Tag Archives: ATH

Reviewing track record of IPOs and other matters

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Now that I have been thinking about some IPOs that I have covered in the past, we have the following:

Whistler Blackcomb (TSX: WB) – I stated in an earlier article that this is one to avoid and I might think about it at $5.30/share and so far nothing has changed this assessment.

Athabasca Oil Sands (TSX: ATH) I did not have a firm valuation opinion other than that the shares seemed to be overpriced at the offering price ($18/share) and stated the following (previous post):

Once this company does go public it would not surprise me that they would get a valuation bump, and other similar companies that already are trading should receive bumps as a result. I have seen this already occur, probably in anticipation of the IPO.

If you had to invest into Athabasca Oil Sands and not anywhere else, I would find it extremely likely there will be a better opportunity to pick up shares post-IPO between now and 2014.

While the valuation pop from the IPO did not materialize (unlike for LinkedIn investors!) the rest of the analysis was essentially correct – investors had the opportunity to pick up shares well below the IPO price (it bottomed out at nearly $10/share in the second half of 2010), although I don’t know whether the company represents a good value at that price or not. I didn’t particularly care because Athabasca Oil Sands has some other baggage that made it un-investable (in my not-so-humble opinion).

While I am reviewing my track record on this site, one of my other predictions dealt with BP, Transocean and Noble Drilling, that:

Over the course of the next 2 years, $10,000 invested in BP (NYSE: BP) at the closing price of June 16, 2010 will under-perform $10,000 evenly invested in Transocean (NYSE: RIG) and Noble (NYSE: NE). Assume dividends are not reinvested and remains as zero-yield cash.

At present, BP would have returned US$14,392.46 to investors, while RIG and NE would have returned US$14,198.52. If I had the ability to close this bet for a mild loss, I would – the political risk for the three companies in question have completely gravitated toward the “status quo” once again after the Gulf of Mexico drilling accident. Drilling capacity is likely to rise, depressing the value of the contractors and favouring BP in this particular bet.

Athabasca Oil Sands IPO – First day of trading

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The first day of trading of Athabasca Oil Sands resulted in a 6% drop in valuation from $18 to $16.90. I had written about my quick researched valuation of the IPO in a prior post, and also said that I wouldn’t be surprised if there was a post-IPO “bump”:

Once this company does go public it would not surprise me that they would get a valuation bump, and other similar companies that already are trading should receive bumps as a result. I have seen this already occur, probably in anticipation of the IPO.

If you had to invest into Athabasca Oil Sands and not anywhere else, I would find it extremely likely there will be a better opportunity to pick up shares post-IPO between now and 2014.

This kind of surprised me in light of the fact that this was much touted by the media before it started trading and it was appearing as if there would be droves of retail investors that would pile into the stock (before it went down). Instead, it just went down from the start of trading:

Probably what will be even more affected by this drop in valuation is the valuation of other related oil firms, which might get sold off now that the hype has been extinguished.

Inevitably, Athabasca Oil Sands will be running net operating losses for the next four years, so investors will have to be very patient before they will see any dividends coming from their common equity.

Athabasca Oil Sands IPO valuation – summary

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I am reading plenty of news how Athabasca Oil Sands is planning a very large public offering. According to their final prospectus, they will raise $1.35 billion @ $18/share of gross proceeds and about $1.26 billion net.

Since this got on the media’s radar, it should be a foregone conclusion that the option to purchase more of the offering will be exercised, so the final offering should be around $1.55 billion gross, and $1.45 billion net. The following analysis assumes the latter will be the case.

Note this is just a summary analysis. It only scratches the surface, but it covers what I figure are the salient details.

After the offering, they will have about 400 million shares outstanding, and assuming an $18 purchase price, this is a market capitalization of about $7.2 billion.

What exactly would an IPO subscriber be purchasing? This is why looking at the prospectus (all 288 pages in its full glory) is a valuable exercise. The company is a development stage company that has interests in a few tar sands near the Fort McMurray area of Alberta. They are currently not performing, but they are expected to come online in a few years, per the following schedule (page 8):

It would be reasonable for an investor to think this company will be producing net losses until around 2014-2015 when their oil sands projects come online.

After the offering, the company will have about $2 billion in the bank and about $400 million in long term debt. Thus, it will mostly be capitalized with equity and should have sufficient room to finish most of what they need to by 2014 – they will have to raise a little more money between now and then.

Page 78-84 of the prospectus contains some significant assumptions and analysis of the company’s estimated reserves. The first chart is based on a discounted net present value given the best estimates:

What this says is that if you have a 10% cost of capital and bought this company’s resources at the various sites for $11.2 billion, it would be a neutral decision. Of course, assumptions such as whether the company will be able to realize the “best estimate” or something better or worse is something for an investor to determine. Also, the following assumptions on future oil prices are made:

Roughly, it is assumed that (the media-quoted oil price source – there are different prices for different classes of oil) oil in 2010 will be US$80 in 2010; that the CDN/USD exchange will be 0.95, and that oil will increase $3/barrel until 2014, and then up 2% from there.

If projected oil prices are lower than this, you “lose” as an investor. If projected oil prices are higher, you “win”.

My quick take is that there are other companies out there using steam-assisted gravity drainage technologies to extract oil from tarsands. It takes a little (and I literally mean this; a little) research to figure out who those players are (beyond Suncor) and looking at their economic profiles. I can safely say that if I were offered shares of Athabasca Oil Sands at the IPO price, I would pass from a valuation perspective. From a market perspective, however, it would be worth considering strictly to sell it off at a post-IPO price. It kind of reminds me of the internet stocks in the late 90′s.

Once this company does go public it would not surprise me that they would get a valuation bump, and other similar companies that already are trading should receive bumps as a result. I have seen this already occur, probably in anticipation of the IPO.

If you had to invest into Athabasca Oil Sands and not anywhere else, I would find it extremely likely there will be a better opportunity to pick up shares post-IPO between now and 2014.