3 Reasons to Buy Athabasca Oil

The company is slowly shifting from development to production. But this is still very much a growth story.

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The Motley Fool

This year is already proving to be a pivotal year for Athabasca Oil (TSX:ATH). Last week, the Alberta cabinet gave its final approval for the company to sell its 40% interest in the Dover oil sands project to PetroChina. The sale will bring in $1.3 billion, which represents over $3 per share (Athabasca shares currently trade at just over $8).

Thus the mood was much more calm as Athabasca reported 2013 earnings Wednesday morning. And despite reporting a $40 million loss for the fourth quarter, the company made plenty of progress during the year as it looks to grow production. After these results, there are a few reasons one should consider owning the shares.

Transition from spending to production

Last year, capital expenditures totaled $762 million, but this year the initial capital budget will be set at only $460 million. The budget will be re-evaluated, and likely raised, after Athabasca receives its proceeds from Dover. But the reduction underscores the company’s transition from a developer to a producer. This of course decreases the risk of the company relative to last year.

Large reserves

Last year’s capital budget was not wasted; Athabasca was able to grow its total reserves by 32%, a number that now stands at 482 million barrels of oil equivalent (boe). For a company that produced 6,700 boe per day last quarter, these reserves will last a very long time. Athabasca’s project pipeline will be plenty to keep the company occupied; it will not have to go buy other projects or companies.

Upside from contingent resources

The total net present value of Athabasca’s reserves is $1.1 billion, excluding the Dover project. So that represents a little under $3 per share. The company will get another $3 per share from selling its Dover interest. After subtracting out net debt, Athabasca’s net reserves are worth about $5.50 per share.

But the real value lies in the company’s contingent resources, which are less certain than reserves, but certainly carry plenty of upside. Those resources are worth about $45 per share. So by purchasing Athabasca shares, one has to pay a slight premium for the reserves, but gets tremendous upside from the additional resources.

Other options

Even though Athabasca is slowly shifting from development to production, this is still a growth story, which requires a lot of patience from investors. This kind of story is not uncommon in Canadian energy.

Investors looking for a little more certainty would be better off with one of the larger producers. For example, Suncor (TSX:SU)(NYSE:SU) shares are cheaper than the value of its reserves, meaning its resources come for free. And unlike Athabasca, Suncor pays a dividend.

Foolish bottom line

Athabasca is a perfect example of the risk/reward trade-off in Canadian energy. While an investment certainly is risky, it comes with a big payoff under an ideal scenario. And those kinds of stocks tend to trade at a serious discount compared to the companies that offer more certainty.

Risk-tolerant investors certainly should consider owning shares of Athabasca. Then again, those that prefer to avoid risk should probably avoid Canadian energy altogether.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

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