Athabasca Oil, Cenovus Energy create Canadian oil, gas company focused on Kaybob

(WO) – Athabasca Oil Corporation has entered into transaction agreements to create Duvernay Energy Corporation (“Duvernay Energy”) with Cenovus Energy Inc. (“Cenovus”). Duvernay Energy will be a standalone, self-funded entity that will drive strong, high netback cash flow and production growth and is expected to unlock significant value.

Source: Athabasca Oil Corp.

Transaction details. Athabasca and Cenovus will jointly contribute assets into Duvernay Energy. Athabasca will own a 70% equity interest in Duvernay Energy with Cenovus owning the remaining 30% equity interest. Athabasca will manage Duvernay Energy through a management and operating services agreement. Duvernay Energy’s Board of Directors will include three members nominated by Athabasca and one member nominated by Cenovus.

On inception, Duvernay Energy will have strong liquidity, including seed capital of $40 million and a $50 million new credit facility led by ATB Financial. Athabasca’s $22 million seed capital contribution to Duvernay Energy will be within its previous $175 million 2024 capital guidance ($135 million Thermal Oil and $40 million Light Oil). Athabasca is also contributing roughly $20 million in expenditures related to Q4 2023 drilling operations on a 100% working interest multi-well pad and long lead inventory for future activity.

Duvernay Energy assets. Duvernay Energy will be positioned with unparalleled pure-play exposure to the prolific Kaybob Duvernay resource play. Duvernay Energy’s assets will be primarily located in the volatile oil region.

In addition to the company’s existing joint venture assets, Duvernay Energy has exposure to approximately 46,000 acres of 100% working interest operated lands contiguous to its existing Duvernay assets. This acreage includes new lands strategically acquired by Athabasca through Crown land sales over the last 18 months and Cenovus’s contribution of Kaybob acreage.

In total, Duvernay Energy will have exposure to about 200,000 gross acres in the liquids rich and oil windows with roughly 500 gross future well locations. The assets are serviced by existing infrastructure, including two operated oil batteries with a gas pipeline network connected to both the Pembina Gas Infrastructure KA facility and the Keyera Simonette facility. Liquids are directly connected to the Pembina Peace liquids system. Duvernay Energy will also own an 8.1% working interest in the 7-4-63-16W5 gas facility.

Current production from Duvernay Energy is roughly 2,000 boed (~75% Liquids) with a defined and self-funded development plan.

Duvernay Energy development plans. Duvernay Energy’s development plans will leverage off significant de-risking activity on its acreage (74 horizontal wells) and on adjacent competitor activity. Duvernay Energy will execute a self-funded development plan that will target growth to roughly 25,000 boedd (~75% Liquids) in the late 2020s with an inventory to support a stable production profile for approximately 20 years.

The company has extended production history with well results consistently supporting type curve expectations. At Kaybob East and Two Creeks, IP365’s have averaged about 550 boed per well (85% Liquids) on the last 12 wells. The latest well design will include lateral lengths up to 4,500 m that are expected to yield stronger initial rates, larger reserves and improved capital efficiencies. Individual well costs are estimated to be $10 – 14 million, depending on pad size, lateral length and proppant loading.

The 2024 development program will include 12 gross wells (7.1 net wells) with a capital budget of approximately $82 million. The program is expected to be funded from the $40 million seed capital contribution and cash flow from Duvernay Energy. The plan is expected to drive strong production momentum with production forecasted to average 6,000 boed in 2025. 2024 activity consists of:

  • 100% working interest activity. A recently spudded, two-well pad at Kaybob East will be placed on production in Q2 2024. An additional two multi-well pads will spud mid-year and are expected to be placed on-stream in early 2025.
  • 30% working interest Joint Venture activity: A three-well pad at Kaybob West is expected to spud in Q1 2024 and will be placed on production in Q2 2024. An additional four-well pad at Kaybob East is expected to spud in Q4 2024 and will be placed on production in 2025.

Strategic rationale. During 2024, Duvernay Energy is forecasting capital expenditures of $82 million, funded by cash flow from the entity and seed capital of $40 million from Athabasca ($22 million) and Cenovus ($18 million). Duvernay Energy will also benefit from $20 million in expenditures related to Athabasca’s Q4 2023 drilling operations on a 100% working interest multi-well pad and long lead inventory for future activity.

Athabasca Thermal Oil budget maintained. Athabasca’s Thermal Oil division underpins the company’s strong free cash flow outlook, with an unchanged $135 million capital budget. At Leismer, production is expected to increase to about 28,000 bpd by mid-year through a facility expansion project and the ramp-up of eight behind pipe wells that recently commenced steaming operations. This production level can be held with modest sustaining capital (~$6/bbl) for many years into the future. At Hangingstone, sustaining drilling will support base production in 2025 and beyond with the objective of ensuring the asset continues to deliver meaningful cash flow contributions.

Differentiated assets: Duvernay Energy’s funded growth profile complements the company’s Thermal assets by producing a diluent quality liquid product and creating a natural hedge for diluent sourcing. The Thermal Oil division’s strong margins and Free Cash Flow are supported by a pre-payout Crown royalty structure, with royalty rates between 5 – 9% anticipated to last into 20271. Leismer has a regulatory approved capacity of 40,000 bpd. Athabasca also has a fully de-risked asset at Corner, which also has regulatory approval for 40,000 bpd with reservoir quality equivalent or better than Leismer.

Lead image source: Athabasca Oil Corp.

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