ATH:CC - Athabasca Oil: The Light Oil Emphasis Increases

2024-06-21 13:56:31 ET

Summary

• Athabasca Oil benefits from Mountain Valley Pipeline because the pipeline operation is likely to reduce the discount from light oil temporarily.
• The joint venture with Cenovus Energy provides potential light oil production.
• Expansion of thermal oil production poses risk because cash flow from production often vanishes in cyclical downturns from the discount expansion.
• Management maintains a net cash position.  But the company also has a lot of debt that would need to be serviced in a cyclical downturn.
• The purchase of shares is an aggressive financial strategy as long as there is significant long-term debt.

Athabasca Oil (ATHOF) has long had a presence in thermal oil production. That production may well benefit from the operations of the Mountain Valley Pipeline because the pipeline could decrease the discount from light oil, at least temporarily and hopefully longer. However, many heavy oil and thermal producers survive long-term by having light oil production or even condensate production because that discount has a tendency to expand during times of weak commodity prices, which wipes out the thermal cash flow. The light oil production provides badly needed cash flow during such times. Athabasca now has a partnership with Cenovus Energy ([[CVE]], [[CVE:CA]]) that may well fit their long-term needs for lighter oil production. This would decrease the earnings and cash flow volatility when compared to many competitors in the industry.

The last article noted that the company reached a net cash position. What was unexpected since then is that the company has stopped repaying debt while returning 100% of defined free cash flow to shareholders in the form of stock repurchases. This raises the risk of this company somewhat because thermal oil is a discounted product compared to light oil. Sometimes that discount expands during cyclical downturns to necessitate a shut-in of production to stop negative cash flow. But then this company would have no cash flow until prices recover....

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