Athabasca and Cenovus combine Kaybob assets to create pure-play Duvernay entity
Athabasca Oil announces creation of “Duvernay Energy Corporation” with Cenovus Energy. (Credit: Brad Weaver on Unsplash)
Athabasca Oil Corporation (TSX: ATH) (“Athabasca” or “the Company”) is pleased to announce it has entered into transaction agreements (“Transaction”) to create Duvernay Energy Corporation (“Duvernay Energy”) with Cenovus Energy Inc. (“Cenovus”). Duvernay Energy will be a standalone self-funded entity that will drive strong, high netback cash flow and production growth and is expected to unlock significant value. The transaction is aligned with Athabasca’s strategy to maximize cash flow per share growth and return capital to shareholders.
Transaction Overview
Athabasca and Cenovus will jointly contribute assets into Duvernay Energy. Athabasca will own a 70% equity interest in Duvernay Energy with Cenovus owning the remaining 30% equity interest. Athabasca will manage Duvernay Energy through a management and operating services agreement. Duvernay Energy’s Board of Directors will include three members nominated by Athabasca and one member nominated by Cenovus.
On inception, Duvernay Energy will have strong Liquidity including seed capital of $40 million and a $50 million new credit facility led by ATB Financial. Athabasca’s $22 million seed capital contribution to Duvernay Energy will be within its previous $175 million 2024 capital guidance ($135 million Thermal Oil and $40 million Light Oil). Athabasca is also contributing ~$20 million in expenditures related to Q4 2023 drilling operations on a 100% working interest multi-well pad and long lead inventory for future activity.
The Transaction will have an effective date of January 1, 2024, is expected to close in the first quarter of 2024 and is subject to customary closing conditions and regulatory approvals, including Competition Act approval. On closing the Company will provide updated guidance for Duvernay Energy and Athabasca.
Duvernay Energy Assets
Duvernay Energy will be positioned with unparalleled pure-play exposure to the prolific Kaybob Duvernay resource play. Duvernay Energy’s assets will be primarily located in the volatile oil region.
In addition to the Company’s existing joint venture assets, Duvernay Energy has exposure to ~46,000 acres of 100% working interest operated lands contiguous to its existing Duvernay assets. This acreage includes new lands strategically acquired by Athabasca through Crown land sales over the last 18 months and Cenovus’s contribution of Kaybob acreage. In total, Duvernay Energy will have exposure to ~200,000 gross acres in the liquids rich and oil windows with ~500 gross future well locations. The assets are serviced by existing infrastructure including two operated oil batteries with a gas pipeline network connected to both the Pembina Gas Infrastructure KA facility and the Keyera Simonette facility. Liquids are directly connected to the Pembina Peace liquids system. Duvernay Energy will also own an 8.1% working interest in the 7-4-63-16W5 gas facility.
Current production from Duvernay Energy is ~2,000 boe/d (~75% Liquids) with a defined and self-funded development plan.
Duvernay Energy Development Plans
Duvernay Energy’s development plans will leverage off significant de-risking activity on its acreage (74 horizontal wells) and on adjacent competitor activity. Duvernay Energy will execute a self-funded development plan that will target growth to ~25,000 boe/d (~75% Liquids) in the late 2020s with an inventory to support a stable production profile thereafter for approximately twenty years.
The Company has extended production history with well results consistently supporting type curve expectations. At Kaybob East and Two Creeks, IP365’s have averaged ~550 boe/d per well (85% Liquids) on the last 12 wells. Latest well design will include lateral lengths up to 4,500 meters that are expected to yield stronger initial rates, larger reserves and improved capital efficiencies. Individual well costs are estimated to be $10 – 14 million, depending on pad size, lateral length and proppant loading.
The 2024 development program will include 12 gross wells (7.1 net wells) with a capital budget of ~$82 million. The program is expected to be funded from the $40 million seed capital contribution and cash flow from Duvernay Energy. The plan is expected to drive strong production momentum with production forecasted to average ~6,000 boe/d in 2025. 2024 activity consists of:
100% working interest activity: A recently spudded two-well pad at Kaybob East will be placed on production in Q2 2024. An additional two multi-well pads will spud mid-year and are expected to be placed on-stream in early 2025.
30% working interest Joint Venture activity: A three-well pad at Kaybob West is expected to spud in Q1 2024 and will be placed on production in Q2 2024. An additional four-well pad at Kaybob East is expected to spud in Q4 2024 and will be placed on production in 2025.
Long-term development is expected to be funded within cash flow and is flexible for a range of commodity prices. The plan will be weighted to activity on Duvernay Energy’s 100% working interest acreage and augmented by development within its 30% working interest joint venture acreage.
Strategic Rationale
Transaction Accelerates Value in Standalone Self-Funded Duvernay Energy. The new entity will accelerate value capture for Athabasca’s shareholders by providing a clear path for accretive production and cash flow growth without sacrificing Athabasca’s ability to fund capital in its Thermal Oil division or Athabasca’s return of capital strategy. The Transaction consolidates Athabasca’s and Cenovus’s 100% working interest operated assets, providing flexibility and efficiencies of scale for impactful development, along with Athabasca’s existing 30% working interest Duvernay joint venture assets that are governed by a strong joint development agreement. Production and cash flow growth will quickly exceed the volumes associated with the Montney non-core disposition completed in September 2023.
During 2024, Duvernay Energy is forecasting capital expenditures of $82 million, funded by cash flow from the entity and seed capital of $40 million from Athabasca ($22 million) and Cenovus ($18 million). Duvernay Energy will also benefit from ~$20 million in expenditures related to Athabasca’s Q4 2023 drilling operations on a 100% working interest multi-well pad and long lead inventory for future activity.
Footnote: Refer to the “Reader Advisory” section within this news release for additional information on Non‐GAAP Financial Measures (e.g. Adjusted Funds Flow, Free Cash Flow, Net Cash, Liquidity) and production disclosure.
1 Pricing Assumptions: 2024 US$80 WTI, US$15 Western Canadian Select “WCS” heavy differential, C$3 AECO, and $0.75 C$/US$ FX. 2025-26 US$85 WTI, US$12.50 WCS heavy differential, C$3 AECO, and $0.75 C$/US$ FX.
Athabasca Thermal Oil Budget Maintained: Athabasca’s Thermal Oil division underpins the Company’s strong free cash flow outlook, with an unchanged $135 million capital budget. At Leismer, production is expected to increase to ~28,000 bbl/d by mid-year through a facility expansion project and the ramp-up of eight behind pipe wells that recently commenced steaming operations. This production level can be held with modest sustaining capital (~$6/bbl) for many years into the future. At Hangingstone, sustaining drilling will support base production in 2025 and beyond with the objective of ensuring the asset continues to deliver meaningful cash flow contributions.
Athabasca Managing for Strong Free Cash Flow: Pro forma the Transaction, Athabasca forecasts Adjusted Funds Flow of ~$460 million in 2024 (US$80/bbl WTI & US$15/bbl WCS heavy differential)1, excluding its 70% equity interest in Duvernay Energy. The capital forecast is $135 million for Thermal Oil, a $40 million reduction in capital spending that previously included Duvernay development. The Transaction does not reduce Athabasca’s 2024 Free Cash Flow forecast which is maintained at ~$325 million. The Company’s low sustaining capital requirements are fully funded within cash flow to US$55/bbl WTI. During the timeframe of 2024 – 2026, Athabasca forecasts >$1 billion in Free Cash Flow1, representing over 50% of its current equity market capitalization. Athabasca anticipates tightening of the WCS heavy differentials from current levels as the Trans Mountain Expansion pipeline (590,000 bbl/d) commences operations in 2024. Every $5/bbl WTI change impacts Adjusted Funds Flow by ~$55 million annually and every $5/bbl WCS change impacts Adjusted Funds Flow by ~$85 million annually.
Return of Capital Commitments Intact: Athabasca maintains its 2024 return of capital commitments outlined in its budget release on December 6, 2023. The Company intends to allocate 100% of Free Cash Flow to shareholders through share buybacks. The Company anticipates completing its current Normal Course Issuer Bid on March 15, 2024 with the intention to renew the program thereafter with the Toronto Stock Exchange for another 12-month period.
Financial Strength Remains: The Company estimates 2023 year-end Liquidity of ~$455 million, including cash of ~$370 million. The principal balance on the Company’s senior secured second lien notes is US$157 million with an estimated year-end Net Cash position of ~$155 million. The Company has ~$2.8 billion in tax pools, including ~$2.3 billion of immediately deductible non‐capital losses and exploration pools. The Company does not anticipate paying cash taxes until 2030 ($85/bbl WTI & $12.50/bbl WCS differential flat long-term pricing).
Differentiated Assets: Duvernay Energy’s funded growth profile complements the Company’s Thermal assets by producing a diluent quality liquid product and creating a natural hedge for diluent sourcing. The Thermal Oil division’s strong margins and Free Cash Flow are supported by a pre-payout Crown royalty structure, with royalty rates between 5 – 9% anticipated to last into 20271. Leismer has regulatory approved capacity of 40,000 bbl/d. Athabasca also has a fully de-risked asset at Corner which also has regulatory approval for 40,000 bbl/d with reservoir quality equivalent or better than Leismer.
Athabasca Executive Update
In conjunction with the Transaction, Athabasca is pleased to announce the appointment of Mr. Bruce Beynon as Vice President Light Oil, with primary responsibility for the development of the assets within Duvernay Energy. Mr. Beynon is a professional geologist with over 30 years of oil and gas industry experience. Mr. Beynon is currently the President of Tiburon Exploration Corp., a private consulting company. Prior thereto, Mr. Beynon was Executive Vice President, Exploration and Corporate Development at Baytex Energy Corporation. Prior to the merger between Baytex and Raging River Exploration, Mr. Beynon held several positions with Raging River including President. Mr. Mike Wojcichowsky will assume the role of Vice President, Drilling Completions Services and Light Oil Operations.
Mr. Robert Broen, President and CEO of Athabasca Oil Corporation, will also assume the role of Chairman, President and CEO of Duvernay Energy. The Board of Duvernay Energy will consist of Mr. Rob Broen, Mr. Matt Taylor, Chief Financial Officer of Athabasca, Mr. Cam Danyluk, General Counsel and Vice President Corporate Development Athabasca, and Mr. Jeff Lawson, Senior Vice-President Corporate Development, Cenovus.
Source: Company Press Release