Athabasca Oil Corporation (TSX:ATH) is a company I've been following for a while, and one that I believe the market is over-hyped about. My concerns are mainly around the sustainability of its future growth, the opportunity cost of investing in the stock accounting for the returns I could have gotten in other peers, and its cash-to-debt management. Whether a company has a good future, in terms of its business operation and financial health, is an important question to address.
Firstly, a quick intro on the company - Athabasca Oil Corporation engages in the exploration, development, and production of light and thermal oil resource plays in the Western Canadian Sedimentary Basin in Alberta, Canada. Started in 2006, it operates in Canada and is recently valued at CA$791.10M.
The first thing that struck me was the pessimistic outlook for ATH. A consensus of CA oil, gas and consumable fuels analysts covering the stock indicates that its revenue level is expected to decline by -34.09% by 2020. As ATH is currently loss-making, this revenue headwind is expected to negatively impact its bottom-line, which should see a further decline from -CA$209.41M to -CA$52.00M.
Limiting your downside risk is an important part of investing, and financial health is a key determinant on whether ATH is a risky investment or not. A big red-siren warning for ATH is its low level of cash generated from its core operating activities. Given its debt level is relatively minimal (34.51% of equity), the fact that ATH's cash only covers a mere 11.73% of debt makes me worry. However, management has been able to reduce debt over the past five years, and it generates enough interest income to cover interest payments. Cash management is still not optimal and should be improved, but its overall debt level and interest coverage somewhat reduces my concerns around the sustainability of the business going forward. ATH has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities. ATH has managed its cash well at a current level of CA$163.32M. However, more than a fifth of its total assets are physical assets and inventory, which means that in the worst case scenario, such as a downturn or bankruptcy, a significant portion of assets will be hard to liquidate and redistribute back to investors.
The current share price for ATH is CA$1.63. With 510.39 million shares, that's a CA$791.10M market cap, which is in-line with its peers based on its industry and adjusted for its asset level. Currently, it's trading at a fair value, with a PB ratio of 0.55x vs. the industry average of 1.08x.
ATH is a fast-fail research for me. Good companies should have good financials to match, which isn't the case here. Given investors have limited time to analyze a universe of stocks, ATH doesn't make the cut for a deeper dive. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I've taken my data from.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.