Should You Buy Athabasca Oil While it’s Below $5?

A mid-cap energy stock with enormous gains in the last two years and trading below $5 remains a buying opportunity for growth investors.

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The TSX’s information technology sector was the top performer in 2023 with its 55.56% gain. Energy went underwater with -0.83%, although one mid-cap constituent was a big winner for the second consecutive year,

Strong returns

Athabasca Oil (TSX:ATH) followed its 102.5% gain in 2022 with a 73.03% return in 2023. At $4.40 per share, the total return in three years is a mind-boggling 2,414.39%. This high-growth stock remains a buying opportunity, and it would be best to buy it now before the price climbs further in 2024.

Athabasca Oil, a $2.5 billion liquids-weighted intermediate producer, operates and develops Canada’s premier resource plays (Montney, Duvernay, Oil Sands). Its two core divisions, Thermal Oil and Light Oil, boast top-tier, long-life asset bases and are responsible for Athabasca’s financial sustainability.

Profitable production growth

Management’s primary focus is to maximize corporate free cash flow (FCF) while maintaining Athabasca’s production base with low sustaining capital requirements. The $145 million capital program in 2023 advances the expansion project at Leismer and operational readiness in Light Oil.

With the new $175 million capital program, Athabasca expects production to reach 37,500 barrels of oil equivalent per day (boe/d) by year-end 2024, or 14% growth from year-end 2023. This year’s capital budget focuses on profitable production growth and strong FCF generation.

Athabasca hopes to generate $500 million of adjusted funds flow and $325 million of FCF (US$80/barrel West Texas Intermediate & US$15/barrel Western Canadian Select heavy differential)this year. But for 2024 to 2026, the company forecasts $1 billion in FCF, representing over 50% of its current equity market capitalization.

Moreover, Athabasca plans to allocate 100% of FCF this year to shareholders through share buybacks. The company implemented its inaugural share-buyback program last year to show its return-of-capital commitment to shareholders. The energy stock is a non-dividend payer, but the capital gains more than compensate.

New growth catalyst

On December 19, 2023, Athabasca Oil and Cenovus Energy announced the creation of Duvernay Energy Corp., a new joint venture. Besides their 70% and 30% equity interests in Duvernay Energy, Athabasca and Cenovus will contribute $22 million and $18 million in seed capital to fund the creation of the independent, standalone company.

The two companies will consolidate their assets in northwest Alberta’s Kaybob Duvernay resource play. Under the management and operating services agreement, effective January 1, 2024, Athabasca will oversee the management of Duvernay Energy. Regarding the board’s composition, Athabasca will nominate three members, while Cenovus will nominate one. The parties hope to obtain regulatory approvals and close the transaction in the first quarter of 2024.

Athabasca expects Duvernay Energy to accelerate value capture for its shareholders through accretive production and cash flow growth. Management said the new entity will not affect Athabasca’s ability to fund capital in its Thermal Oil division or its return of capital strategy.

Lastly, the transaction consolidates Athabasca’s and Cenovus’s 100% working interest in operated assets. Duvernay Energy also provides flexibility and efficiencies of scale for impactful development.

Robust free cash flow profile

Athabasca is poised to repeat its superb performance in the last two years. The new joint venture complements its Thermal assets and enhances the company’s robust FCF profile.  

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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