Mr. Robert Broen of Athabasca Oil reports

ATHABASCA OIL ANNOUNCES CREATION OF "DUVERNAY ENERGY CORPORATION" WITH CENOVUS ENERGY TO ACCELERATE VALUE IN THE PROLIFIC KAYBOB DUVERNAY PLAY

Athabasca Oil Corp. has entered into transaction agreements to create Duvernay Energy Corp. with Cenovus Energy Inc. Duvernay Energy will be a stand-alone self-financed entity that will drive strong, high-netback cash flow and production growth, and is expected to unlock significant value. The transaction is aligned with Athabasca Oil's strategy to maximize cash flow per share growth and return capital to shareholders.

Transaction overview

Athabasca Oil and Cenovus will jointly contribute assets into Duvernay Energy. Athabasca Oil will own a 70-per-cent equity interest in Duvernay Energy with Cenovus owning the remaining 30-per-cent equity interest. Athabasca Oil will manage Duvernay Energy through a management and operating service agreement. Duvernay Energy's board of directors will include three members nominated by Athabasca Oil 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 Oil'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 Oil is also contributing approximately $20-million in expenditures related to fourth quarter 2023 drilling operations on a 100-per-cent-working-interest multiwell pad and long-lead inventory for future activity.

The transaction will have an effective date of Jan. 1, 2024, is expected to close in the first quarter of 2024, and is subject to customary closing conditions and regulatory approvals, including Competition Act approval. On closing, the company will provide updated guidance for Duvernay Energy and Athabasca Oil.

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-per-cent-working-interest operated lands contiguous to its existing Duvernay assets. This acreage includes new lands strategically acquired by Athabasca Oil through Crown land sales over the last 18 months and Cenovus's contribution of Kaybob acreage. In total, Duvernay Energy will have exposure to approximately 200,000 gross acres in the liquids-rich and oil windows with approximately 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-per-cent working interest in the 7-4-63-16W5 gas facility.

Current production from Duvernay Energy is approximately 2,000 barrels of oil equivalent per day (approximately 75 per cent liquids) with a defined and self-financed development plan outlined in the section below.

Duvernay Energy development plans

Duvernay Energy's development plans will leverage off significant derisking activity on its acreage (74 horizontal wells) and on adjacent competitor activity. Duvernay Energy will execute a self-financed development plan that will target growth to approximately 25,000 boe/d (approximately 75 per cent liquids) in the late 2020s with an inventory to support a stable production profile thereafter for approximately 20 years.

The company has extended production history with well results consistently supporting type curve expectations. At Kaybob East and Two Creeks, IP365s have averaged approximately 550 boe/d per well (85 per cent liquids) on the past 12 wells. Latest well design will include lateral lengths up to 4,500 metres that are expected to yield stronger initial rates, larger reserves and improved capital efficiencies. Individual well costs are estimated to be $10-million to $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 financed 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 approximately 6,000 boe/d in 2025. Two thousand twenty-four activity consists of:

• One-hundred-per-cent-working-interest activity: A recently spudded two-well pad at Kaybob East will be placed on production in second quarter 2024. An additional two multiwell pads will spud midyear and are expected to be placed on stream in early 2025.
• Thirty-per-cent-working-interest joint venture activity: A three-well pad at Kaybob West is expected to spud in first quarter 2024 and will be placed on production in second quarter 2024. An additional four-well pad at Kaybob East is expected to spud in fourth quarter 2024 and will be placed on production in 2025.

Long-term development is expected to be financed within cash flow and is flexible for a range of commodity prices. The plan will be weighted to activity on Duvernay Energy's 100-per-cent-working-interest acreage and augmented by development within its 30-per-cent-working-interest joint venture acreage.

Strategic rationale

Transaction accelerates value in stand-alone self-financed Duvernay Energy: The new entity will accelerate value capture for Athabasca Oil's shareholders by providing a clear path for accretive production and cash flow growth without sacrificing Athabasca Oil's ability to finance capital in its thermal oil division or Athabasca Oil's return of capital strategy. The transaction consolidates Athabasca Oil's and Cenovus's 100-per-cent-working-interest operated assets, providing flexibility and efficiencies of scale for impactful development, along with Athabasca Oil's existing 30-per-cent-working-interest Duvernay joint venture assets that are governed by a strong joint development agreement. Production and cash flow growth will quickly exceed the volumes associated with the Montney non-core disposition completed in September, 2023.

During 2024, Duvernay Energy is forecasting capital expenditures of $82-million financed by cash flow from the entity and seed capital of $40-million from Athabasca Oil ($22-million) and Cenovus ($18-million). Duvernay Energy will also benefit from approximately $20-million in expenditures related to Athabasca Oil's fourth quarter 2023 drilling operations on a 100-per-cent-working-interest multiwell pad and long-lead inventory for future activity.

Athabasca Oil thermal oil budget maintained: Athabasca Oil'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 approximately 28,000 barrels per day by midyear 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 (approximately $6 per 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.

Athabasca Oil managing for strong free cash flow: Pro forma the transaction, Athabasca Oil forecasts adjusted funds flow of approximately $460-million in 2024 ($80 (U.S.) per barrel West Texas Intermediate and $15 (U.S.) per barrel Western Canadian Select heavy differential), excluding its 70-per-cent equity interest in Duvernay Energy. The capital forecast is $135-million for thermal oil, a $40-million reduction in capital spending that previously included Duvernay development. The transaction does not reduce Athabasca Oil's 2024 free cash flow forecast, which is maintained at approximately $325-million. The company's low sustaining capital requirements are fully financed within cash flow to $55 (U.S.) per barrel WTI. During the time frame of 2024 to 2026, Athabasca Oil forecasts greater than $1-billion in free cash flow, representing over 50 per cent of its current equity market capitalization. Athabasca Oil anticipates tightening of the WCS heavy differentials from current levels as the Trans Mountain Expansion pipeline (590,000 bbl/d) commences operations in 2024. Every $5-per-barrel WTI change impacts adjusted funds flow by approximately $55-million annually, and every $5-per-barrel WCS change impacts adjusted funds flow by approximately $85-million annually.

Return of capital commitments intact: Athabasca Oil maintains its 2024 return of capital commitments outlined in its budget release on Dec. 6, 2023. The company intends to allocate 100 per cent of free cash flow to shareholders through share buybacks. The company anticipates completing its current normal course issuer bid on March 15, 2024, with the intention to renew the program thereafter with the Toronto Stock Exchange for another 12-month period.

Financial strength remains: The company estimates year-end 2023 liquidity of approximately $455-million, including cash of approximately $370-million. The principal balance on the company's senior secured second-lien notes is $157-million (U.S.) with an estimated year-end net cash position of approximately $155-million. The company has approximately $2.8-billion in tax pools, including approximately $2.3-billion of immediately deductible non-capital losses and exploration pools. The company does not anticipate paying cash taxes until 2030 ($85 per bbl WTI and $12.50 per bbl WCS differential flat long-term pricing).

Differentiated assets: Duvernay Energy's financed 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 prepayout Crown royalty structure, with royalty rates between 5 and 9 per cent anticipated to last into 2027. Leismer has regulatory approved capacity of 40,000 bbl/d. Athabasca Oil also has a fully derisked asset at Corner, which also has regulatory approval for 40,000 bbl/d with reservoir quality equivalent or better than Leismer.

Athabasca Oil executive update

In conjunction with the transaction, Athabasca Oil is pleased to announce the appointment of Bruce Beynon as vice-president, light oil, with primary responsibility for the development of the assets within Duvernay Energy. Mr. Beynon is a professional geologist with over 30 years of oil and gas industry experience. Mr. Beynon is currently the president of Tiburon Exploration Corp., a private consulting company. Prior thereto, Mr. Beynon was executive vice-president, exploration and corporate development, at Baytex Energy Corp. Prior to the merger between Baytex and Raging River Exploration, Mr. Beynon held several positions with Raging River including president. Mike Wojcichowsky will assume the role of vice-president, drilling completion services and light oil operations.

Robert Broen, president and chief executive officer of Athabasca Oil, will also assume the role of chairman, president and CEO of Duvernay Energy. The board of Duvernay Energy will consist of Mr. Broen, Matt Taylor, chief financial officer of Athabasca Oil, Cam Danyluk, general counsel and vice-president, corporate development, Athabasca Oil, and Jeff Lawson, senior vice-president, corporate development, Cenovus.

Conference call

Athabasca Oil will be hosting a conference call for the investment community to discuss the transaction on Tuesday, Dec. 19, 2023, at 4:30 p.m. MT.

An archived recording of the call will be made available on Athabasca Oil's website.

Advisers

ATB Capital Markets is acting as financial adviser for Athabasca Oil in connection with the transaction. ATB Financial will lead Duvernay Energy's new $50-million credit facility. Norton Rose Fullbright Canada LLP is acting as legal adviser for Athabasca Oil.

About Athabasca Oil Corp.

Athabasca Oil is a Canadian energy company with a focused strategy on the development of thermal and light oil assets. Situated in Alberta's Western Canadian sedimentary basin, the company has amassed a significant land base of extensive, high-quality resources. Athabasca Oil's common shares trade on the Toronto Stock Exchange under the symbol ATH.

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