Investors
Dear shareholders,
It is a pleasure for me to finally be able to again write the “President’s message” after the expiry of the so-called “quiet period” following Athabasca Oil Sands Corp.’s (AOSC) IPO and I will use the occasion to welcome new shareholders.
The last twelve months have been very eventful and successful for AOSC, with completion of the IPO and the PetroChina joint venture as the main highlights.
AOSC managed to weather the financially challenging 2009 very well due to the $400 million 3-year debt that we raised in 2008. This enabled us to continue our technical programs and business development activities as planned. During the winter 2009 program, 77 delineation wells were drilled resulting in an approximate 50% increase in best estimate contingent resources (10.0 billion barrels best estimate contingent resources plus 349 million barrels probable plus possible reserves as per December 31, 2009 independent evaluator reports, prior to giving effect to the PetroChina transaction). This program was mainly focused on the exploration/delineation of the northern part of the Dover area, where excellent reservoir rocks were confirmed, a dense delineation of the first commercial phase development area in MacKay River and the exploration/delineation of the Leduc dolomite carbonate rocks in the Dover West area.
Dover West merits special mention. AOSC started acquiring lands in the area based on the presence of good quality bitumen-rich Cretaceous sandstones of the McMurray and Wabiskaw formations. Our first drilling season in the area during 2008 confirmed the excellent potential of the Cretaceous sandstones but also demonstrated that the underlying Leduc formation was saturated with bitumen and had outstanding reservoir quality with reservoir thickness up to 150 meters. The results were kept confidential until the remaining open acreage had been secured and AOSC drilled another 12 wells through the formation in 2009 confirming the geological trends as mapped. The Leduc formation in the area contains approximately 12.5 billion barrels of total Petroleum Initially in Place, including discovered and undiscovered (GLJ – December, 31, 2009 best estimate), a figure we expect to increase when the independent evaluation of the recently acquired 28km2 3D seismic survey and the 12 wells drilled in winter 2010 has been completed. The Leduc formation is a proven excellent reservoir elsewhere in Alberta where it has produced several billion barrels of light oil since the discovery in 1947. We expect to release results of the updated independent resource evaluation during the second quarter of 2010.
The MacKay River commercial application was prepared during the year and filed slightly ahead of schedule in early December 2009. The entire development, in which AOSC now has a 40% interest, is forecast to reach 150,000 barrels per day with a Phase 1 of 35,000 barrels per day. Initial capex estimates for Phase 1 are approximately $35,000 per barrel which includes infrastructure costs and pre-builds for future phases on MacKay River. Regulatory approval is expected towards the end of 2011 and production start up is scheduled for 2014.
The company considers that financial uncertainty is one of the greatest risks to independent oil sands developers. The penalty paid for financial distress in the oil sands industry is very high and AOSC therefore decided to secure access to sufficient funds through joint ventures and an IPO. AOSC has for several years been forecasting that joint venture arrangements with major companies would be the most feasible method to finance our project developments. Our joint venture efforts started in March 2009 when AOSC began a confidential process offering to joint venture our two most mature projects: MacKay River and Dover.
A number of interested parties participated in the process and AOSC ultimately entered into a series of agreements with affiliates of PetroChina Company Limited to sell an indirect 60% working interest in both projects for cash consideration of $1.9 billion. In addition, PetroChina provided certain debt financing facilities totalling approximately $1.1 billion. The initial agreement was signed August 28, 2009 and the deal was closed February 10, 2010 following Investment Canada Act approval. We anticipate that PetroChina, the world’s largest energy company measured by market capitalization, will bring a wealth of technical resources and financial capabilities to the projects.
AOSC has also been approached to accept partners on the Hangingstone, Birch and Dover West projects. We will continue to evaluate such further opportunities while we assess the full potential of those areas. The successful joint venture efforts confirm the quality of our assets and validate the strategic choices which have been made.
One of the company’s goals has always been to maximize value to its shareholders. In light of the prevailing fiscal regime for Canadian private companies, it was decided that the payment of an extraordinary dividend would be the best way of achieving this goal in connection with the successful conclusion of the PetroChina transaction. Approximately $1.3 billion was distributed to shareholders in March 2010.
An IPO was considered to be a complementary source of financing for the development of our projects. Preparations for the IPO started during the second half of 2009, but the final timing was dependent on the closing of the PetroChina deal. With the goal of raising $750 million, the Preliminary Prospectus was filed on February 26, 2010. The price range was set at $16-$18 per share. An international road show was undertaken during March and the response was overwhelming. It was soon clear that the IPO would be well oversubscribed and with final orders exceeding the initial goal of $750 million several times over, it was decided to increase the size of the offering by 80% to $1.35 billion at $18 per share. The Final Prospectus was filed on March 30, 2010. The IPO closed on April 8, 2010 and the shares started trading later that day.
General market conditions are a part of the reason for the decline in stock price, but equally important is that, since the IPO process was completed, we have seen a shift in the type of investment dollars and investors we’ve been attracting. AOSC is now at a stage whereby it is seen by many longer-term investors as a solid and reliable investment. We believe many of AOSC’s early investors who sold after the IPO were looking for an opportunity to realize profits and invest in other early stage companies. AOSC is now in a strong position to achieve our business objectives and stimulate development while providing solid growth for investors. It is also worth noting that many insiders, who are locked up for 6 months, in addition to virtually all AOSC employees, showed great confidence in the Company and purchased additional shares in the IPO.
For AOSC, having successfully executed our 2009 objectives to secure financing for our business plan through the joint venture of MacKay River and Dover and the IPO, the most important objective now is to execute the projects as contemplated and continue to build the relationship with our main partner, PetroChina. On the strength of our high quality assets and strong financial position, we have managed to build one of the strongest technical teams by handpicking some of the most experienced talent in the region.
We also intend to continue increasing our already extensive resource base through further delineation of our under-explored acreage and also through business development activities. AOSC, with approximately $2 billion in cash and access to significant term credit facilities from PetroChina affiliates, is in a unique position to maximize the value of its current and future assets. It is therefore with well founded optimism that the undersigned and the other employees of AOSC look forward to the rest of 2010 and the years to follow.
