August WCS index differentials) through the fall as more industry volumes are placed back on production.
The global heavy oil market continues to see structural supply declines in Venezuela and Mexico, extended OPEC production cuts and growing petrochemical demand. These shifting dynamics are expected to support heavy oil pricing benchmarks with US refineries in PADD II and III requiring a heavier feedstock. Athabasca is well positioned for this changing dynamic with its Thermal Oil assets.
Corporate Update and Response to COVID-19
Safety is a key priority for Athabasca. The Company has implemented business procedures that comply with Alberta Health Guidelines. Athabasca has successfully transitioned its office staff back to the office and the field sites continue to take site specific pre-cautionary measures related to COVID-19. The Company has not experienced any COVID-19 cases in the Calgary office or at its field sites.
The Company has taken swift action in response to the pandemic and economic crisis. Major initiatives to date include a reduction to the 2020 capital program, significant production curtailments, partnering with service companies to reduce operating costs and reducing future financial commitments on the Keystone XL pipeline. Finally, the Company bolstered its liquidity by $70 million through an upsized Contingent Bitumen Royalty.
The Company is well positioned to navigate the current challenging environment with $170 million in liquidity, of which $167 million is unrestricted cash. The Company’s RBL credit facility was renewed at $41 million which reflects the current outstanding letters of credit for long term transportation commitments and is secured by the Company’s cash balances. Athabasca is currently pursuing additional financial support under the previously announced EDC RBL support program. Athabasca is disappointed in the lack of urgency by the Federal Government to administer the program in an effective manner.
Athabasca remains focused on maximizing corporate funds flow and maintaining strong corporate liquidity. Athabasca maintains long-term optionality across a deep inventory of high-quality Thermal Oil projects and flexible Light Oil development opportunities. This balanced portfolio provides shareholders with differentiated exposure to liquids weighted production and significant long reserve life assets. The low decline nature of the Company’s assets allows for minimal capital investment while maintaining its production base for a crude oil demand recovery.
In Q2 2020, production averaged 17,600 bbl/d. The Company took proactive steps to temporarily curtail Leismer volumes and fully suspend Hangingstone operations in response to unprecedented commodity prices. Activity in the field was minimal during the quarter with $4.7 million of capital expenditures. The Company has halted all major capital projects for the H2 2020 with budgeted activity only including routine pump-changes on wells.
At Leismer, volumes were curtailed down to 15,000 bbl/d in late April. As the commodity outlook improved the Company commenced ramping up volumes through the balance of the quarter. July production is expected to average ~18,500 bbl/d. Leismer operations are now benefiting from the water disposal project which was completed in Q1 2020. The project is estimated to reduce non-energy operating costs by approximately $10 million on an annual basis. In addition, Leismer’s steam oil ratio (“SOR”) is currently 3.4x supported by the ramp-up of sustaining Pad L7 and NCG co-injection on the mature pads. These activities have reduced field wide steam demand by 15% relative to the prior year and is supporting lower energy operating costs and emissions.
At Hangingstone, operations were suspended in April 2020. Through the summer planned turnaround activities were completed. With the improved commodity price outlook, the Company is planning to restart field operations in September. To protect against future commodity price volatility the Company has hedged the production profile through next winter and intends to secure additional risk management activities for the balance of 2021. The Company has utilized a collar hedge structure with a minimum WCS floor price of ~US$25/bbl with upside potential to ~US$31/bbl WCS (Q4 2020 – Q1 2021).
In Q2 2020, production averaged 9,466 boe/d (62% liquids). In response to unprecedented commodity prices, the Company elected to defer the start-up of its new Montney development wells. Capital expenditures were $1.1 million during the quarter as the Company completed its winter Montney and Duvernay program. No additional Light Oil activity is planned for the balance of the year.
At Greater Placid, production from the 10 Montney development wells from the winter program were deferred to July and all wells are now on-stream. Placid is positioned for flexible future development with an inventory of approximately 200 locations and no near-term land retention requirements.
In the Greater Kaybob Duvernay 16 wells have been brought on-stream year-to-date. In the volatile oil window, production results have been consistently strong. Recent multi-well pads at Kaybob East have had IP30s averaging ~1,000 boe/d per well (88% liquids) and IP90s ~840 boe/d (85% liquids). Drilling and completion costs have been reduced to ~C$7.5 million (2-well pads) with line of sight to further improvements with multi-well pad development. These results compare favorably to the East Shale Basin Duvernay due to low capital costs and higher sustained liquids rates. Greater Kaybob is positioned for flexible future development with an inventory of approximately 700 locations, established infrastructure and no near-term land retention requirements.
Athabasca reiterates its $85 million 2020 capital budget, a $40 million reduction from the original budget, with minimal activity planned for the balance of the year (H2 2020 ~$25 million). The Company forecasts Q4 2020 production between 32,000 – 34,000 boe/d (~88% liquids) reflecting a ramp-up in volumes following curtailments and the Hangingstone suspension. Athabasca is well positioned to navigate the current challenging environment with $170 million in liquidity, of which $167 million is unrestricted cash.