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MEG Energy Fourth Quarter, Full Year 2020 Results

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| Friday,March 05,2021

MEG Energy Corp. reported its full-year 2020 operational and financial results.

Highlights include:

Free cash flow of $129 million driven by adjusted funds flow of $278 million ($0.91 per share) and disciplined capital spend of $149 million;
Bitumen production volumes of 82,441 barrels per day (bbls/d) at a steam-oil ratio (SOR) of 2.3;
Repayment of $132 million of long-term debt concurrent with the refinancing of US$1.2 billion of existing indebtedness;
General and administrative expense of $49 million which was $19 million, or 28%, lower than 2019;
Net operating costs of $6.18 per barrel, supported by record low non-energy operating costs of $4.38 per barrel and strong power sales which offset 45% of per barrel energy operating costs resulting in a net energy operating cost of $1.80 per barrel; and
Exited 2020 with $114 million of cash on hand and MEG’s $800 million modified covenant-lite revolver remains undrawn.

CEO Derek Evans said: “Notwithstanding the incredibly challenging environment our industry faced in 2020, MEG continued to execute on its strategic focus of improving overall cost efficiencies, preserving financial liquidity and enhancing MEG’s competitive position. In keeping with this strategy, we significantly reduced G&A, repaid indebtedness, extended the maturity runway of outstanding long-term debt and began moving the majority of our barrels to the USGC for the first time. None of this would have been achieved without the commitment, perseverance, and resilience of the MEG team which has my thanks and those of the Board for all their collective and individual efforts during the year.”

Financial Liquidity and Debt Repayment

In the last three years, the Corporation has repaid approximately $2 billion (US$1.5 billion) of long-term debt including $132 million (US$100 million) in 2020.

In January 2020, the Corporation successfully closed a private offering of US$1.2 billion in aggregate principal amount of 7.125% senior unsecured notes due February 2027. The net proceeds of the offering plus cash on hand were used to fully redeem US$800 million of the 6.375% senior unsecured notes due January 2023 and partially redeem US$400 million of the US$1.0 billion 7.0% senior unsecured notes due March 2024. Post this refinancing, MEG had a 4-year runway until its next debt maturity represented by the remaining US$600 million of March 2024 notes.

Subsequent to year end, in February 2021, the Corporation successfully closed a private offering of US$600 million in aggregate principal amount of 5.875% senior unsecured notes due February 2029. The net proceeds of the offering plus cash on hand were used to fully redeem the remaining US$600 million of the 7.0% senior unsecured notes due March 2024. Post this refinancing, MEG maintains a 4-year runway until its next debt maturity represented by the remaining US$496 million of 6.50% second lien notes due January 2025.

MEG generated $129 million of free cash flow in 2020 and exited the year with $114 million of cash on hand. The Corporation’s $800 million modified covenant-lite revolver, in place until July 2024, remains undrawn.

Blend Sales Pricing and North American Market Access

MEG realized an average AWB blend sales price of US$28.07 per barrel in 2020 compared to US$46.19 per barrel in 2019. The decrease in average AWB blend sales price year over year was primarily a result of the average WTI price decreasing by US$17.63 per barrel. MEG sold 40% of its sales volumes to the US Gulf Coast (“USGC”) in 2020 compared to 33% in 2019. The increase in sales to the USGC in 2020 is primarily a result of the Corporation’s increased contracted blend transportation capacity on the Flanagan South and Seaway Pipeline systems (“FSP”) effective July 1, 2020 from 50,000 bbls/d to 100,000 bbls/d.

Transportation and storage costs averaged US$6.74 per barrel of AWB blend sales in 2020 compared to US$5.70 per barrel of AWB blend sales 2019. The increase in transportation and storage costs is primarily due to the fixed costs associated with increased FSP contracted capacity coupled with lower year over year sales volumes. MEG’s AWB blend sales by rail were 16,865 bbls/d in 2020, representing 14% of total blend sales, compared to 19,686 bbls/d, representing 15% of total blend sales in 2019. MEG is not anticipating undertaking any AWB blend sales by rail in 2021.

Operational Performance

Bitumen production averaged 82,441 bbls/d in 2020, compared to 93,082 bbls/d in 2019. Contributing to the decrease was the impact of the Corporation’s major planned turnaround at the Phase 1 and 2 facilities which was extended in duration to 75-days and expanded in scope relative to the Corporation’s original budget in order to minimize staff levels at site during COVID-19 and maximize utilization of the Corporation’s internal resources thereby lowering overall cash costs. MEG also made the decision to advance turnaround activities from 2021 to significantly reduce the 2021 turnaround requirements.

The decrease in 2020 bitumen production was also impacted by the Corporation’s decision, in the first half of 2020, to reduce capital investment by $100 million and undertake voluntary price-related production curtailments during the second quarter of 2020 in order to preserve financial liquidity.

Non-energy operating costs were $133 million, or $4.38 per barrel, in 2020 compared to $157 million, or $4.61 per barrel, in 2019. General and administrative expense was $49 million, or $1.62 per barrel, in 2020 compared to $68 million, or $1.99 per barrel, in 2019. Throughout 2020 MEG continued efforts to drive efficiency into its cost structure including reductions in staffing levels as well as temporary salary rollbacks and vendor concessions which contributed to the decrease in expenses year over year. The Corporation also took part in various government led initiatives during 2020, aimed at supporting businesses facing the negative impacts of COVID-19.

Adjusted Funds Flow and Net Loss

The Corporation’s adjusted funds flow was $278 million in 2020 compared to $726 million in 2019. The decrease in adjusted funds flow was driven primarily by the 31% decrease in the WTI price year over year partially offset by a realized commodity risk management gain of $343 million.

The Corporation recognized a net loss of $357 million in 2020 compared to a net loss of $62 million in 2019. The increase in the net loss year over year was largely driven by significant non-cash items including a $366 million exploration expense associated with certain non-core assets and a decrease in the unrealized foreign exchange gain driven by the strengthening of the Canadian dollar. These were partially offset by an unrealized commodity risk management gain as a result of weaker forward commodity prices compared to an unrealized commodity risk management loss in the same period of 2019.

Capital Expenditures

Capital expenditures in 2020 totaled $149 million compared to $198 million in 2019. The decrease in capital spending in 2020, compared to 2019, reflects the Corporation’s decision to reduce its original 2020 capital budget of $250 million by approximately $100 million due to the unprecedented negative macro oil price environment experienced in 2020. Capital expenditures during 2020 primarily consisted of sustaining and maintenance and turnaround activities.

Sustainability

In 2020 we continued to advance our Environmental, Social and Governance (“ESG”) activities and strategy with corporate commitments to supporting the Paris Agreement, the approval of our long-term ambition of reaching net-zero GHG emissions (scope 1 and scope 2) by 2050, and our commitment to human rights as reflected in the UN Universal Declaration of Human Rights.

We remain committed to ESG leadership and look forward to updating our performance in that regard with the release of our 2020 Sustainability Report mid-2021.

COVID-19 Global Pandemic

The health and safety of its people is the Corporation’s first priority. The Corporation’s business activities have been declared an essential service by the Alberta Government and the Corporation remains committed to ensuring the health and safety of all its personnel and business partners, and the safe and reliable operation of the Christina Lake facility. At the onset of the global pandemic, a COVID-19 task force was established by the Corporation comprised of members of senior management and employees as well as third party expert consultants to promptly implement measures to protect the health and safety of the Corporation’s work force and the public, as well as to ensure continuity of operations. The implementation of mandatory self-quarantine policies, travel restrictions, screening protocols, enhanced cleaning and sanitation measures, and social distancing measures, including directing the vast majority of its office staff and certain non-essential field staff to work from home at the onset of the pandemic in March 2020, revising shift schedules and increasing appropriate protective equipment, were proactively established. To date, the Corporation has not experienced any COVID-19 outbreaks at any of its locations.

The Corporation continues to monitor the developing COVID-19 situation to determine what, if any, additional measures might need to be taken to ensure that the health and safety of its people remain a top priority. In September, MEG safely returned to near-normal operations, with new safety measures in place, including the majority of staff returning to regular work locations. In December 2020, the Corporation reverted to having staff who are able to work remotely to do so, to reduce risk of exposure. Flexibility and adaptability continue to be integral to the risk management strategy.

Outlook

Announced December 7, 2020, MEG’s capital investment plan for 2021 of $260 million includes $245 million to be directed towards sustaining and maintenance capital and the remaining $15 million directed towards non-discretionary field infrastructure, regulatory and corporate capital costs.

MEG’s 2021 annual average bitumen production volumes are targeted to be in the range of 86,000 – 90,000 bbls/d and the Corporation’s 2021 non-energy operating costs and general and administrative expense are targeted to be in the range of $4.60 – $5.00 per barrel and $1.70 – $1.80 per barrel, respectively.

2021 Commodity Price Risk Management

To support MEG’s 2021 capital budget announced December 7, 2020, MEG entered into benchmark WTI fixed price hedges and enhanced WTI fixed price hedges with sold put options for approximately 47% (60% 1H, 33% 2H) of forecast bitumen production at an average price of US$46.66 per barrel. These hedges were put in place to protect funding of the Corporation’s 2021 capital program with internally generated cash flow down to a US$30 per barrel WCS price and to protect MEG’s balance sheet. The first half weighting of these hedges reflect the first half weighting of MEG’s capital investment profile as well as the uncertainty regarding pace of 2021 economic recovery at time of execution.

MEG has hedged approximately 23% of its forecast Edmonton WTI:WCS differential exposure (41% 1H, 5% 2H) at an average differential of US$13.42 per barrel. MEG has also hedged approximately 40% of its expected 2021 condensate requirements at a landed-at-Edmonton price of 96% of WTI, approximately 35% of expected 2021 natural gas requirements at an average price of C$2.62 per GJ and fixed the sales price on approximately 25% of expected 2021 power available for sale at an average price of C$62.80 per MW. The table below reflects MEG’s 2021 hedge positions.