Fort McMurray Eviction Leaves Alberta Oilsands Trading at Half of Potential Cash Breakup Value

The shares of junior energy exploration company Alberta OilSands Inc. AOS.V 0.115 [-0.025] more than tripled this week to 15 cents—after announcing its main asset was essentially being bought out by the government—for 25 cents a share cash.  They already had 3 cents a share cash.

That would imply the stock has more room to run.

Normally, investors buy junior energy stocks so they get bought out by a major or intermediate sized oil company.   I have never before heard of a junior energy company being bought out by a Canadian government.

Alberta OilSands’ flagship property is the 27 section Clearwater property which has 373 million barrels in contingent resources with a PV10 of $490 million – that’s about $2.30 a share.  And it sits right beside the Fort McMurray airport.

AOS was evicted by the government when it cancelled all oil sands leases on 55,000 acres surrounding Fort McMurray. The town which lies in the heart of the oil sands industry in Alberta needs more housing and infrastructure in order to grow. Its population is expected to double over the next 2 decades because of the oil sands industry.

Affected companies will be compensated for all the money spent on the acquisition & development of their oil sands leases to date. For AOS, that’s more than $51 million plus interest of approximately 5% for a total of at least $53.5 million – that’s about $0.25 per share.

At first glance, the outcome is disappointing; Clearwater had the potential to produce 4,350 bopd in phase 1 and up to 40,000 bopd in phase 2. However, just phase 1 would have required approximately $150 million in capex.

As of its last news release, the company had $6.75 million in cash. There’s just no way AOS can come up with $150 million in THIS market. Furthermore, AOS was not being given any value for the assets by the market.

So in my opinion, the lease cancellation is a blessing to investors based on cash per share. If I add the cash on hand to the expected compensation I get around $60 million or $0.28 per share.

That’s almost 100% upside from here – and that’s just for the cash.

Just a couple of weeks ago, the stock was trading at cash value at $0.03 to $0.04 per share. There’s a good chance the stock will trade at $0.28 per share but only once the money from the government shows up in their account.

That would not be the only upside here as the company has multiple assets investors can get for free.

At Grand Rapids, AOS has a 100% WI in 18 sections of oil sands leases with 120 million barrels of contingent resources. Then there’s a smaller 5 section (100% WI) property at Mackay next to Southern Pacific Resource and 51 sections (100% WI) of land at Algar Lake which I find most interesting.

The Algar Lake property has seen 3 drills (1958, 1958, 1960) so it’s largely unexplored. While all three wells indicate in-situ bitumen volumes, the game changer here is the potential for “cold-flow” heavy oil. Contrary to SAGD where the oil has to be heated in order to flow, the heavy oil would flow on its own from conventional vertical or horizontal wells just like in the greater Lloydminster area.

The beauty of “cold-flow” heavy oil is that you can put a well on production for less than $1 million. The company would not need extensive capital or complex facilities to produce the oil.

Algar Lake is AOS’s biggest property in Alberta. In this area, there’s no problem finding oil since the McMurray formation holds the traditional oil sands. The cold-flow potential lies in the Wabiskaw sandy formation believed to hold movable heavy oil.

alberta oilsands algar lake

Even though this property is surrounded by 3 developed projects including the Pelican Lake Field with cold-flow production 40 km south west of AOS, this property remains an exploration project that requires some work to confirm the Wabiskaw potential.

On this front, AOS executed a letter of intent to farm-out its interest with a private entity – Crescendo. They come with a track record of discovery, 2 billion barrels in the past decade. The farmee will be spending all the money to drill 5 wells at Algar starting this winter. The first 3 wells would earn the farmee 51% WI with the option to drill 2 additional test holes bringing its WI up to 75%.

So on top of trading below cash value, there’s a free call on Algar Lake since someone else will be paying for the wells. If moveable heavy oil proves to be a reality, this property could easily turn AOS into a junior heavy oil producer with positive cash flow such as Palliser Oil & Gas or Rock Energy.

The timing would be perfect now that heavy oil differentials narrowed back to average about 20% to WTI. Western Canadian Select, the heavy oil benchmark, has been strong trading above $80 per barrel. That’s a long way from trading below $50 earlier this year!

The market seems to believe that the transportation bottleneck for Canadian oil is solved, at least in the medium term. The WTI/Brent spread narrowed substantially this year supported with an extra 1.4 million barrels in additional takeaway capacity coming up in 2014 thanks to pipeline expansions (Seaway) or new pipelines (Keystone XL south.)

The US Midwest refining complex is also an important variable as it is increasing heavy oil demand by 140,000 barrels this year and 180,000 barrels next year. Throw rail and other pipeline projects into the mix and all of a sudden Keystone XL no longer seems that important, that is until 2015 at least according to Raymond James.

Besides the call option on Algar Lake, AOS also provides exposure to 2 offshore blocks of oil exploration in Namibia and 18 million acres of oil leases in Zambia. The strategy here is to rely on the neighbors for drilling and exploration on adjacent blocks. The international leases have minimal work commitments for the next 18 to 24 months so it’s a wait and see game.

The African portfolio comes for free at this price but anyone of these assets could become a game changer at any point of time in the future. Any neighboring discoveries could unlock value quickly for shareholders as potential partners with deep pockets emerge.

Finally, the most important catalyst for AOS is receiving the compensation money from the government. Algar Lake would be the next catalyst to watch going into the winter of 2014. I personally view the African portfolio as free lottery tickets that may or may not payoff in the future.

What’s your opinion on AOS?

Disclaimer: I hold a small position in AOS. This is not an invitation to buy or sell AOS shares, please do your own due diligence before taking an investment decision.

34 comments to Fort McMurray Eviction Leaves Alberta Oilsands Trading at Half of Potential Cash Breakup Value

  • UCOG

    This company has like zero oil and gas experience among its management team and board. Kind of a red flag for me.

    • Mich

      But they are business men and they know how to put deals together. The upside still remains starting with the potential cash value upon receiving payment.

  • Rocky

    Hi Mitch,

    This seems quite high risk, with some reward. There is probably no likely hood of this no going through as the government is taking ownership of the land. So it might warrant a small portion of investment into the stock, but purely as a speculation.


    • Mich

      Rocky, this is mainly a play on the government buyout. If they don’t get the money it will likely drift back to $0.035. But like you said, because it’s the government, the money will most likely be paid.

      Again, very small speculative position on my end in this.

  • Rocky

    So one would be looking at this from the standpoint of hopefully making a small gain. When does the deal complete?

    • Mich

      The last NR mentioned:
      “In the near future, the company expects to receive an official notice of cancellation from the Province of Alberta setting out details of the cancellation.”

      I think the money might show up in a few months. But I’d have to call management and ask to confirm when they expect the official notice to be received.

  • JC

    It seems that in the current environment, quite a lot of resource stock are trading below their cash value. I think even if the deal went through, the stock might slowly fall back down to the current level (around 15 cents). What do you think?

    • Mich

      That’s always a possibility JC, but if it was trading at cash value 3 weeks ago, why not trade again at cash value a few weeks/months from now when the money is in the bank?

      That’s the premise…

  • JC

    It seems like the market is pricing either that the chance of this can go through is less than 50% (which is kind of odd), or that it can only trade at less than its cash value even if it does (which is also odd). The market is the market. It has its own ways. What can you say.

  • JC

    They have announced the notice of lease cancellation on Oct 18. Is this any different from the original eviction announcement?

  • JC

    I converted the hectares into acres and got 10,726. It seems that this is only the 1st 1/5 of the total thing if it really would go through.

  • JC

    Based on the announcement of Oct 18, 2013, the Alberta gov is cancelling 4341.7 hectares aos land. Base on slide 24, aos is supposed to have 32 sections (square miles) of land in clearwater, which is 8287 hectares. This imply that they are cancelling a little bit over 50% of the entire clearwater land owned by aos. If that is the case, I believe the current price of aos (at 0.12) is a little bit lower than its cash value, assuming that it already have some cash on hand before the cancellation. What do you think?

    • Mich

      If we go with the 50% cancellation figure, that would bring the cash value of the stock from $0.28 to about $0.14.

      In the near term this means there’s little upside based on today’s price until there’s something exciting coming down the pipe!

      I still would love to catch up with management. However based on the stock action, there’s no need to hurry :)

  • JC

    Today’s announcement seems great. However, market only did a yon. Why? Again, they will take a looong time to get the money, or the market simply does not believe their statement.

    • Mich

      This could be the case, market might be pricing in a long recovery period?

      I tried the CEO again today, no luck….Besides getting paid, I’d love to know what other catalysts the company has after Algar Lake.

  • JC

    Found the following:
    The Company also announced that it has terminated the Algar Lake farm-out agreement with Crescendo Resources. AOS will review and pursue other opportunities to develop and/or monetize Algar Lake.

  • JC

    A big portion of the 56M is: A development allowance of approximately $41.931 million.
    Do you believe that they have really spent so much development money without any production of oil?

  • JC

    If you have been following the stock price, you will notice that it is going up and down basically leaving itself at around the same range, even though there is news that it is getting closer to either get an approval from the government (or a denial). Based on the stock price, it seems that the market is only seeing a 50% of a chance that it will go through, which is weird unless they think that the management was lying, because the whole process is legislated and all they have to do is provide the evidence for the # they claimed for, nothing rocket science about.
    Are there other factors the market is seeing that I have not considered? Is it simply getting impatient and cashed out for other opportunities?

    • Mich

      JC, I have AOS on my watch list because I’ve kept a small amount of shares in my account. It dates from around the time I first wrote about them.
      It seems that the market doesn’t believe them because @$0.26+ cash per share following payment, we’re sure trading at 50% here. Maybe because it is taking longer than expected? You definitely have a point with hot money moving in and out, patience is not a virtue with speculators :)

      Still holding, I believe it’s a matter of time before they get paid. Like you said, the delay is in the bureaucracy!

  • JW

    Based on the existing SP and fact that the claim should be settled in relatively short term, it almost looks like that the market knows something really -ve that we do not know, or that they are simply running out of patient. What do you think?

    • Mich

      I haven’t followed up on AOS in a few months. Patience running out would me normal since it has taken some time and the claim is still not settled ie money in the bank. On the other hand, maybe the fact that it’s only a matter of time before the money shows up is what keeps the SP floating. After all, the risk of the government not delivering is small.

  • JW

    I think this will be coming relatively soon. Forget about the timing, how much will the market price the company is a bigger question. seeing that in the current environment, most of the juniors as priced much less than their book value. I guess, cash book value, may be priced differently. What do you think?

    • Mich

      hey JW, this AOS story is taking A LOT LONGER than expected to unfold. Maybe it’s to their benefit since they will be able to pick up some assets on the cheap. Most of the juniors are priced below book value but don’t give too much weight to that, BV has to be recalculated with more up2date strip pricing, you’d be surprised how much the value drops.

  • JW

    Well. The BV is very difficult to estimate. E.g. Terra Energy sold its Montey to Crew. It actually gets more than what’s in their book for the Montey land. For a lot of these assets really is a liability to the Junior producers and if they develop them, they cannot even breakeven with today’s strip price. It does not mean that they do not worth a chunk of money to others.

  • AOS

    Has anyone contacted management to determine whether they believe the full $56M of compensation will be paid?

  • JC

    news out. Only $34M. Share price is weaker than what it is worth. What a market.

    • Mich

      lower amount than expected, money not in the bank yet as it may drag longer if the company is not happy with the offer? might explain the weakness!

  • JC

    Make sense. The dragging will make this a good trading stock because there is the tug of war between the bulls and the bears and they both have a story.

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