Quarterly / Earnings Reports | Third Quarter (3Q) Update

MEG Energy Reports Q3 2019 Results

Share Print Bookmark    |    Wednesday,October 30,2019

• Adjusted funds flow of $192 million ($0.63 per share) and $152 million free cash flow in the quarter. For the nine months ended September 30, 2019, MEG has generated free cash flow of $443 million;
  
  
• Bitumen production volumes of 93,278 barrels per day (bbls/d) at a steam-oil-ratio (SOR) of 2.26;
  
  
• Record low net operating costs of $4.30 per barrel, supported by low non-energy operating costs of $4.22 per barrel and strong power sales which had the impact of offsetting 95% of per barrel energy operating costs resulting in a net energy operating expense of $0.08 per barrel;
  
  
• Average AWB blend sales price net of transportation and storage costs at Edmonton of US$41.60 which was in-line with the posted AWB index price for the quarter, notwithstanding 44% Enbridge mainline apportionment, highlighting the value of MEG's North American marketing strategy;
  
  
• Total capital expenditures of $40 million, primarily consisting of sustaining and maintenance capital; and
  
  
• Year-to-date repayment of $481 million of outstanding long-term debt, including $88 million subsequent to the quarter. Management remains committed to applying all free cash flow after sustaining capital to further debt reduction.

"In the first nine months of the year, MEG has generated $569 million of adjusted funds flow which is almost triple our full year 2019 capital investment plan of $200 million" says Derek Evans, President and Chief Executive Officer. "We remain focused on driving efficiencies in our business from an operational and cost perspective and will continue to direct all available free cash flow to debt repayment."

Bitumen production averaged 93,278 bbls/d in the third quarter of 2019, a 6% decrease over the same period in 2018 due to the impact of the Alberta Government's mandated production curtailment program which came into effect January 1, 2019. Third quarter 2019 production was 4% lower than second quarter 2019 production levels as fewer third-party curtailment credits were available for purchase. Bitumen sales exceeded bitumen production by 1,714 bbls/d during the third quarter of 2019 due primarily to the timing of sales over quarter end.

Notwithstanding the 6% decrease in production level year over year, third quarter 2019 per barrel non-energy operating costs of $4.22 and per barrel net operating costs of $4.30 were better than third quarter 2018 per barrel non-energy and net operating costs of $4.38 and $4.34, respectively, due primarily to higher bitumen sales volumes. The Corporation now expects non-energy operating expenses in the range of $4.75 - $5.00 per barrel in 2019.  Energy operating costs of $1.51 per barrel in the third quarter of 2019 were largely offset by strong power revenues of $1.43 per barrel, compared to energy operating costs and power revenues of $1.50 and $1.54 per barrel respectively for the same period in 2018. 

General and administrative ("G&A") expense of $1.66 per barrel of production in the third quarter of 2019 represents an 8% decrease from second quarter 2019, due primarily to the timing of expenses. The Corporation continues to expect G&A expense in the range of $1.95 - $2.05 per barrel in 2019.

Blend Sales Pricing and North American Market Access

MEG realized a third quarter 2019 average AWB blend sales price of US$45.63 per barrel compared to US$51.72 per barrel in the second quarter of 2019. The change in average AWB blend sales price quarter over quarter is primarily due to a US$3.37 per barrel reduction in the benchmark WTI index combined with WTI:AWB differentials at Edmonton widening to US$14.52 per barrel from US$12.32 per barrel and at the U.S. Gulf Coast ("USGC") widening to a discount of US$2.50 from a premium of US$1.64 per barrel. MEG sold 33% (26% via pipeline and 7% via rail) of its sales volumes to the USGC market in the third quarter of 2019 compared to 34% (29% via pipeline and 5% via rail) in the second quarter of 2019.

Transportation and storage costs averaged US$5.74 per barrel of AWB blend sales in the third quarter of 2019 compared to US$5.60 per barrel of AWB blend sales for second quarter of 2019 and US$5.00 per barrel of AWB blend sales in third quarter of 2018.

Excluding transportation and storage costs upstream of the Edmonton index sales point, MEG's net AWB blend sales price at Edmonton averaged US$41.60 per barrel in the third quarter of 2019 compared to the posted AWB index price at Edmonton of US$41.93. Notwithstanding that Enbridge mainline apportionment averaged 44%, MEG was able to capture pricing in-line with the Edmonton index on its barrels as a result of its marketing and storage assets ability to move barrels toward higher value markets as well as provide flexibility to avoid the price constrained post-apportionment market at Edmonton. MEG's average pricing against the AWB index price at Edmonton should improve further once MEG's contracted capacity on the Flanagan and Seaway pipeline system doubles to 100,000 bbls/d of AWB blend in mid-2020.

Despite 44% average Enbridge mainline apportionment in the quarter, MEG was required to sell less than 5% of its blend sales into the price constrained post-apportionment market at Edmonton in the third quarter of 2019. These post-apportionment sales typically receive a significant discount to the AWB index price at Edmonton. Avoiding the discounted pricing received by industry in the price constrained post-apportionment market highlights the strategic value of MEG's North American marketing strategy.

MEG's AWB blend sales by rail in the third quarter were 19,560 bbls/d compared to 23,443 bbls/d in the second quarter of 2019.  47% of sales by rail in the third quarter of 2019 were delivered to the USGC compared to 28% in the second quarter of 2019, with the remainder sold at Edmonton. Subject to market conditions at the time, MEG anticipates being in a position to fully utilize its 30,000 bbls/d of rail capacity at the Bruderheim rail terminal in 2020 once the results of the Alberta Petroleum Marketing Commission's crude by rail asset divestiture process are announced.  MEG understands that the completion of the process is anticipated to be some time in 2019.

Adjusted Funds Flow and Net Earnings

During the third quarter of 2019, MEG's bitumen realization averaged $53.37 per barrel, compared to $62.23 per barrel in the second quarter of 2019 and $49.63 per barrel in the third quarter of 2018 and was impacted by the same primary factors as average AWB blend sales price.

MEG's cash operating netback averaged $32.44 per barrel in the third quarter of 2019, compared to $37.88 per barrel in second quarter of 2019 and $24.01 per barrel in third quarter of 2018.  The cash operating netback in the third quarter of 2019 compared to the second quarter of 2019 reflects a lower realized bitumen sales price partially offset by lower hedging losses.

Adjusted funds flow was impacted by the same primary factors as cash operating netback, resulting in adjusted funds flow of $192 million in the third quarter of 2019, compared to $227 million in the second quarter of 2019 and $116 million in the third quarter of 2018.

The Corporation recognized net earnings of $24 million in the third quarter of 2019 compared to a net loss of $64 million in the second quarter of 2019 and net earnings of $118 million during the third quarter of 2018. The decrease during the third quarter of 2019 compared to the same period of 2018 is due to an unrealized foreign exchange loss and a lower unrealized gain on commodity risk management partially offset by a higher cash operating netback.

Capital Expenditures

Capital expenditures in the third quarter of 2019 totaled $40 million with the majority of expenditures directed toward sustaining and maintenance capital.

In the first nine months of 2019 capital expenditures totaled $126 million relative to MEG's 2019 capital budget of $200 million which was set during the implementation of the Alberta Government's mandated production curtailment program in January 2019. Over the course of 2019 MEG has been successful in finding capital cost savings and undertaking minor scope changes that will allow the Corporation to deliver its original $200 million budget for approximately $170 million. As a result, based on expected operational benefits, including plant integrity and turn-around management, MEG has shifted into 2019 approximately $30 million of expected 2020 capital expenditures to accelerate the completion of the Corporation's in-progress brownfield project at the Phase 2B central processing facility which includes incremental steam generation, water handling and oil treating capacity.  This project, which was initiated in 2018, is expected to be completed in the first half of 2020.

Debt Repayment

Up to October 30^th MEG has repaid $481 million of outstanding long-term debt in 2019, including $385 million during the third quarter of 2019 and $88 million subsequent to the quarter. Annualized interest savings from these repurchases are expected to be approximately $30 million. These annualized interest savings, when combined with the annualized $14 million of credit fee savings associated with the amendment of MEG's revolving credit facility announced July 30, 2019 brings aggregate credit-related cash cost savings contribution to annual free cash flow to approximately $44 million.

Management remains committed to its stated strategy of continuing to direct all available free cash flow, after funding sustaining capital, toward debt reduction. 

Outlook

MEG is revising its 2019 full year production guidance from 90,000 - 92,000 bbls/d to 92,000 - 93,000 bbls/d to reflect year to date production results and the continued impact of the Alberta Government's mandated production curtailment.  MEG is also revising its 2019 full year non-energy operating cost guidance from $4.75 - $5.25 per barrel to $4.75 - $5.00 per barrel.