If you search the beaten-up Canadian energy sector for a notable underperformer, you’ll likely come face to face with Calgary-based Athabasca Oil Corp., a stock that has fallen off the radar screens of most investors following a splashy initial public offering in 2010.
From a debut at $18, the shares have been languishing below $2 for most of the past three years – weighed down by struggling oil prices, declining foreign interest in Canada’s oilsands and a rash of quarterly losses.
But there is a bullish case here: Athabasca’s cash flow will soar if the energy sector can solve the shipping bottlenecks that are being blamed for holding back the price of benchmark Canadian oil.
If the mere idea of buying Athabasca shares makes you laugh, it’s a good indication that sentiment toward this energy producer is near rock-bottom.
There’s a good reason for that: Its IPO in 2010 was a big deal, followed by disappointment.
The company raised $1.35-billion, which, at the time, was one of the largest Canadian public offerings. The energy sector was recovering from the financial crisis, and foreign investors wanted in.
After a rough start, when the shares slid below their IPO price as insiders cashed out, the share price recovered to a high of $18.61 in 2011. At the same time, the price of U.S.-benchmark West Texas intermediate crude oil (WTI) rose above US$100 a barrel, which made Athabasca’s oilsands properties in Alberta, then under development, look promising.
Since then, a number of things have gone wrong. The price of WTI plummeted between 2014 and 2016, scaring off foreign-based companies such as Royal Dutch Shell PLC, Marathon Oil Corp. and Norway’s Statoil.
And although the price of WTI has since doubled from its lows in 2016, Alberta’s Western Canada Select (WCS) crude oil, the benchmark for Canadian producers, has lagged this recovery because of export bottlenecks and uncertainty about new pipeline projects.
The spread between Canadian and U.S. oil is a wide US$25 a barrel.
So why take a flyer on Athabasca?
Some observers, including Desjardins Securities, Peters & Co. and Athabasca management, believe that the company is particularly well-positioned among Canadian oil producers to benefit from improvements in the price of Canadian oil, or a narrowing spread with U.S. oil. That’s because the company is focused on oil production, rather than refining, and much of its output is unhedged.
Analysts at Desjardins Securities estimate that for every $1 increase in the per-barrel price of WCS in 2019, Athabasca’s cash flow (or funds from operations) will rise 10.4 per cent.
That compares with an average improvement of just 0.8 per cent in cash flow among large-cap producers such as Suncor Energy Inc. and Canadian Natural Resources Ltd. And it’s also better than an average improvement of 6.4 per cent in cash flow among mid-cap producers such as Baytex Energy Corp. and Pengrowth Energy Corp.
As for what could drive the price of WCS oil higher and shrink the gap with WTI, the Desjardins analysts have a couple of ideas.
In the near term, they expect oil producers will turn increasingly toward the railways to transport their oil and ease export bottlenecks. The analysts expect crude-by-rail, though pricey, will shrink the spread between the two oil benchmarks from US$25 a barrel to as little as US$17 a barrel.
Longer term, three new proposed pipelines – Kinder Morgan Inc.’s Trans Mountain Express, TransCanada Corp.’s Keystone XL and Enbridge Inc.’s Line 3 Replacement – could narrow the spread by an additional US$5 a barrel.
“Of course, there are many moving parts − decreasing Venezuelan imports could narrow the differential while the looming prospect of the International Maritime Organization’s new sulphur content regulations could serve to widen differentials (beyond 2020),” the Desjardins analysts warn.
But if the moving parts align nicely, Athabasca could be the big winner in Canada’s oil patch, easing the pain of existing shareholders and rewarding new ones that can handle some risk.
David Berman