Investing in quality, undervalued stocks is a good strategy to create long-term wealth and derive outsized gains. It’s essential to identify stocks trading below their intrinsic value, providing you with a margin of safety and the potential to beat the broader markets when investor sentiment improves.
One such undervalued TSX stock is Athabasca Oil (TSX:ATH), which is valued at $2.2 billion by market cap. Let’s see why.
Is Athabasca Oil a good stock to buy right now?
Athabasca Oil is a liquids-weighted intermediate producer active in Canada’s most active resource plays. It owns and operates a predictable, low-decline thermal oil business with strong netbacks and low capital requirements.
Basically, netbacks measure revenue for oil and gas companies net of royalty, production, and transportation expenses. It is a summary of all costs associated with bringing the product to a marketplace and is an indicator of efficiency and profitability.
ATH also operates a de-risked light oil business with flexible capital and a large inventory in the Montney and Duvernay basin.
Down 77% from all-time highs, ATH stock has returned close to 300% in the last five years, outpacing the TSX index by a wide margin.
Athabasca Oil is focused on maximizing cash flows and maintaining its production base with sustainable capital expenditures. The company’s deep inventory of thermal oil projects provides it with long-term growth optionality while a differentiated portfolio offers shareholders exposure to significant long reserve life assets.
Athabasca Oil reported petroleum, natural gas & midstream revenue of $379.2 million in the third quarter (Q3) of 2023 with an operating income of $168.4 million. It reported a record adjusted funds flow of $141.1 million, while free cash flow stood at $107.9 million.
The energy company ended Q3 with $425 million in liquidity, which includes its cash balance of $337 million. Moreover, Athabasca Oil closed the sales of its non-core light oil assets for $160 million in the September quarter.
What is the target price for ATH stock?
Athabasca Oil aims to enhance shareholder value through strong multi-year growth in cash flow per share. Its asset base provides a platform to drive profitable liquids growth supported by strong financials.
It estimates to execute a capital growth program totaling $145 million in 2023 as its portfolio of long-life assets underpins a low-corporate decline of 5% annually.
Athabasca Oil emphasized it would return at least 75% of excess cash flow to shareholders through buybacks. The company is positioned for continued margin growth in 2024, enabling it to accelerate buybacks in the near term.
Athabasca Oil expects to generate $1 billion in free cash flow between 2023 and 2025. According to Bay Street estimates, its adjusted earnings should improve to $0.59 per share in 2024, up from $0.24 per share in 2022. So, ATH stock is priced at 6.5 times forward earnings, which is very cheap.
Analysts remain bullish on ATH stock and expect it to return almost 30% in the next 12 months. However, investors should understand that Athabasca Oil is part of the highly cyclical energy sector. So, its performance and cash flow growth largely depend on commodity prices.
In the last three years, oil prices advanced with strong global demand, allowing Athabasca to deliver market-thumping gains to investors. Additionally, in recent months, the higher oil prices were supported by continued OPEC+ cuts and inventory drawdowns.
