TSE:MEG MEG Energy Q1 2023 Earnings Report C$20.18 -0.28 (-1.37%) As of 04:00 PM Eastern Earnings HistoryForecast MEG Energy EPS ResultsActual EPSC$0.28Consensus EPS C$0.35Beat/MissMissed by -C$0.07One Year Ago EPSN/AMEG Energy Revenue ResultsActual Revenue$1.48 billionExpected Revenue$1.21 billionBeat/MissBeat by +$269.48 millionYoY Revenue GrowthN/AMEG Energy Announcement DetailsQuarterQ1 2023Date5/1/2023TimeN/AConference Call DateTuesday, May 2, 2023Conference Call Time8:00AM ETConference Call ResourcesConference Call AudioConference Call TranscriptSlide DeckPress ReleaseEarnings HistoryCompany ProfileSlide DeckFull Screen Slide DeckPowered by MEG Energy Q1 2023 Earnings Call TranscriptProvided by QuartrMay 2, 2023 ShareLink copied to clipboard.There are 8 speakers on the call. Operator00:00:00Good morning, ladies and gentlemen. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the MEG Energy 2023 Q1 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Operator00:00:25Then the number one on your telephone keypad. At this time, I would like to turn the conference over to Mr. Derek Evans, CEO. Please go ahead, sir. Speaker 100:00:40Thank you, Michelle, and good morning, everyone, and thank you for joining us to review MEG Energy's 2023 Q1 operating and financial results. With me on the call this morning are Ryan Kubik, our Chief Financial Officer Darling Gates, our Chief Operating Officer and Lyle Uzedesky, our General Counsel and Corporate Secretary. I'd like to remind our listeners that this call contains forward looking information. Please refer to the advisories in our disclosure documents filed on SEDAR and on our website. I'll keep my remarks brief today and refer listeners to yesterday's press release, along with that ensures nobody gets hurt, eliminates serious incidents and delivers operational excellence. Speaker 100:01:33I'm extremely proud of the safety, operating and financial performance delivered by our team. Their focus on safety, plant reliability, steam utilization and ongoing well optimization have all contributed to a strong operational quarter. Operations team have begun our scheduled turnaround at the Christina Lake facility. Our priority is to maintain safe and reliable operations throughout turnaround. Before I turn the call over to Darlene and Ryan to share details of our results, I'd like to Briefly touch on some of the first quarter highlights. Speaker 100:02:12Pitcherman production rose 6% to approximately 107,000 Natural Gas and Higher Power Prices. These strong operational results enabled our ongoing commitment to debt reduction. We continue to execute on our debt repayment strategy, repaying approximately CAD117 1,000,000 with net debt declining to US1 $1,000,000,000 approximately or approximately CAD1.4 billion Speaker 200:02:48at the Speaker 100:02:49end of Q1. Approximately 50% of 2023 free cash flow is being allocated to debt reduction, with the remainder being applied to share buybacks. Once we achieve the US600 $1,000,000 debt repayment target, MEG will return 100% free cash flow to our shareholders. I'll now ask Arlene Gates, our COO, to speak to our operating results and and ask Ryan Kubik, our CFO, to talk to our financial results. Before I open the call to questions, I'll provide an update Pathway Alliance's efforts this year. Speaker 100:03:23Darlene, over to you. Speaker 300:03:26Thanks, Derek, and good morning, everyone. In the Q1, MEG maintained its position as a leader in innovative and responsible energy development. The continued strong operational performance I will highlight today is underpinned by a commitment at all levels of our organization to ensure we take care of the safety of our employees, contractors and the communities in which we operate. In the Q1, we executed a high level of activity while achieving one of our lowest quarterly total recordable injury rate. In the past several years, at 0.24 incidents per 200,000 work hours, Our Q1 production averaged 107,000 barrels per day, a 6% increase over the same period. Speaker 300:04:13This production was delivered for Christine Lake at a top tier steam oil ratio of 2.25. Since exiting 2022 at record production rates, we've gained valuable knowledge surrounding water treatment optimization associated with the higher throughput rates at the facility. Our team's continuous improvement mindset has been instrumental in proactively managing us. Total operating expense is comprised of non energy and energy costs of $6.13 per barrel for the Q1. This is a 31% reduction from the same period last year. Speaker 300:04:51In the quarter, we continued to realize substantial benefits from our cogeneration facilities, which helps reduce energy operating costs net of power revenue of $1.36 per barrel. Non energy costs remained essentially flat from the same period a year ago at $4.77 per barrel, and that's in line with our full year guidance of $4.75 to $5.05 per barrel. As Derek mentioned, executing a safe and effective turnaround is a top operational priority for us Q2. This turnaround will be focused on our Phase 1 and 2 facilities and is expected to have a full year production impact of 6,000 barrels per day. This translates into a second quarter volumes outlook of approximately 84,000 to 88,000 barrels per day. Speaker 300:05:40Our teams recently completed safe ramp down of the facilities and have begun conducting scheduled maintenance focused on maintaining Regulatory Compliance and Delivering Improved Performance. Despite continued pressure on short cycle labor availability and associated service rates, I believe we're well positioned to deliver a productive and impactful turnaround. Turning to development. This quarter, we executed a robust winter drilling program. Preliminary results continue to validate quality of our long term resource base. Speaker 300:06:13We also kicked off our 2023 infill and redevelopment drilling program, which pairs high quality resource with proven innovative subsurface technologies. This supports our previously announced production guidance of 100,000 to 105,000 barrels per day. Looking ahead, we're focused on continuing to maintain a strong safety and environmental performance record to consistently deliver sustainable value to our shareholders. With that, I'll hand it over to Ryan. Speaker 400:06:43Thanks, Darlene. MEG generated $274,000,000 of adjusted funds flow or $0.94 per share in the Q1 of 2023. The 6% production increase over the Q1 of 2022 was more than offset by a 49% decrease in our bitumen realization after net transportation and storage expense. As a result, cash operating netback declined to $34 per barrel from $70 per barrel in the Q1 of 2022. In 2023, we sold 56% of our AWB blend in the U. Speaker 400:07:20S. Gulf Coast, generating a US2.25 dollars per barrel premium relative to the Edmonton AWB Index. In addition, operating expenses net of power revenue declined to 6 point $0.13 per barrel, reflecting a 78% increase in our realized power price and lower natural gas prices compared to the Q1 of 2022. Crown Royalties also declined to $3.18 per barrel as a result of lower bitumen revenue. We had estimated that our Christina Lake project would reach royalty payout late in Q1. Speaker 400:07:59However, advanced expenditure timing provided additional royalty shelter during the quarter and move that timing into early Q2. After funding $113,000,000 Capital Expenditures. MEG generated $161,000,000 of free cash flow for debt reduction and share buybacks in the Q1 of 2023. We repurchased US86 $1,000,000 of senior notes and ended the quarter with US1 $1,000,000,000 of net debt. In addition, we bought $103,000,000 or 4,900,000 MEG shares in the quarter at a weighted average price of $20.88 Thanks. Speaker 400:08:41And with that, I'm going to hand it back to Derek. Speaker 100:08:45Thanks, Ryan, and I apologize for the noise in the background. It seems to be lots of fire engines rolling around. Before we move into questions, I'd like to share an update on the Pathways Alliance. MEG, along with its Pathway Alliance peers, is progressing pre work on The proposed foundational carbon capture and storage project, which will transport CO2 via pipeline from multiple oil sands facilities to be stored safely and permanently in the Cold Lake region of Alberta. Significant amount of work is underway with the Pathways Alliance as we also progress environmental assessments and early engineering work for the Carbon Capture and Storage Project and also Advanced Other Technologies. Speaker 100:09:27This quarter, the alliance made progress in engineering by awarding a contract to a global engineering firm to continue development plans for the 400 kilometer CO2 Transportation Pipeline. Conversations with the provincial and federal governments about their role in partnering with us to advance. Decarbonization efforts continue to go well. On March 28, the Canadian federal government announced measures in its 2023 budget to provide greater policy certainty to support and incentivize investment in clean technologies, including CCS projects that are critical to meeting Canada's emissions reduction goals. We continue to engage with federal and provincial governments in aligning how the Pathways Alliance can support Canada in reaching its climate commitments. Speaker 100:10:14As I bring my remarks to Speaker 400:10:15a close, I once again Speaker 100:10:16want to extend my thanks to our team for their commitment and perseverance. I'm proud of what we've been able to and confident in our future and our commitment to sustainable, innovative and responsible energy development. On behalf of MEG's Board of Directors and our management team, I want to thank you for your continued support. With that, I'll turn the call back over to Michelle to begin the Q and A. Operator00:10:39Thank you, sir. Ladies and gentlemen, we will now begin the question and answer one moment please for your first question. Your first question will come from Greg Pardy at RBC Capital Markets. Please go ahead. Speaker 300:11:19Mr. Pardy, Operator00:11:20your line is open. Your next question will come from Menno Holsoff at TD Securities. Please go ahead. Speaker 500:11:37Thanks and good morning everyone else. I'll start with a question on growth. On the last call, Derek, I believe you talked about potentially growing production to 120,000 barrels per day over the next 2 to 3 years. But can you just elaborate on how you arrived at that target? Is it largely being driven by the 20,000 When we think about capital efficiencies for that growth, how much of it can be delivered through lower capital Opportunities like redrilling of existing pads versus higher cost options like new pads. Speaker 100:12:23No, I'll take a cut at that and Darlene may want to step in with some details on re drills and the capital Going from $110,000 to $120,000 is really predicated on 2 things. It's predicated on, well, it's really 3. 1, that our Investors do not want us spending large amounts of capital growing. These typically types of expenditures we're talking about are really bottlenecking expenditures inside of our facility as well as short cycle redrills And that sort of work that has very high capital or very low capital sort of reinvestment costs, very Quick payout in a matter of months. But I think the way that it's not being driven by our takeaway capacity in in any way, shape or form. Speaker 100:13:24So it's nice to have that takeaway capacity. We see the biggest value of the takeaway capacity being that it's really going to tighten up that WCS differential even tighter as it pulls Up to 600,000 barrels a day of product away from the U. S. Gulf Coast and puts it on the West Coast. Darlene, I don't know if you want to talk a little bit about Capital Reinvestment Efficiency. Speaker 300:13:50Yes. Thanks, Mano, and thanks, Dirk. I think Dirk hit most of the main points, but a couple of adds I would Throw in there is we have some pretty exciting new pad development from our pad design that the team is Working on pretty hard that we'll see come out in the next 1 to 2 years, and that's going to help us really drive that capital efficiency for the new pads. Derek really reinforced, our program has a lot of exciting opportunity as we go and use the technology for the 4 d seismic that's helping us really optimize the existing pads and that gets after those quick redrills and infills that we're pursuing at this time. I'd also always want to do another shout out to the optimization team that does from the facilities and the workovers that our team is working on. Speaker 300:14:38Again, Just keep dialing in the reservoir as we learn it to get more familiar with it. And then looking to the future, our winter program, as I mentioned, Looks pretty exciting to us. We've got a lot of great reservoir to go pursue. And then the surface side of it is really going after that capital efficiency cost opportunity. So a lot of exciting work on the way, and I think will really help capture those capital efficiencies. Speaker 500:15:08Excellent. Thanks, Darlene and Derek for that. Just the second question relates to the 500,000 barrels per month of contracted dock space on the Gulf Coast. I guess my question is, is that the endgame for dock space? Or is there potential to expand that. Speaker 500:15:26And then I guess if we take it to a higher level, what are your midterm goals for growing export capacity? Speaker 100:15:35So, now it's Derek. Look, 500,000 barrels a day is basically the in the U. S. Gulf Coast about what you can put in an So that's we have the capability of effectively loading an Aframax a month at At the current time, that is not our ambition. We would love to be able to have a better or clearer Like to increase volumes off the U. Speaker 100:16:04S. Gulf Coast or across the dock. So you should think about it as a starting point, not endpoint and that if it's going to grow, it should grow in sort of 500,000 barrel a day type of pieces. As we think about our export strategy, I think it's long been a desire of Western Canadian To get their product, their heavy oil to the U. S. Speaker 100:16:33Gulf Coast. And now that everybody is successfully doing that, we've managed To move the pinch point in terms of pricing and move the pricing power away from PADD II down to PADD III. Our strategy is we should be working hard to find other buyers for that product to take that product away from the U. S. Gulf Coast and make sure that we're very much better balanced between supply and refiner demand in that area. Speaker 100:16:59So I don't want to get into too specifics, but you've heard us continue to talk about the big driver in the WCS differential coming in as tight as it has been, incremental barrels moving across the dog and continue and you should expect us to try and continue to move volumes in excess Thanks, Matt. Operator00:17:45Your next question will come from John Royall at JPMorgan. Please go ahead. Speaker 600:17:52Hi, good morning. Thanks for taking my question. Speaker 700:17:55I just wanted to see if there was an update to the timing on reaching your net debt for I think year end 2024 was the most recent and your release from 1Q just says beyond 2023 occurring oil prices. So Is year end next year still the right time line to think about or is there any update there? Speaker 400:18:16Hi, John, it's Ryan. I would say that with the narrowing differentials we've seen over the last little while, we've seen the cash flow free cash flow coming in a little bit higher than we had anticipated. And that's allowing us to repay debt maybe a little bit sooner. So it is into 2024 at current oil prices, maybe in the second half of 2024 at this point in time relative to the end of 2024 previously. So, the longer we see narrower differentials, higher oil prices, it's going to But still second half twenty twenty four ish. Speaker 700:18:49Okay, great. Thank you. And then, could you Just talk a little bit about the drivers of the working capital headwind in 1Q. I think it was about 110,000,000 Do you expect any reversal in 2Q or in 2023 in general? Speaker 400:19:04A lot of that depends on the oil price. The biggest driver is our accounts receivable rising. This quarter, we did see an increase in AR around purchased product sales. We did see WTI go down relative to the Q1 of Speaker 100:19:18the prior period relative to Speaker 400:19:21the end of the year, I should say. And we still saw our accounts receivable go up because we did sell some purchased product. So that was the main driver. We did have some interest payments that always impacts the Q1 as well. Those are probably the 2 big drivers. Speaker 400:19:39We could see it reverse if oil prices fall, I guess, but I would say the best view is that we'll see it pretty stable at this point in time. Speaker 700:19:50Thank you very much. Operator00:19:54Your next question will come from Neil Mehta at Goldman Sachs. Please go ahead. Speaker 200:20:01Good morning, Derek and team. Thanks for taking the time. I guess the first question is around sustaining CapEx. It's Tracking around $400,000,000 this year. How do you see that evolving over time and where are the puts and takes, right, ranging from inflation to volumes? Speaker 100:20:20Neil, it's Derek. Thank you for that question. It's one that we talk about often, both externally and internally. And you hit on the biggest single unknown, which is inflation and what is the impact. So over the last 2 years, you've seen that sustaining capital move up fairly aggressively to that We're in the process of and continuing to watch inflation this year. Speaker 100:20:57We're still seeing inflationary pressures on two fronts, on basically salaries. Wages are still a hot button moving anywhere in that 5% to 7% in both the field and in the office side of the business. But I'd also say the other aspect on this is availability people. And that cuts into your sustaining capital in 2 ways. 1, it takes longer. Speaker 100:21:25If you can't find the people, it takes longer to get the And if you can't find experienced people, the effectiveness of and the cost effectiveness And the safety and everything else that's associated with green hands or inexperienced people, adds to your cost structure and also adds to So it's too early for us to really be able to tell you what we think is going to happen in terms of inflation on that sustaining capital number, but that is the single biggest driver at this point in time. Speaker 200:22:02Thanks, Derek. And the follow-up is on WCS and then Pemex associated with that. So we've seen WCS tighten up a lot here. How much of this is, do you think, structural versus seasonal kind of an element to us that seems more structural nature, especially given The OPEC cuts, but curious on your perspective on that. And then as it relates to TMX and the cost overruns, How should we think about any financial impact that would have on the shippers recognizing that's a moving target right Speaker 100:22:39Yes. So structural versus seasonal on WCS. My thesis and our thesis at MEG has been that this is structural. This is largely been Driven by increased loads across the dock to at least in this year's, The biggest driver has been incremental loads going into China as they've come out of their COVID shutdowns. We don't see that dropping off. Speaker 100:23:17So we would say that, that is a structural piece and you should expect to see that continue. I would be remiss if I Say there is some seasonality associated with this, but it's at the margin and I think quite small. I think though as you move, you roll the clock forward and you think about what's going on in that more macro picture with The Mexican refinery, Dos Bocas, coming up at somewhere in the neighborhood of 340,000 barrels. TMX I would expect that you could see further structural tightening in that market as we drive forward. So I think the outlook on WCS is quite positive and Should be very supportive of our business going forward and but you will continue to see variations in that differential, which sort of well understood from a seasonal perspective. Speaker 100:24:30On TMX, I've got to we are a shipper. We Ship about 20,000 barrels a day or we will be shipping 20,000 barrels a day of dilbit. It's still too early for us to be able to talk to with any degree of certainty, what the impact of those cost overruns will be. We are precluded from providing information by virtue of an NDA that we have So I really can't elaborate or talk about in great detail about this other than to say this is an important piece of infrastructure for the Western Canadian Sedimentary Via Basin. It provides another 6 100,000 barrels a day of egress. Speaker 100:25:19And especially when you think that our major market is the U. S. Gulf Coast and it's pulling that 600,000 barrels a Stay away from there and it's going to impact the WCS differential, we believe, positively on our whole business. Talking about a toll on a specific part of that line, probably wouldn't do it justice in terms of the economic value that one to bring to the table for us. Speaker 200:25:49And Derek, the follow-up on this, I don't know if you can comment on it, but our understanding of TMX, While there was a cost overrun, it's still tracking on schedule from a timing perspective. Is that fair? Speaker 100:26:02Yes, that's the that's our understanding as well. Speaker 200:26:06Okay. Thank you, sir. Speaker 100:26:08Thanks, Neil. Operator00:26:12Your next question comes from Jesus Sanchez at Castanar. Please go ahead. Speaker 600:26:20Hi. Thank you for taking my question. A couple of questions for Ryan. In the reconciliation from funds from operation to adjusted fund flow, We have $87,000,000 in realized equity price risk management gain, which is available from last quarter. Maybe you can give some explanation about this account. Speaker 600:26:44Thank you. And the second question will be about the return on shareholders. We have spent €120,000,000 in debt repayment, but our net debt is flat, €13.80 C9 $1,000,000 of Canadian's platform last quarter and also the repurchases. We have spent $100,000,000 in repurchases, but Only the share account decreased by half of the €5,000,000 That we have reported, which accounts only for €50,000,000 So there's €50,000,000 there, €170,000,000 over there in paper payments. Meg, you can give us some color about that. Speaker 400:27:32Sure. Write them down, so remind me if I don't The first one was on the $87,000,000 of equity price risk management. That was the equity risk management hedge that was put in place To manage the risk around the LTI that was issued back in 2020 at a relatively low price in the $1.57 range. And so we did a good piece of business there, brought in about $120,000,000 to the company by heading that LTI position. It did settle in the period, the 2020 LTI settled during the period. Speaker 400:28:10And so the $87,000,000 that you're seeing there The realized gain from that position, we had recognized for our accounting purposes about 78,000,000 at the end of the year. So it went from unrealized $78,000,000 to realized $87,000,000 $9,000,000 move during the quarter. So you're just seeing the impact of a shift to realized from unrealized, if that makes sense. Yes. You had a question on net debt, why it only fell why it didn't fall maybe as much as you would have anticipated. Speaker 400:28:44The reason for that is the earlier question on working capital build. The working we did generate $160,000,000 of free cash flow during the period. We had a couple of $100,000,000 of cash available to repay debt and buy back shares. But with that $160,000,000 of free cash flow, A portion of that is sitting in accounts receivable and wasn't actually collected as cash. So cash fell to buyback stock and the debt during the period and a portion of the free cash flow that we generated is sitting in accounts receivable yet to be collected. Speaker 400:29:23So that's the impact you're seeing there. Net debt did fall. It just didn't fall as much as you might have expected because The cash balance fell to help us buy back that $103,000,000 of stock and about $117,000,000 So that was your second question, working capital build. And then the last question was on the number of shares. We bought back 4,900,000 shares during the period, but the actual share balance didn't fall that much. Speaker 400:29:52The reason for that is we actually issued some LTI during the period. So we did have an offsetting issue of stock. Not all the LTI is cash based. Some of it is share based and was issued in shares during the period. Speaker 600:30:12Thank you for displaying some. Thank you very much, Brian. Speaker 400:30:15You're welcome. Operator00:30:31There are no further questions on the phone lines. So I turn the conference back to Derek Evans for any closing remarks. Speaker 100:30:39Thank you, Michelle, and thank you to everybody that joined us this morning for our Q1 results Conference Call. We're excited about what we're able to achieve this last year and look forward to updating you on our operational performance return of capital program when we release our Q2 results in July. Hope everybody has a great day and thank you again for joining us. Operator00:31:01Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallMEG Energy Q1 202300:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsSlide DeckPress Release MEG Energy Earnings HeadlinesMEG Energy price target lowered to C$24 from C$28 at National BankApril 26 at 11:23 PM | markets.businessinsider.comMEG Energy Corp.'s (TSE:MEG) largest shareholders are individual investors with 50% ownership, institutions own 50%April 24, 2025 | finance.yahoo.comCrypto’s crashing…but we’re still profitingMost traders are panicking right now. Bitcoin’s dropping. Altcoins are bleeding. The stock market’s a mess. The news is screaming fear. But while most traders watch their portfolios tank…April 28, 2025 | Crypto Swap Profits (Ad)MEG Energy Announces First Quarter of 2025 Results and Conference CallApril 23, 2025 | finance.yahoo.comMEG Energy price target lowered to C$30 from C$33 at ScotiabankApril 12, 2025 | finance.yahoo.comMEG Energy price target lowered to C$28 from C$32 at CIBCApril 11, 2025 | markets.businessinsider.comSee More MEG Energy Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like MEG Energy? Sign up for Earnings360's daily newsletter to receive timely earnings updates on MEG Energy and other key companies, straight to your email. Email Address About MEG EnergyMEG Energy (TSE:MEG) is engaged in in situ oil sands development and production in Alberta, Canada. As of March 2021, the company reported estimated net proved and probable reserves of 2 billion barrels of oil equivalent. Net production averaged 82,000 barrels per day in 2020.View MEG Energy ProfileRead more More Earnings Resources from MarketBeat Earnings Tools Today's Earnings Tomorrow's Earnings Next Week's Earnings Upcoming Earnings Calls Earnings Newsletter Earnings Call Transcripts Earnings Beats & Misses Corporate Guidance Earnings Screener Earnings By Country U.S. Earnings Reports Canadian Earnings Reports U.K. Earnings Reports Latest Articles Alphabet Rebounds After Strong Earnings and Buyback AnnouncementMarkets Think Robinhood Earnings Could Send the Stock UpIs the Floor in for Lam Research After Bullish Earnings?Texas Instruments: Earnings Beat, Upbeat Guidance Fuel RecoveryMarket Anticipation Builds: Joby Stock Climbs Ahead of EarningsIs Intuitive Surgical a Buy After Volatile Reaction to Earnings?Seismic Shift at Intel: Massive Layoffs Precede Crucial Earnings Upcoming Earnings AstraZeneca (4/29/2025)Booking (4/29/2025)DoorDash (4/29/2025)Honeywell International (4/29/2025)Mondelez International (4/29/2025)PayPal (4/29/2025)Regeneron Pharmaceuticals (4/29/2025)Starbucks (4/29/2025)American Tower (4/29/2025)América Móvil (4/29/2025) Get 30 Days of MarketBeat All Access for Free Sign up for MarketBeat All Access to gain access to MarketBeat's full suite of research tools. Start Your 30-Day Trial MarketBeat All Access Features Best-in-Class Portfolio Monitoring Get personalized stock ideas. Compare portfolio to indices. Check stock news, ratings, SEC filings, and more. Stock Ideas and Recommendations See daily stock ideas from top analysts. Receive short-term trading ideas from MarketBeat. Identify trending stocks on social media. Advanced Stock Screeners and Research Tools Use our seven stock screeners to find suitable stocks. Stay informed with MarketBeat's real-time news. Export data to Excel for personal analysis. Sign in to your free account to enjoy these benefits In-depth profiles and analysis for 20,000 public companies. Real-time analyst ratings, insider transactions, earnings data, and more. Our daily ratings and market update email newsletter. Sign in to your free account to enjoy all that MarketBeat has to offer. Sign In Create Account Your Email Address: Email Address Required Your Password: Password Required Log In or Sign in with Facebook Sign in with Google Forgot your password? Your Email Address: Please enter your email address. Please enter a valid email address Choose a Password: Please enter your password. Your password must be at least 8 characters long and contain at least 1 number, 1 letter, and 1 special character. Create My Account (Free) or Sign in with Facebook Sign in with Google By creating a free account, you agree to our terms of service. This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
There are 8 speakers on the call. Operator00:00:00Good morning, ladies and gentlemen. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the MEG Energy 2023 Q1 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Operator00:00:25Then the number one on your telephone keypad. At this time, I would like to turn the conference over to Mr. Derek Evans, CEO. Please go ahead, sir. Speaker 100:00:40Thank you, Michelle, and good morning, everyone, and thank you for joining us to review MEG Energy's 2023 Q1 operating and financial results. With me on the call this morning are Ryan Kubik, our Chief Financial Officer Darling Gates, our Chief Operating Officer and Lyle Uzedesky, our General Counsel and Corporate Secretary. I'd like to remind our listeners that this call contains forward looking information. Please refer to the advisories in our disclosure documents filed on SEDAR and on our website. I'll keep my remarks brief today and refer listeners to yesterday's press release, along with that ensures nobody gets hurt, eliminates serious incidents and delivers operational excellence. Speaker 100:01:33I'm extremely proud of the safety, operating and financial performance delivered by our team. Their focus on safety, plant reliability, steam utilization and ongoing well optimization have all contributed to a strong operational quarter. Operations team have begun our scheduled turnaround at the Christina Lake facility. Our priority is to maintain safe and reliable operations throughout turnaround. Before I turn the call over to Darlene and Ryan to share details of our results, I'd like to Briefly touch on some of the first quarter highlights. Speaker 100:02:12Pitcherman production rose 6% to approximately 107,000 Natural Gas and Higher Power Prices. These strong operational results enabled our ongoing commitment to debt reduction. We continue to execute on our debt repayment strategy, repaying approximately CAD117 1,000,000 with net debt declining to US1 $1,000,000,000 approximately or approximately CAD1.4 billion Speaker 200:02:48at the Speaker 100:02:49end of Q1. Approximately 50% of 2023 free cash flow is being allocated to debt reduction, with the remainder being applied to share buybacks. Once we achieve the US600 $1,000,000 debt repayment target, MEG will return 100% free cash flow to our shareholders. I'll now ask Arlene Gates, our COO, to speak to our operating results and and ask Ryan Kubik, our CFO, to talk to our financial results. Before I open the call to questions, I'll provide an update Pathway Alliance's efforts this year. Speaker 100:03:23Darlene, over to you. Speaker 300:03:26Thanks, Derek, and good morning, everyone. In the Q1, MEG maintained its position as a leader in innovative and responsible energy development. The continued strong operational performance I will highlight today is underpinned by a commitment at all levels of our organization to ensure we take care of the safety of our employees, contractors and the communities in which we operate. In the Q1, we executed a high level of activity while achieving one of our lowest quarterly total recordable injury rate. In the past several years, at 0.24 incidents per 200,000 work hours, Our Q1 production averaged 107,000 barrels per day, a 6% increase over the same period. Speaker 300:04:13This production was delivered for Christine Lake at a top tier steam oil ratio of 2.25. Since exiting 2022 at record production rates, we've gained valuable knowledge surrounding water treatment optimization associated with the higher throughput rates at the facility. Our team's continuous improvement mindset has been instrumental in proactively managing us. Total operating expense is comprised of non energy and energy costs of $6.13 per barrel for the Q1. This is a 31% reduction from the same period last year. Speaker 300:04:51In the quarter, we continued to realize substantial benefits from our cogeneration facilities, which helps reduce energy operating costs net of power revenue of $1.36 per barrel. Non energy costs remained essentially flat from the same period a year ago at $4.77 per barrel, and that's in line with our full year guidance of $4.75 to $5.05 per barrel. As Derek mentioned, executing a safe and effective turnaround is a top operational priority for us Q2. This turnaround will be focused on our Phase 1 and 2 facilities and is expected to have a full year production impact of 6,000 barrels per day. This translates into a second quarter volumes outlook of approximately 84,000 to 88,000 barrels per day. Speaker 300:05:40Our teams recently completed safe ramp down of the facilities and have begun conducting scheduled maintenance focused on maintaining Regulatory Compliance and Delivering Improved Performance. Despite continued pressure on short cycle labor availability and associated service rates, I believe we're well positioned to deliver a productive and impactful turnaround. Turning to development. This quarter, we executed a robust winter drilling program. Preliminary results continue to validate quality of our long term resource base. Speaker 300:06:13We also kicked off our 2023 infill and redevelopment drilling program, which pairs high quality resource with proven innovative subsurface technologies. This supports our previously announced production guidance of 100,000 to 105,000 barrels per day. Looking ahead, we're focused on continuing to maintain a strong safety and environmental performance record to consistently deliver sustainable value to our shareholders. With that, I'll hand it over to Ryan. Speaker 400:06:43Thanks, Darlene. MEG generated $274,000,000 of adjusted funds flow or $0.94 per share in the Q1 of 2023. The 6% production increase over the Q1 of 2022 was more than offset by a 49% decrease in our bitumen realization after net transportation and storage expense. As a result, cash operating netback declined to $34 per barrel from $70 per barrel in the Q1 of 2022. In 2023, we sold 56% of our AWB blend in the U. Speaker 400:07:20S. Gulf Coast, generating a US2.25 dollars per barrel premium relative to the Edmonton AWB Index. In addition, operating expenses net of power revenue declined to 6 point $0.13 per barrel, reflecting a 78% increase in our realized power price and lower natural gas prices compared to the Q1 of 2022. Crown Royalties also declined to $3.18 per barrel as a result of lower bitumen revenue. We had estimated that our Christina Lake project would reach royalty payout late in Q1. Speaker 400:07:59However, advanced expenditure timing provided additional royalty shelter during the quarter and move that timing into early Q2. After funding $113,000,000 Capital Expenditures. MEG generated $161,000,000 of free cash flow for debt reduction and share buybacks in the Q1 of 2023. We repurchased US86 $1,000,000 of senior notes and ended the quarter with US1 $1,000,000,000 of net debt. In addition, we bought $103,000,000 or 4,900,000 MEG shares in the quarter at a weighted average price of $20.88 Thanks. Speaker 400:08:41And with that, I'm going to hand it back to Derek. Speaker 100:08:45Thanks, Ryan, and I apologize for the noise in the background. It seems to be lots of fire engines rolling around. Before we move into questions, I'd like to share an update on the Pathways Alliance. MEG, along with its Pathway Alliance peers, is progressing pre work on The proposed foundational carbon capture and storage project, which will transport CO2 via pipeline from multiple oil sands facilities to be stored safely and permanently in the Cold Lake region of Alberta. Significant amount of work is underway with the Pathways Alliance as we also progress environmental assessments and early engineering work for the Carbon Capture and Storage Project and also Advanced Other Technologies. Speaker 100:09:27This quarter, the alliance made progress in engineering by awarding a contract to a global engineering firm to continue development plans for the 400 kilometer CO2 Transportation Pipeline. Conversations with the provincial and federal governments about their role in partnering with us to advance. Decarbonization efforts continue to go well. On March 28, the Canadian federal government announced measures in its 2023 budget to provide greater policy certainty to support and incentivize investment in clean technologies, including CCS projects that are critical to meeting Canada's emissions reduction goals. We continue to engage with federal and provincial governments in aligning how the Pathways Alliance can support Canada in reaching its climate commitments. Speaker 100:10:14As I bring my remarks to Speaker 400:10:15a close, I once again Speaker 100:10:16want to extend my thanks to our team for their commitment and perseverance. I'm proud of what we've been able to and confident in our future and our commitment to sustainable, innovative and responsible energy development. On behalf of MEG's Board of Directors and our management team, I want to thank you for your continued support. With that, I'll turn the call back over to Michelle to begin the Q and A. Operator00:10:39Thank you, sir. Ladies and gentlemen, we will now begin the question and answer one moment please for your first question. Your first question will come from Greg Pardy at RBC Capital Markets. Please go ahead. Speaker 300:11:19Mr. Pardy, Operator00:11:20your line is open. Your next question will come from Menno Holsoff at TD Securities. Please go ahead. Speaker 500:11:37Thanks and good morning everyone else. I'll start with a question on growth. On the last call, Derek, I believe you talked about potentially growing production to 120,000 barrels per day over the next 2 to 3 years. But can you just elaborate on how you arrived at that target? Is it largely being driven by the 20,000 When we think about capital efficiencies for that growth, how much of it can be delivered through lower capital Opportunities like redrilling of existing pads versus higher cost options like new pads. Speaker 100:12:23No, I'll take a cut at that and Darlene may want to step in with some details on re drills and the capital Going from $110,000 to $120,000 is really predicated on 2 things. It's predicated on, well, it's really 3. 1, that our Investors do not want us spending large amounts of capital growing. These typically types of expenditures we're talking about are really bottlenecking expenditures inside of our facility as well as short cycle redrills And that sort of work that has very high capital or very low capital sort of reinvestment costs, very Quick payout in a matter of months. But I think the way that it's not being driven by our takeaway capacity in in any way, shape or form. Speaker 100:13:24So it's nice to have that takeaway capacity. We see the biggest value of the takeaway capacity being that it's really going to tighten up that WCS differential even tighter as it pulls Up to 600,000 barrels a day of product away from the U. S. Gulf Coast and puts it on the West Coast. Darlene, I don't know if you want to talk a little bit about Capital Reinvestment Efficiency. Speaker 300:13:50Yes. Thanks, Mano, and thanks, Dirk. I think Dirk hit most of the main points, but a couple of adds I would Throw in there is we have some pretty exciting new pad development from our pad design that the team is Working on pretty hard that we'll see come out in the next 1 to 2 years, and that's going to help us really drive that capital efficiency for the new pads. Derek really reinforced, our program has a lot of exciting opportunity as we go and use the technology for the 4 d seismic that's helping us really optimize the existing pads and that gets after those quick redrills and infills that we're pursuing at this time. I'd also always want to do another shout out to the optimization team that does from the facilities and the workovers that our team is working on. Speaker 300:14:38Again, Just keep dialing in the reservoir as we learn it to get more familiar with it. And then looking to the future, our winter program, as I mentioned, Looks pretty exciting to us. We've got a lot of great reservoir to go pursue. And then the surface side of it is really going after that capital efficiency cost opportunity. So a lot of exciting work on the way, and I think will really help capture those capital efficiencies. Speaker 500:15:08Excellent. Thanks, Darlene and Derek for that. Just the second question relates to the 500,000 barrels per month of contracted dock space on the Gulf Coast. I guess my question is, is that the endgame for dock space? Or is there potential to expand that. Speaker 500:15:26And then I guess if we take it to a higher level, what are your midterm goals for growing export capacity? Speaker 100:15:35So, now it's Derek. Look, 500,000 barrels a day is basically the in the U. S. Gulf Coast about what you can put in an So that's we have the capability of effectively loading an Aframax a month at At the current time, that is not our ambition. We would love to be able to have a better or clearer Like to increase volumes off the U. Speaker 100:16:04S. Gulf Coast or across the dock. So you should think about it as a starting point, not endpoint and that if it's going to grow, it should grow in sort of 500,000 barrel a day type of pieces. As we think about our export strategy, I think it's long been a desire of Western Canadian To get their product, their heavy oil to the U. S. Speaker 100:16:33Gulf Coast. And now that everybody is successfully doing that, we've managed To move the pinch point in terms of pricing and move the pricing power away from PADD II down to PADD III. Our strategy is we should be working hard to find other buyers for that product to take that product away from the U. S. Gulf Coast and make sure that we're very much better balanced between supply and refiner demand in that area. Speaker 100:16:59So I don't want to get into too specifics, but you've heard us continue to talk about the big driver in the WCS differential coming in as tight as it has been, incremental barrels moving across the dog and continue and you should expect us to try and continue to move volumes in excess Thanks, Matt. Operator00:17:45Your next question will come from John Royall at JPMorgan. Please go ahead. Speaker 600:17:52Hi, good morning. Thanks for taking my question. Speaker 700:17:55I just wanted to see if there was an update to the timing on reaching your net debt for I think year end 2024 was the most recent and your release from 1Q just says beyond 2023 occurring oil prices. So Is year end next year still the right time line to think about or is there any update there? Speaker 400:18:16Hi, John, it's Ryan. I would say that with the narrowing differentials we've seen over the last little while, we've seen the cash flow free cash flow coming in a little bit higher than we had anticipated. And that's allowing us to repay debt maybe a little bit sooner. So it is into 2024 at current oil prices, maybe in the second half of 2024 at this point in time relative to the end of 2024 previously. So, the longer we see narrower differentials, higher oil prices, it's going to But still second half twenty twenty four ish. Speaker 700:18:49Okay, great. Thank you. And then, could you Just talk a little bit about the drivers of the working capital headwind in 1Q. I think it was about 110,000,000 Do you expect any reversal in 2Q or in 2023 in general? Speaker 400:19:04A lot of that depends on the oil price. The biggest driver is our accounts receivable rising. This quarter, we did see an increase in AR around purchased product sales. We did see WTI go down relative to the Q1 of Speaker 100:19:18the prior period relative to Speaker 400:19:21the end of the year, I should say. And we still saw our accounts receivable go up because we did sell some purchased product. So that was the main driver. We did have some interest payments that always impacts the Q1 as well. Those are probably the 2 big drivers. Speaker 400:19:39We could see it reverse if oil prices fall, I guess, but I would say the best view is that we'll see it pretty stable at this point in time. Speaker 700:19:50Thank you very much. Operator00:19:54Your next question will come from Neil Mehta at Goldman Sachs. Please go ahead. Speaker 200:20:01Good morning, Derek and team. Thanks for taking the time. I guess the first question is around sustaining CapEx. It's Tracking around $400,000,000 this year. How do you see that evolving over time and where are the puts and takes, right, ranging from inflation to volumes? Speaker 100:20:20Neil, it's Derek. Thank you for that question. It's one that we talk about often, both externally and internally. And you hit on the biggest single unknown, which is inflation and what is the impact. So over the last 2 years, you've seen that sustaining capital move up fairly aggressively to that We're in the process of and continuing to watch inflation this year. Speaker 100:20:57We're still seeing inflationary pressures on two fronts, on basically salaries. Wages are still a hot button moving anywhere in that 5% to 7% in both the field and in the office side of the business. But I'd also say the other aspect on this is availability people. And that cuts into your sustaining capital in 2 ways. 1, it takes longer. Speaker 100:21:25If you can't find the people, it takes longer to get the And if you can't find experienced people, the effectiveness of and the cost effectiveness And the safety and everything else that's associated with green hands or inexperienced people, adds to your cost structure and also adds to So it's too early for us to really be able to tell you what we think is going to happen in terms of inflation on that sustaining capital number, but that is the single biggest driver at this point in time. Speaker 200:22:02Thanks, Derek. And the follow-up is on WCS and then Pemex associated with that. So we've seen WCS tighten up a lot here. How much of this is, do you think, structural versus seasonal kind of an element to us that seems more structural nature, especially given The OPEC cuts, but curious on your perspective on that. And then as it relates to TMX and the cost overruns, How should we think about any financial impact that would have on the shippers recognizing that's a moving target right Speaker 100:22:39Yes. So structural versus seasonal on WCS. My thesis and our thesis at MEG has been that this is structural. This is largely been Driven by increased loads across the dock to at least in this year's, The biggest driver has been incremental loads going into China as they've come out of their COVID shutdowns. We don't see that dropping off. Speaker 100:23:17So we would say that, that is a structural piece and you should expect to see that continue. I would be remiss if I Say there is some seasonality associated with this, but it's at the margin and I think quite small. I think though as you move, you roll the clock forward and you think about what's going on in that more macro picture with The Mexican refinery, Dos Bocas, coming up at somewhere in the neighborhood of 340,000 barrels. TMX I would expect that you could see further structural tightening in that market as we drive forward. So I think the outlook on WCS is quite positive and Should be very supportive of our business going forward and but you will continue to see variations in that differential, which sort of well understood from a seasonal perspective. Speaker 100:24:30On TMX, I've got to we are a shipper. We Ship about 20,000 barrels a day or we will be shipping 20,000 barrels a day of dilbit. It's still too early for us to be able to talk to with any degree of certainty, what the impact of those cost overruns will be. We are precluded from providing information by virtue of an NDA that we have So I really can't elaborate or talk about in great detail about this other than to say this is an important piece of infrastructure for the Western Canadian Sedimentary Via Basin. It provides another 6 100,000 barrels a day of egress. Speaker 100:25:19And especially when you think that our major market is the U. S. Gulf Coast and it's pulling that 600,000 barrels a Stay away from there and it's going to impact the WCS differential, we believe, positively on our whole business. Talking about a toll on a specific part of that line, probably wouldn't do it justice in terms of the economic value that one to bring to the table for us. Speaker 200:25:49And Derek, the follow-up on this, I don't know if you can comment on it, but our understanding of TMX, While there was a cost overrun, it's still tracking on schedule from a timing perspective. Is that fair? Speaker 100:26:02Yes, that's the that's our understanding as well. Speaker 200:26:06Okay. Thank you, sir. Speaker 100:26:08Thanks, Neil. Operator00:26:12Your next question comes from Jesus Sanchez at Castanar. Please go ahead. Speaker 600:26:20Hi. Thank you for taking my question. A couple of questions for Ryan. In the reconciliation from funds from operation to adjusted fund flow, We have $87,000,000 in realized equity price risk management gain, which is available from last quarter. Maybe you can give some explanation about this account. Speaker 600:26:44Thank you. And the second question will be about the return on shareholders. We have spent €120,000,000 in debt repayment, but our net debt is flat, €13.80 C9 $1,000,000 of Canadian's platform last quarter and also the repurchases. We have spent $100,000,000 in repurchases, but Only the share account decreased by half of the €5,000,000 That we have reported, which accounts only for €50,000,000 So there's €50,000,000 there, €170,000,000 over there in paper payments. Meg, you can give us some color about that. Speaker 400:27:32Sure. Write them down, so remind me if I don't The first one was on the $87,000,000 of equity price risk management. That was the equity risk management hedge that was put in place To manage the risk around the LTI that was issued back in 2020 at a relatively low price in the $1.57 range. And so we did a good piece of business there, brought in about $120,000,000 to the company by heading that LTI position. It did settle in the period, the 2020 LTI settled during the period. Speaker 400:28:10And so the $87,000,000 that you're seeing there The realized gain from that position, we had recognized for our accounting purposes about 78,000,000 at the end of the year. So it went from unrealized $78,000,000 to realized $87,000,000 $9,000,000 move during the quarter. So you're just seeing the impact of a shift to realized from unrealized, if that makes sense. Yes. You had a question on net debt, why it only fell why it didn't fall maybe as much as you would have anticipated. Speaker 400:28:44The reason for that is the earlier question on working capital build. The working we did generate $160,000,000 of free cash flow during the period. We had a couple of $100,000,000 of cash available to repay debt and buy back shares. But with that $160,000,000 of free cash flow, A portion of that is sitting in accounts receivable and wasn't actually collected as cash. So cash fell to buyback stock and the debt during the period and a portion of the free cash flow that we generated is sitting in accounts receivable yet to be collected. Speaker 400:29:23So that's the impact you're seeing there. Net debt did fall. It just didn't fall as much as you might have expected because The cash balance fell to help us buy back that $103,000,000 of stock and about $117,000,000 So that was your second question, working capital build. And then the last question was on the number of shares. We bought back 4,900,000 shares during the period, but the actual share balance didn't fall that much. Speaker 400:29:52The reason for that is we actually issued some LTI during the period. So we did have an offsetting issue of stock. Not all the LTI is cash based. Some of it is share based and was issued in shares during the period. Speaker 600:30:12Thank you for displaying some. Thank you very much, Brian. Speaker 400:30:15You're welcome. Operator00:30:31There are no further questions on the phone lines. So I turn the conference back to Derek Evans for any closing remarks. Speaker 100:30:39Thank you, Michelle, and thank you to everybody that joined us this morning for our Q1 results Conference Call. We're excited about what we're able to achieve this last year and look forward to updating you on our operational performance return of capital program when we release our Q2 results in July. Hope everybody has a great day and thank you again for joining us. Operator00:31:01Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.Read morePowered by