Bitumen pipelineDAVID BOILY
Athabasca Oil Sands Corp. isn't the only party awaiting the results of the initial public offering the company unveiled last week. The success of the IPO could float the boats of other junior oil sands stocks, too - notably UTS Energy Corp.
"A strong IPO of a pure-play oil sands player should have a positive impact on junior oil sands plays," National Bank Financial energy analyst Peter Ogden wrote in a research report.
What's more, he said, there's good reason to think the Athabasca IPO will garner a strong price - one strong enough to make the likes of UTS look attractive by comparison.
The closing of the $750-million offering is still about two weeks away, but the rumblings on Bay Street are that the shares will go in the $16 to $18 range. There is also talk that deep-pocketed PetroChina (which recently closed a $1.9-billion deal to buy a 60-per-cent stake in Athabasca's two major projects, MacKay and Dover) will pony up for a big chunk of the offering and that the IPO already looks destined to be oversubscribed - both of which suggest the final price is more likely to be at the top end of that range.
At $18 a share, Mr. Ogden said, the IPO would value Athabasca's assets at about $1 a barrel - based on its 5.5-billion barrels of estimated "contingent resources" excluding carbonates (a type of bitumen that can't be extracted with existing technology, so probably shouldn't be included in any asset valuation anyway). While that would be a bit tilted toward the high end of the recent range for oil sands transactions, it would still be well within that range.
It's also consistent with the valuations contained in option agreements PetroChina and Athabasca have for the Chinese oil giant to buy up Athabasca's remaining stakes in the MacKay and Dover projects a couple of years from now, when the projects are expected to receive full development approval. Those options would appear to essentially establish the price PetroChina is willing to pay for Athabasca's assets - setting the bar for others wanting a piece of the IPO.
It could also serve to nudge the bar up for other junior oil sands plays, Mr. Ogden said - especially given the interest with other potential Asian buyers in oil sands assets, and the fact that Athabasca is commanding this sort of price when MacKay and Dover are still four or five years away from production.
That's where the valuation gap between Athabasca and UTS comes in.
Both companies are junior oil sands players that own pieces of promising projects that have garnered international attention. Mr. Ogden noted that both are well-capitalized to finance development of those projects: Athabasca will be sitting on nearly $1.5-billion after the IPO and the previous PetroChina deal, while UTS had $460-million in cash at the end of the third quarter.
Yet UTS's current stock price implies a valuation of less than 50 cents per barrel of net contingent resource - roughly half of what Athabasca's expected IPO price will pay.
"In our view, UTS's project slate is at least as good as [Athabasca's]" Mr. Ogden said. He added that UTS also has strong major partners in its key assets - Suncor Energy Inc. at its 20-per-cent-owned Fort Hills project, and Teck Resources Ltd. at its 50-per-cent-owned Frontier and Equinox projects - both of which are considered potential acquirers of UTS down the road.
That's not to say that UTS - which is largely at Suncor's mercy on its key Fort Hills project - deserves to be fully priced at the same levels as Athabasca's IPO; indeed, Mr. Ogden's price target of $3.30 a share on the stock would still put it at a more affordable 71 cents a barrel of contingent resource. But given what the market looks ready to pay for Athabasca, UTS and others are going to look mighty cheap once the IPO goes through.