Athabasca Oil Seen Winning Approval for Dover Project

Athabasca Oil Corp. is poised to rebound from a record low after a Canadian aboriginal group that has opposed an oil-sands project with PetroChina Co. signaled the impasse can be overcome.

“We still feel there could be a resolution that will satisfy both parties,” Dayle Hyde, a spokeswoman for Fort McKay First Nation, said in an April 24 interview. “We’re not opposing the full project, we are just opposing the project that’s closest to our reserve area.”

Athabasca fell 15 percent on April 23, the first day of a regulatory hearing to decide the fate of the Dover development that was triggered by the Fort McKay group’s objection. Athabasca needs approval to sell its stake in Dover to Beijing-based project partner PetroChina for C$1.32 billion ($1.30 billion), which would raise cash for the Calgary-based company’s development.

The possibility of compromise from Fort McKay, a band that employs more than 800 people in companies that provide services for oil-sands developers, comes as Alberta regulators head into a second week of hearings. Cases of public opposition to developments usually result in conditional approvals, according to the Energy Resources Conservation Board.

Athabasca was under pressure before the hearing, down 22 percent this year to April 22, as a lack of pipeline capacity restricts crude exports and weighs on Canadian energy stocks. Last week’s one-day fall pushed the stock to C$6.95, the lowest since its initial public offering led by Morgan Stanley and GMP Capital Inc. at C$18 in 2010. Athabasca closed 3.8 percent higher at C$7.42 in Toronto today.

Cultural Activities

“It’s oversold,” said Chris Cox, a Calgary-based analyst at AltaCorp Capital Inc. He expects the regulator will rule in August. “Even without a resolution, I think this thing is a buy,” Cox said in a phone interview on April 25.

Fort McKay is seeking a 20-kilometer (12-mile) buffer zone free of development around two lakes the community uses for cultural activities. The Dover site is about 100 kilometers northwest of Fort McMurray.

The 20-kilometer buffer “is our ideal,” Hyde said, declining to discuss where Fort McKay may find common ground with Dover Operating Corp., the company jointly owned by Athabasca and PetroChina.

The buffer would carve out oil-rich lands from Dover, Athabasca President Bryan Gould said in a phone interview on April 25. “We’ve been trying for awhile and we haven’t found that space that works for both parties,” Gould said. He declined to comment on specific negotiation details.

Thirteen analysts rate Athabasca a buy, three say hold and there are no sells on the stock, according to data compiled by Bloomberg, signaling analysts expect regulatory approval. The 12-month average target price is C$14.32.

Conditional Approval

The 250,000 barrel-a-day Dover project would extract bitumen using a technology that injects steam underground to melt the heavy crude so it flows to the surface.

The Energy Resources Conservation Board has 90 days to decide on Dover after the hearings, which may result in denial, approval or conditional approval, Bob Curran, a board spokesman said. The “majority” of hearings triggered by public opposition result in conditional approval, he said.

The Dover joint venture signed in 2010 includes a put option that allows Athabasca the right to sell its 40 percent stake in the project to the Chinese state-owned company upon receiving regulatory approval.

Sale Proceeds

The C$1.32 billion option is “critical” for Athabasca’s oil growth in 2014, Matthew Taylor, a Calgary-based analyst at National Bank Financial, said in a note on April 24. Proceeds from the Dover stake sale, along with other joint ventures Athabasca may sign, are not currently priced into the stock, Taylor said, which he valued at C$7.95 without those items.

“The share price got down to the point where the put option got discounted to zero,” Mason Granger, who oversees about C$400 million at Sentry Investments Inc. in Toronto, said in a phone interview on April 25, calling the “risk-returns” on Athabasca “favorable.” He doesn’t own the stock.

Should the project be rejected, Athabasca has other ways to raise money, including tapping equity and debt markets, signing joint venture deals and selling assets, Gould said.

A separate joint venture with PetroChina to develop the 150,000-barrel-a-day MacKay River oil-sands project had a similar put option that allowed Athabasca to sell its 40 percent stake for C$680 million last year.

Joint Ventures

The Dover deal, which was signed and approved in 2010, would potentially be the last oil-sands acquisition by a state-owned firm after Canada changed foreign-takeover rules last year to prevent government-backed companies from owning oil-sands businesses, barring exceptional circumstances.

Athabasca is seeking additional joint ventures to develop its oil and natural gas in Alberta, home to the world’s third-largest reserves of crude, Gould said. He declined to comment on a joint venture the company said it was working on last year for its Birch and Hangingstone properties.

The 20-kilometer buffer sought by Fort McKay would potentially include Athabasca’s Birch lands, and “infringe on ultimate development,” National Bank Financial’s Taylor said.

Athabasca reported profit of C$260.2 million last year, a rise of 83 percent over 2011, as the company boosted production of oil and gas by more than five times. The company has plans to increase output to the equivalent of 220,000 barrels of oil a day by 2020, from 4,110 barrels in the fourth quarter of 2012.

Quarterly Results

The company, which releases its first-quarter results tomorrow, is expected to report a loss of 2.8 cents a share, excluding one-time items, according to five analysts’ estimates compiled by Bloomberg. First-quarter output was expected to be impacted by an outage at a plant that processes Athabasca’s gas, according to an April 18 note by FirstEnergy Capital Corp.

The objection to Dover by Fort McKay represents the first time the band has formally opposed an oil-sands project since 1993, according to Hyde.

This is “significant” for John Stephenson, an Athabasca holder who said he won’t buy on the stock’s weakness. “It is unclear what the implications will be for Athabasca’s put option if the approval comes under certain conditions,” Stephenson, who helps oversee C$2.7 billion at First Asset Investment Management Inc. in Toronto, said in an e-mail on April 24. “It’s too risky to add to our position at this time.”

The regulatory concern over Dover is misguided, said Jared Dziuba, a Calgary-based analyst at BMO Capital Markets who rates Athabasca a buy.

“We continue to believe government regulators are highly unlikely to reject the Dover project through a hearing process,” Dziuba said in a note on April 24.