MEG Energy Q4 2023 Earnings Call Transcript

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March 1, 2024

There are 10 speakers on the call.

Operator

Good morning. My name is Mark, and I will be your conference operator today. At this time, I'd like to welcome everyone to MEGS Energy's 2023 Q4 Results Conference Call. And now I would like to hand the call over to Mr. Derek Evans, CEO.

Operator

You may now begin your conference.

Speaker 1

Thank you, Mark. Good morning, everyone, and thank you for joining us to review MEG Energy's Q4 and annual 2023 operating and financial results. With me on the call this morning are Ryan Cubic, our Chief Financial Officer Darling Gates, our Chief Operating Officer and Lyle Yustevsky, 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 Plus and on our website.

Speaker 1

Before we get started, I'd like to make a few comments regarding the CEO succession announcement we made yesterday. After almost 6 years leading MEG, I've decided to step down as President and CEO and from the Board on May 1. Darling Gates, our Chief Operating Officer has been appointed by the Board as my successor and will be named President and CEO and nominated to join the Board of Directors at MEG's Annual General Meeting. When I joined MEG in 2018, I set out to deliver shareholder value by strengthening our balance sheet, improving efficiencies and reshaping MEG's long term strategy. That work is complete and MEG is now positioned with an enduring foundation for the future.

Speaker 1

As such, I'm confident this is the appropriate time to step down. Over the past few years, I've worked with the Board to plan and execute a smooth CEO succession. Since Darlene joined Meg in 2021, we've worked together on her development as part of that process and she continues to demonstrate that she's uniquely positioned to lead MEG. Darlene brings many skills to the role, the most important of which is her deep commitment to our people, the environment and the communities in which we live and work. She's also been an exceptional partner to me, driving an intense focus on health and safety and was instrumental in delivering our operating and financial results and strategy.

Speaker 1

I have great confidence that Meg will flourish under her leadership and I'm excited about the future as it continues to execute the strategy that we have built together. I joined MEG because we had a world class resource base and a team that was known for its technological innovation and best in class execution. Those qualities remain. Working the past 6 years as part of Meg's team has reinforced my belief that fundamentally this is a people's business people business, where talented and innovative people can make extraordinary things happen. I want to thank the Board and the entire MEG team for being part of this journey with me.

Speaker 1

I'm extremely proud of where MEG is today and how it is poised for the future. Thanks again. And with that said, let's move into a discussion of our Q4 and annual 2023 results. Our top priority at MEG is our focus on health, safety and the environment, which ensures that nobody gets hurt, eliminates serious incidents, and delivers operational excellence. Those priorities were clearly reflected in the performance delivered by our team in 2023.

Speaker 1

MIG's financial results continue to benefit from a relatively strong WTI oil price averaging about US78 dollars per barrel in 2023 that was supported by increasing oil demand and coordinated OPEC plus supply management. While the Edmonton WCS discount averaged a relatively wide US $22 per barrel during the Q4 and US19 dollars per barrel in 2023, the historic lack of pipeline egress driving those wide differentials is about to change. The TMX pipeline to Canada's West Coast continues to progress, with TMX calling for line fill in April and start up estimated in the Q2 of this year. Achieving that long awaited milestone will be a key catalyst to deliver value to MIG's shareholders as the price of all of our barrels will benefit from unconstrained market access. Over 80% of our production will also have the ability to reach high value markets in the U.

Speaker 1

S. Gulf Coast and internationally. Through our diverse market access and marketing optimization activities, MIG was able to deliver a premium of US2.10 dollars per barrel in 2023 for our production compared to the AWB index price in Edmonton. Our 2023 results also reflect the company's strong operating performance that has enabled our significant commitment to debt reduction and share buybacks. We are on the cusp of reaching our US600 million dollars long term net debt target and that significant milestone will be the end of our multi year balance sheet rebuild and mark the transition to a company focused on moderate production growth, where 100% of the free cash flow is being returned to shareholders.

Speaker 1

That strategy capitalized on the strengths of MEG's high quality long life reserves and will deliver maximum long term value to our shareholders. Once again, I'm truly proud of the hard work delivered by the MEG team. With that, I'll now ask Darlene Gates, our Chief Operating Officer, to speak to our operating results and ask Ryan Kubik, our CFO, to talk to our financial results. Before I open the call to questions, I'll provide an update on the Pathways Alliance efforts this last quarter. Darlene, over to you.

Speaker 2

Thank you, Derek, and good morning, everyone. Before I jump into the results, Derek, I'd like to thank you personally for your leadership, integrity and your commitment to making MEG the success it is today. You set a great example for what an outstanding CEO and leadership be. On behalf of everyone at MEG, thank you for everything you have done for our people and our business. Know that you have had a significant impact on every one of us.

Speaker 3

Thank you.

Speaker 2

I'll now turn our focus over to our operating results. May continues to be a leader in innovative and responsible energy development, and we delivered another quarter of strong safety, health and environmental performance with no lost time injuries. In 2023, we achieved a 15% reduction in our total recordable incident rate and our lowest annual spill volume in MEG history. This performance was a result of a continued focus on strong safety culture and our teams and contractor partners. As part of our commitment to continuous improvement, I'm proud to share that we rolled out a new operations excellence management system.

Speaker 2

This new system helps us create a workplace where serious incidents are eliminated, improves operational performance and moves us towards our vision of nobody gets hurt. In the Q4 of 2023, production averaged over 109,000 barrels per day and we exited the year at 110,000 barrels per day in the month of December. This performance capped off a strong year for MEG, as we delivered a year a full year production average of over 101,000 barrels per day, which is a new annual record for us and a 6% increase over 2022. We also achieved a 4% year over year reduction in our steam to oil ratio, reflecting continued success in steam optimization across our top tier resource. 4th quarter non energy unit operating costs were $4.64 per barrel, driven by low maintenance activity levels and high production rates.

Speaker 2

In 2023, our total operating costs net of power revenue were an industry leading $5.96 per barrel, which demonstrates the value of our low cost structure and cogeneration facilities. In addition, our 2023 capital and development program was also delivered in line with guidance at 449,000,000 That program included key investments in redevelopment wells, SEGD well pads, field and facility infrastructure and a major facility turnaround. As we move into 2024, we've navigated a cold start to the year and kicked off a development program that underpins moderate capacity growth. In the first half of the year, we are increasing drilling activity across site deep pads and executing a short cycle redevelopment and infill program. This positions us to bring on 2 new safety pads in 2024, one late in the first half and another late in the second half.

Speaker 2

This will support our previously announced production guidance of 102,000 to 108,000 barrels per day. Engineering is also progressing on our multi year moderate capacity growth projects, and we expect to see activity ramp up through 2024. 2023 was a strong year for Manc and our continued focus on safety, culture and operational excellence positions us well to deliver on our 2024 commitments. With that, I will turn it over to Ryan to provide the financial update. Ryan?

Speaker 4

Thanks, Darlene. MIG generated adjusted funds flow of $358,000,000 or $1.27 per share in the Q4 of 2023, bringing our annual adjusted funds flow to $1,400,000,000 After funding $104,000,000 of capital expenditures, we generated $254,000,000 of free cash flow in the 4th quarter, which was used for US128 $1,000,000 of debt reduction and to purchase US219 $1,000,000 or 8,700,000 MEG shares at an average price of $25.29 per share. In 2023, MIG generated $953,000,000 of free cash flow, which allowed us to purchase $446,000,000 or 19,000,000 shares at an average price of $23.54 per share. In addition, we reduced debt by a further US322 $1,000,000 At December 31, 2023, our net debt declined to US730 $1,000,000 and under a US75 dollars WTI oil price assumption, we forecast reaching our US600 $1,000,000 net debt target in the Q3 of this year. At that point, we'll raise our return of capital to shareholders up to 100% of free cash flow And we're in the process of renewing our normal course issuer bid for another year.

Speaker 4

The 105,000 barrel per day midpoint of our 2024 production outlook is an increase of about 4% over 2023. And when combined with an estimated under a US75 dollars per barrel WTI oil price assumption, MEG is estimated to generate production per share growth of about 12% this year. At the same time, our CAD550 1,000,000 capital budget will position the company for future capacity growth over the next several years. Thanks. And with that, I'm going to hand it back to Derek.

Speaker 4

Thanks, Ryan. I'd now like

Speaker 1

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. Work continues on the major regulatory applications for the CO2 pipeline network and storage hub with over 50% of the front end engineering and design work on the pipeline and over 2,000 hours of environmental field work completed so far, as well as significant community engagement and formal consultation with indigenous groups along the proposed transportation corridor and storage hub. We continue to work with the federal and provincial governments to secure the necessary fiscal and regulatory framework to advance this project. As I bring my remarks to a close, I once again want to extend my sincere thanks to our team for their commitment and perseverance.

Speaker 1

I'm proud of what we've been able to accomplish and confident in MEG's future and 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 all for your continued support. With that, I'll turn the call back over to Mark to begin the Q and A.

Speaker 5

Thank you.

Operator

Our first question comes from the line of John Royall at JPMorgan. Please go ahead. Your line is open.

Speaker 6

Hi, good morning and congrats to Derek and Darwin. So my first one is on capital allocation. You're now maybe 6 months or so away from hitting your net debt for on your guidance. I'm wondering in terms of getting to that 100% allocation, does the base dividend become something you might look to do early on and then use the buyback as sort of a flywheel or might you look to get through this growth investment period first before you would think about a dividend?

Speaker 1

John, thanks for the question. I'm going

Speaker 4

to ask Brian to take it. John, a base dividend is under consideration by the Board at this time. When we say a base dividend, I would say that we are looking at a relatively small base dividend. We do see it as a fixed an addition to our fixed cost structure and we are cognizant of the capital coming up, etcetera. We want to make sure that we put a dividend in place that would be sustainable through the cycle and that we can grow with our production as production grows.

Speaker 4

So it is under consideration. You will see us, however, continue to largely focus on share buybacks as a part of that 100% free cash flow return.

Speaker 6

Great. And then just looking at your growth investments for this year and next year, I was hoping to dig in a little bit on the Skim Tank in particular. If you could just go into a little more detail on that and the slides mentioned the benefit to the 2025 turnaround in particular. Is that more of a one time benefit or could this reduce timing of all your turnarounds? Just trying to understand that project a little better.

Speaker 6

Sure.

Speaker 2

I'll take that one, John. Thanks. It's Darlene. The Skim Tank helps us in a couple of different ways. It positions us for the future growth strategy with the 3rd processing train.

Speaker 2

But it bringing it in early allows us really to start up the plant earlier when you're optimizing a turnaround. I see that also then as we go forward, we'll have that optionality with the tanks to start up future turnarounds as well. So it'll have a long term impact.

Operator

Our next question comes from the line of Greg Pardy at RBC. Please go ahead. Your line is open.

Speaker 7

Yes, thanks. Good morning. Derek, it's been great to work with you over the year. So you're definitely going to be missed and congrats to Darlene. Really kind of 2 very different questions.

Speaker 7

Maybe the first one is to 0 in a little bit on TMX and maybe just I think I might have missed it in the opening remarks. But assuming that there has been a call for LinePack and then secondly is to what extent could you comment do you think LinePack is going to occur here in, I don't know, April, May? What's your what can you provide us with color wise in terms of how the ramp up looks?

Speaker 1

Greg, it's Derek. I'm happy to take that one. So TMX did issue a call for line fill yesterday. As a matter of fact, they're looking for 2,100,000 barrels in April and another 2,100,000 barrels in May. So we see this as incredibly positive.

Speaker 1

We can't imagine why you would call for line fill if you didn't if you weren't comfortable that obviously the pipeline was going to be up and running in that Q2 type timeframe. So line fill has been called for. I think that's information that's publicly available. So and as I said, good news for not only us, but really everybody in the heavy oil business, it will substantially that incremental egress will substantially reduce that WCS differential.

Speaker 7

Okay, terrific. That is indeed good news. And then very different, I mean, really question for Darlene in terms of priorities, how you see the business running, areas of focus. Like we had a number of inquiries last night as to people kind of asking, well, how do we read this, what should we be thinking and so on. So I'm just kind of the floor is yours in terms of whatever you'd like to frame?

Speaker 2

Greg, thank you for this question. I would reassure everyone, as you would expect and you have known Derek as a great leader, he has been working very closely with all of us as an executive team for the last several years. And we have been intimately involved in setting the strategy and strategic focus for the company and the rollout of the new moderate growth that we executed for 2024. All of that we have been part of. I've been actively involved and really you'll see my fingerprints over all of it.

Speaker 2

And so as a result of that, you will see no change other than continued focus on the story that we've been communicating. Ryan has been a partner as well as the rest of the executive team, and you will see continued focus on what we've been communicating. So you should be reassured that you already know the game plan and you know the executive team already. We will continue to execute under the leadership and guidance that Derek has instilled in all of us.

Operator

Our next question comes from the line of Dennis Fong at CIBC. Please go ahead. Your line is

Speaker 8

open. First off, I'd like to reiterate the sentiments of my 2 fellow peers. Thanks, Derek, and congrats to Darlene.

Speaker 9

My first question

Speaker 8

focuses a little bit around going forward. I know in previous conference calls, Derek, you've mentioned some inflationary cost pressures mostly related to turnaround costs, but also a little bit in, we'll call it sustaining as well. Darlene, maybe if you wouldn't mind outlining some of the initiatives that you guys are pursuing to help keep those costs in check or even kind of some of those costs potentially into the future?

Speaker 2

Sure. Thanks, Thanos. Again, this really just reinforces the direction that we've been going is a strategic focus on moderate growth, but also operational excellence. And that really fits into the question that you're asking about. We've got both on operating expenses, we've got several initiatives that we've got undergoing, really focusing on our maintenance and reliability programs to drive moving from a reactive to a proactive program.

Speaker 2

And so we've got several full life studies on looking at how we can improve our maintenance activities. And then you're very aware that we announced that we didn't have a major turnaround this year. That was an intense focus from our team using risk based analysis of our integrity programs, allowing us to put that into 2025 and spend the time in 2024 to really go after operational improvements on the execution of turnaround. So maintenance as well as the turnarounds. And then I'd also highlight on the capital side of our program, we've got a couple of really exciting developments that are going to be maturing in 2024.

Speaker 2

A couple areas is our drilling and completions team has been implementing some new technology. They implemented some significant cost reductions in the drilling program, and we're hoping to sustain that into 2024. And our second pad that we will be implementing in 2024 is will be rolled out with a new surface pad design. And that will help us take what usually from when we start up an investment to putting a pad on production, takes us almost 2 years to do a project like that. With this new surface pad design, we're hoping to drop that down in half.

Speaker 2

So a couple opportunities and examples from both an operating side as well as the capital side. Some pretty significant work the team is underway, and we're pretty excited to see how that rolls through both 2024 and then into the future operating and capital budget.

Speaker 8

Great. Appreciate that color and context. Shifting gears a little bit towards the capital return framework. I know buybacks have historically been a focus and from your comments and your answer to the question there, Ryan, seem to continue to be a large focus. I was just curious as to how do you guys look at from a capital allocation perspective, the returns potentially on allocating towards share buybacks versus any of the other possible opportunities that exist within your portfolio set of capital deployment?

Speaker 4

Thanks, Dennis. Yes, I mean, when we look at capital allocation, we obviously look at the opportunities within the brownfield projects that we're working. We've got this 3rd processing train that Darlene and team are in the process of executing. We are putting in some steam tie ins into our facilities and that suggests we see value in some of the brownfield investments to add additional steam. So we are out analyzing those opportunities as well, and we think they're highly economic.

Speaker 4

Beyond capital, we will return this 100% of free cash flow, obviously, And share buybacks are a great use of that those funds as well. When we look at our multiples, where we trade relative to historic levels, where we trade relative to peers, when we look at our free cash flow yield that we're going to be generating here, we see metrics that suggest value in our own shares. So we'll use some of the funds to buy back that stock and add value to shareholders that way as well.

Operator

Thank you. Our next question comes from the line of Neil Mehta at Goldman Sachs. Please go ahead. Your line is open.

Speaker 3

Hi, good morning. This is Nicholas Flusser on for Neel Mehta. Darlene, congratulations and Derek, thank you for all the leadership and industry contributions over the years. Our first question would just be around the expected turnaround schedule for 2024. Understand from the deck that all 20 24 quarters are expected to exceed 100,000 barrels per day.

Speaker 3

Can you provide any insight on how this may positively impact pricing realizations over the year without a heavier 2Q turnaround? And then I know there was some commentary on this from a previous question, but if you can provide any details on what is more minor in terms of maintenance this year relative to last? Thank you.

Speaker 2

I'll start with the turnaround component. What you'll see is we're looking at every year turnaround and maintenance sequence depending on the sequences of your vessels and the activity, our team is going to be doing what I call minor turnarounds. So there'll be shorter sequences throughout the year. So you will see us sit mostly throughout the year around 100,000 barrels a day higher than we usually do. And really just implementing a smarter program.

Speaker 2

And then through the studies work, we'll have more information as we go forward of how the turnarounds will be impacted with some of the work that we're doing go forward. Currently, we would share that our turnarounds are usually on about a 3 year cycle. And we have 2 of those, 2 major turnarounds. And then on our 3rd year, we'll have what I call minor turnarounds.

Speaker 3

That's very helpful. Thank you. And then again, just from the deck here, McSEMA oil ratio appears to be close to that I think 15% below average with MEG closer to about 2.3%. Can you just walk us through what factors may be contributing to the low relative SLR and any focuses to drive that metric potentially lower over time though recognizing you're already below the average?

Speaker 2

Yes, I'll take that one too. First, we've got to give a lot of credit to our teams. They've put a lot of focus on understanding our resource base and optimizing the steam in the facility. That's the first part is steam optimization and some of the redrills that we've been doing. 2nd piece really is about the resource, and this is the exciting part of what we're working on.

Speaker 2

As we look ahead, our winter programs are helping us identify where to place our pads. And we're seeing really good resources as we look ahead, higher oil saturations in those plants, and it allows us to reduce the steam to oil ratio as we look ahead. For 2024, we'll see the steam to oil ratio sit fairly flat to last year with a slight increase, and that's just the timing of the pads and the steaming of the 2 pads we're starting up. And as we look ahead, the team is targeting a 5% to 10% reduction in steam to oil ratio as we move forward. And again, that's because of the great resource and opportunities that we have ahead of us.

Speaker 3

Very clear. Thank you.

Operator

Thank you. Our next question comes from the line of Menno Holzof of TD Cowen. Please go ahead. Your line is open.

Speaker 9

Good morning, everyone, and all the best Derek and Darlene with the transition. I'll start by digging a bit deeper on the 15,000 barrel per day capacity increase. Just looking at the budget, dollars $300,020,000 per daily flowing. So the question is, how much of the $300,000,000 total has been locked in? How much contingency do you have in there?

Speaker 9

And then looking at the train itself, are there any new efficiency features that set it apart from the first two trains?

Speaker 2

Okay. Well, I will take that one as well. So as I look ahead to this the 3rd processing train, team is working very closely right now through the engineering design. So the 300,000,000 dollars will still be it's a preliminary number that estimate that we have. We're in the process right now of doing the detailed engineering.

Speaker 2

And so we'll get more information as we see how that evolves. We are in the process of working with a Canadian company right now as looking for project execution. And so when I look to what the team, again, strategic focus on how we execute projects will be an integral part of what we're doing. And with that, we'll also be bringing in some of the engineering cold eyes on that 3rd processing train. So I expect to see some improvements clearly from the last 2, 3 processing trains technically that we have.

Speaker 2

And but that's still in progress right now.

Speaker 9

And then just on the crude marketing side of things, can we get an update on where MEG is currently focused in terms of marketing initiatives, including the build out of export capacity on the U. S. Gulf Coast? And I ask that especially because your Gulf Coast access should increase pretty significantly with the ramp up of TMX and falling mainline apportionment? Thank you.

Speaker 1

So, Menno, it's Derek. I will take that question. Our marketing activities are one of the key value added aspects of the company. And over the last year, we've been moving about 500,000 barrels a month across the dock in the U. S.

Speaker 1

Gulf to Asian markets and we expect that to continue as we drive forward. Now obviously the key benefit of that is increasing or increasing the opportunities to pull product away from that North American or U. S. Gulf Coast refinery complex and help tighten up the WCS differential and that truly is the exciting part about what TMX will do. It'll have the same impact, but larger in terms of pulling an incremental 500,000 barrels of product away.

Speaker 1

So we continue diversify our marketing activities. We're happy with the fact that TMX is coming on and that we'll have 20,000 barrels exiting through Burnaby that we all have 100,000 barrels at the U. S. Gulf Coast, but that is a fairly significant contribution in the U. S.

Speaker 1

Gulf Coast. So our export activities will continue across the dock there and potentially even expand, which should be beneficial not only to MEG, but to others that rely on the WCS

Operator

Thank you. The next question comes from the line of Eric Nuttall at Nine Point Partners. Please go ahead. Your line is open.

Speaker 5

Good morning, everyone. Derek, congratulations, Darlene as well. Greg asked my main question. I think investors were just looking for reassurance that the change in leadership didn't signal any strategy shift. Derek, just on behalf of my clients, I truly want to thank you for an incredible run.

Speaker 5

If my math is directionally accurate, the stock is almost quadrupled under your leadership and we remain extremely excited with the prospect of meaningful buybacks in the coming months. So thank you again.

Speaker 1

Thank you, Eric.

Operator

Thank you. And there are currently no further questions on the line at this time. So I'll hand the floor back to Eric for the closing comments.

Speaker 1

Thank you, Mark, and thank you for everybody that joined us this morning for our Q3, our 2023 Q4 annual results conference call. We appreciate you making the time and the effort and appreciate your confidence in us to continue to drive the company forward. So thank you all. Have a great day.

Operator

Thank you. This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.

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