Quarterly / Earnings Reports | Second Quarter (2Q) Update

MEG Energy Reports Second Quarter 2019 Results

Share Print Bookmark    |    Tuesday,July 30,2019

MEG Energy Corp. reported its second quarter 2019 operational and financial results.

Highlights include:

• Record free cash flow of $195 million and adjusted funds flow of $227 million ($0.76 per share) in the quarter. For the 6 months ended June 30, 2019 MEG generated free cash flow of $293 million;
• Bitumen production volumes of 97,288 barrels per day (bbls/d) at a steam-oil-ratio (SOR) of 2.16;
• Average AWB blend sales price net of transportation and storage costs at Edmonton of US$47.77 beat the posted AWB index price for the quarter, notwithstanding 41% Enbridge mainline apportionment, highlighting the value of MEG’s North American marketing strategy;
• Total cash capital investment of $32 million in the quarter as part of the $200 million 2019 capital program. Previously announced $75 million discretionary capital will not be sanctioned in 2019;
• Net operating costs of $4.66 per barrel, supported by non-energy operating costs of $4.53 per barrel and strong power sales which had the impact of offsetting 93% of per barrel energy operating costs resulting in a net energy operating expense of $0.13 per barrel; and
• Subsequent to the quarter, MEG repaid the outstanding 1^st lien term loan balance of approximately $285 million and amended and restated its existing credit facilities to have new 5-year terms and total available credit of $1.3 billion. MEG remains committed to debt reduction going forward and will continue to direct available free cash flow to debt repayment. Cash cost savings of approximately $42 million per year are expected from the combination of the reduction in credit fees under the new credit facilities, the 1^st lien debt repayment and the disposal or sale of non-core assets announced in the quarter.

Capital Investment

Total cash capital investment in the second quarter of 2019 totaled $32 million relative to MEG’s 2019 base capital budget of $200 million. Capital investment in the period was primarily directed towards non-discretionary capital to sustain and maintain current production capacity level and investment to complete work already underway on the Phase 2B Brownfield expansion.

Outlook

MEG reiterates its 2019 capital investment plan of $200 million and confirms that the previously announced 2019 discretionary capital budget of $75 million will not be sanctioned in 2019 given provincially mandated production curtailment, current lack of clarity on market egress and on-going prioritization of debt repayment. The 2019 capital budget is primarily designed to sustain production capability at 100,000 bbls/d while completing the in-progress expansion of the oil treating capacity at the Corporation’s central processing facility to approximately 120,000 bbls/d.

While MEG has the ability to average 100,000 bbls/d of production, the current 2019 production guidance of 90,000 to 92,000 bbls/d reflects year to date production and the expected continued impact of the Alberta government’s mandated production curtailment.  Subject to financial and operational considerations, MEG will continue to opportunistically purchase production credits from other upstream producers who choose to sell a portion of their mandated production allocation.

Operational Update

“Record free cash flow of $195 million generated during the second quarter demonstrates MEG’s ability to generate substantial value in a volatile market with our low-cost structure and our strategic access to high-valued markets,” says Derek Evans, President and Chief Executive Officer. “Third-party curtailment credits purchased in the second quarter allowed us to opportunistically increase production to levels near our current productive capacity of 100,000 bbls/d and enhance funds flow in a favourable pricing environment despite on-going government mandated production curtailments. Year to date, we have generated $378 million of adjusted funds flow, almost double our full year 2019 capital investment plan of $200 million with debt reduction remaining a top priority for free cash flow. Based on current strip pricing, we expect our total net debt to EBITDA to be approximately 3.0x by the end of 2019″.

Bitumen production averaged 97,288 bbls/d in the second quarter of 2019, a 36% increase over the same period in 2018 which was impacted by a large-scale turnaround. Second quarter 2019 production was 12% higher than first quarter 2019 production levels as purchased third-party curtailment credits allowed MEG to produce at higher levels than otherwise allowed under the Alberta Government’s mandated production curtailment which came into effect January 1, 2019. Bitumen production exceeded bitumen sales by 2,168 bbls/d during the second quarter due to a combination of increased production, higher June apportionment levels and the timing of sales over quarter end.

Second quarter 2019 per barrel non-energy operating costs of $4.53 and net operating costs of $4.66 reflects higher bitumen sales volumes compared to second quarter 2018 per barrel non-energy and net operating costs of $5.47 and $5.64 respectively. Energy operating costs of $1.78 per barrel in the second quarter of 2019 were largely offset by strong power revenues of $1.65 per barrel, compared to energy operating costs and power revenues of $1.79 and $1.62 per barrel respectively for the same period in 2018.

General and administrative (“G&A”) expense of $1.81 per barrel of production in the second quarter of 2019 represents a 20% decrease from first quarter 2019, due to increased production levels quarter over quarter and the impact of changes to staffing levels. The Corporation expects 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 strong pricing in the second quarter of 2019 with AWB blend sales price averaging US$51.72per barrel compared to US$44.40 per barrel in the first quarter of 2019 as a result of an improvement in both the WTI benchmark price and the WTI:AWB differential quarter over quarter. WTI:AWB differentials at Edmonton narrowed to US$12.32 from US$14.50 per barrel and in the Gulf Coast narrowed to a premium of US$1.64 from a discount of US$0.89 per barrel in first quarter of 2019. MEG sold 34% (29% via Flanagan and 5% via rail) of its sales volumes to the USGC market in the second quarter of 2019 compared to 31% (25% via Flanagan and 6% via rail) in the first quarter of 2019.