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3Q17 production of 36,133 boe/d was slightly ahead of GMPFE estimate of 35,550 boe/d and in line with the street at 36,250 boe/d. Production was relatively flat QoQ due to downtime and restrictions. However, October production was ~41,000 boe/d as ATH returned to more normalized volumes. As such, we have aligned our 4Q17 forecasts to reflect this. CFPS (f.d.) of $0.07/share was ahead of our estimate of $0.05/share and the street estimate of $0.05/share. This was largely driven by better than expected realized price and lower cost items. During 3Q17, operating netbacks from Leismer were $17.78/b ($15.60/b in 2Q17) compared to Hangingstone at $2.90/b (2Q17 was as negative $2.20/b). The quarter marked the first positive quarter for Hangingstone operating income. Continued disclosure of initial results from ATH’s Montney and Duvernay drilling program appear positive. These two plays will continue to produce catalysts through 2018 with an active winter 17/18 drilling program. We updated our estimates to reflect the quarter as well as initial 2018 guidance.
3Q16e WTI prices look set to average ~US$44.50/bbl vs. our $50.00/bbl prior estimate. We have also reduced our 4Q16e WTI forecasts by US$5.00 to US$50.00/ bbl, but left our 2016e+ oil & gas price deck largely unchanged. For the second time in three months we are increasing our forecasts for Canadian refined product premiums relative to New York Harbor.
Athabasca announced that it has received the final payment ($139 mm) from Brion Energy Corporation (PetroChina) for consideration of the sale of ATH's remaining 40% stake in Dover in 2014, thus bringing to a conclusion the relationship between Athabasca and PetroChina that began with the announcement of the $1.9 billion oilsands JV transaction in late 2009.
Recent transactions (Murphy JV, bitumen royalty sale, term loan repayment) improve ATH’s liquidity ahead of a $550 mm debt maturity next year, with possible partial repayment YE16e. Hangingstone appears on track to near nameplate capacity by year-end. The 2H16e budget increased $60 mm to drill 12 new Placid Montney wells. Our estimates have been updated in lieu of new Light Oil division guidance for 2016e and beyond. Upgrading to Outperform. The shares are being discounted due to uncertainty over debt refinancing, Hangingstone ramp up, and Light Oil deliverability. Delivering against these expectations will be key for ATH’s stock.
Market Impact: Neutral. Quarterly disclosures were highlighted by an additional $60 mm added to Light Oil capex for 2016e, while perhaps unsurprisingly, production guidance was lowered due to disruptions at Hangingstone from wildfires, but ATH continues to expect nameplate capacity to be hit by year end. 2Q16 production (11.1 mboe/d) was slightly ahead of our expectations and CFPS slightly below (-$0.07/share diluted).
The Fort McMurray wildfire took more than 1.2 mmbbl/d of oilsands production offline at one point, disrupting operations of many companies within our coverage universe. We expect production estimates for many oilsands producers (HSE, IMO, SU, ATH) to be more varied than usual with more variables to account for than usual (downtime, ramp up, sales volumes). SCO prices were boosted by the wildfire, with CNQ best positioned to have taken advantage, given the upgrader at Horizon was only mildly affected by wildfires. CVE, HSE and SU likely benefited from a positive FIFO impact. We estimate a positive FIFO impact of $4-5/bbl of throughput assuming a 30 day lag, with a larger positive FIFO impact on longer lags. We are generally close to consensus for most CFPS estimates, with the exception of Suncor, where we are estimating $0.34/share versus consensus at $0.44/share. There are no target price or ranking changes with this publication.
Commodity Price Update – Impact on Integrateds, Large Cap E&P, Oilsands
Athabasca held its AGM yesterday in Calgary. Voting for election o f directors was notable in that five out of the six directors received less than 70% "Votes For". Athabasca noted that a large individual shareholder appears to have been "working alone or jointly and in concert with others" to unlawfully solicit proxies. We believe the large individual shareholder Athabasca is referencing is former CEO Sveinung Svarte, who attended the AGM and voiced numerous criticisms during the question and answer period.
Market Impact: Positive. ATH has sold a GORR on its oilsands assets, which does not kick in until ~US$75/bbl WTI, for $129 mm (~$0.31/share dil.), and repaid its US$221 mm first lien term loan.
1Q16 CFPS of -$0.10/share was lower than expectations, due to lower realized rices and production than forecasted.
Slightly negative as production and cash flow were slightly behind expectations. There is more turnover at the Board level. The JV has not yet closed.
We are updating our estimates to reflect FirstEnergy’s updated price deck for oil, natural gas, and refining crack spreads.
4Q15 results were more or less as expected. Apples-to-apples guidance for 2016e was essentially unchanged, although closing of the Murphy JV transaction is now expected in 2Q16 instead of March. Repaying and refinancing debt remains a focus for Management in 2016e. Hangingstone bitumen requires less diluent than typical Athabasca bitumen. Our NAV now reflects better price realizations than previously assumed. Target price reduced to $1.15/share, to reflect our updated Core NAV before ascribing value for Hangingstone 2A (~$1.10/share). Market Perform ranking maintained.
Market Impact: Neutral.
With the reduction to our oil price deck (see our commodities analyst Martin King’s note), we have made significant reductions to our target prices for this group of companies. Notably, we have taken our rankings for Imperial Oil and Suncor to Underperform, as we believe the equity valuations for these two companies are implying much, much higher oil prices, AND much better refining margins, going forward, than we believe is reasonable to assume at this time. We do not believe these two stocks will participate in much of the upside if oil prices rally in the near term, and to the downside, refining margins year-to date are looking weaker, with Eastern Canada margins the only bright spot, and that may not last.
The $475 mm JV with Murphy assigns an implied value to ATH’s Light Oil division, which, combined with its net cash position, amounts to ~$0.84/share by our estimate. The current share price implies additional value for its Light Oil and/or Oilsands division assets. This JV helps, but does not eliminate, ATH’s debt. Managing liquidity will still be a focus, given the cash drain of interest, G&A, and Hangingstone. We had overestimated the market value of the asset being sold. Our target price is reduced to $1.50/share. Ranking reduced to Market Perform.
Market Impact: We believe this transaction is neutral relative to the current share price. While we view this deal as a positive move for the Company in the long term, we are concerned that many current shareholders owned the stock on expectations that the Duvernay would fetch a significantly higher valuation. As such, we expect a volatile next couple of trading days for the stock but would be surprised if it did not eventually revert to a level not far from Wednesday's $1.46/share close.
4Q15 results will be ugly, but 1Q16e is obviously shaping up to be much worse. We anticipate further capex budget reductions and have moved capex estimates below current guidance for several companies. Bitumen prices are single digits. If they go negative we suspect some bitumen producing projects could curtail output at least modestly. Liquidity Analysis: futures strip pricing would imply massive debt increases in 2016e-2017e for most names, but most names have sufficient liquidity arranged. We have reduced our ECA target price by US$2.00/share to more appropriately reflect commitments associated with non-core assets.
FirstEnergy has reduced its 2016e WTI oil price forecast from US$57.00/bbl to US$49.75/bbl, and also reduced its natural gas price forecasts going forward. We have updated our estimates and target prices, also incorporating this past week’s guidance and news disclosures. Given no significant changes to our oil price forecasts for 2017e+, and the predominance of long life oil producing assets within this group of companies, our target prices have only been reduced modestly, while we have made no changes to rankings, which continue to be biased towards stocks that should benefit the most from a recovery in oil prices.
There were few surprises in this budget, with notional capex having been disclosed already and 2016e production guidance generally in line with our estimates, though we have increased our 2016e Light Oil production forecast. Duvernay well costs are trending downwards and are encouraging, while Hangingstone continues to ramp up without issues.
Market Impact: Slightly positive, as we will be increasing our production estimates, while Duvernay well costs are coming down and operations are progressing as previously expected.
Market Impact: Slightly positive. Production is higher than expected (Hangingstone), while 2015e capex guidance is reduced, and Duvernay well costs are headed lower.
Hangingstone ramp up has gone well so far, with no surprises in well behaviour, while the plant has run at a very high reliability rate. After researching data of several hundred wells, not surprisingly, Management sees two main variables driving returns on Duvernay wells, with the variables being more aggressive proppant loading and pump rates, provided the well casing is sufficient to handle higher pump rates. This is generally consistent with what is being seen in other plays. To this end, the two well pad at Kaybob East (5-65-18W5) currently being drilled will have one well completed with 1,000 lbs/ft of proppant loading and the other with 2,000 lbs/ft so a direct comparison on well performance can be made.
Market Impact: Positive. Athabasca disclosed September production to date has averaged 3,200 bbl/d with current production in excess of 4,000 bbl/d. This is ahead of our expectations with current Hangingstone volumes already ahead of our 4Q15e forecast of 3,250 bbl/d; exit production guidance remains unchanged at 3,000-6,000 bbl/d (December average) and we believe Hangingstone will likely exit at the high end of this range. Better than expected performance may be especially important for this project, given that some investors have been skeptical regarding the success of this project.
Our 3Q15e estimates have been updated to reflect quarter-to-date commodity prices (see Martin King’s notes on oil and natural gas prices), and recently available production data and company disclosures. Going forward, our commodity price forecasts are largely unchanged, other than a US$0.35/mcf reduction to our NYMEX Henry Hub forecast in 2016e, a narrower AECO discount, and a reduction to our 4Q15e and 2016e Canadian dollar forecast.
With our firm reducing our WTI price forecasts by more than US$10/bbl for the second half of this year and 2016e, and by US$5/bbl longer term, we have reduced our target prices across the board (see FirstEnergy commodity analyst Martin King’s note on oil prices). Our target prices continue to be derived primarily in relation to our Risked NAVs (‘RENAVs’). Generally, we have looked at a weighted average of our estimated RENAVs (75% FirstEnergy price deck/25% futures strip) for the Integrateds & Large Caps, with an average target price reduction of 11% for those companies.
Athabasca announced this morning that ~4,200 boe/d of its production has been shut in as a result of the shutdown of the Alliance Pipeline late last week, representing most of the Company's Light Oil division production (prior guidance was for 5,000 boe/d in 3Q15e). We expect the pipeline to resume shipments later this week. In Athabasca's press release this morning it noted that five days of downtime would have ~250 boe/d impact on 3Q15e Light Oil division production.
Operational updates generally met expectations, with Duvernay well results meeting type curve expectations. At Hangingstone, fi rst oil was achieved, in line with our expectations and guidance. Quarterly results met or exceeded our expectations and consensus. With little to suggest much change to our estimates and the stock trading around the $1.50/share level, we continue to assign an Outperform ranking and $3.00/share target price. The next couple of quarters will be busier, with more data points expected.
Market Impact: Neutral to Slightly Positive. Results were generally in line to above expectations, Hangingstone first oil has been achieved this month and services costs appear to be coming down and translating into lower D&C costs.
Production beat expectations and guidance, while operationally, no surprises materialized in both major divisions. The Company announced a six well program, in addition to the 2015 Light Oil program, at the Duvernay for 2H15e/2016e, with no changes to 2015e guidance or the capital budget.
Market Impact: Slightly Positive. Production of 5,877 boe/d was higher than our estimate of 4,241 boe/d, consensus at 5,127 boe/d and guidance of ~5,000 boe/d. CFPS was $0.01/share (FCC -$0.02, consensus -$0.03).
