Q3 2019 Earnings Call

Good morning, My name is Jessica I would be a conference operator today at this time I would like to welcome everyone to the Meg Energy's 2019 at third quarter results Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. She would like to ask a question. During this time.

Simply press Star then the number one on your telephone keypad, if you'd like to withdraw your question. Please press the star followed by the two thank you Mr. Derek Evans CEO you may begin your conference.

Thank you Jessica and good morning, everyone. Thanks for joining us for our third quarter 2019 conference call in the room with me. This morning, I barricades, our CFO she tacky, our COO and grant barbaric senior Vice President legal <unk> General Counsel and corporate Secretary.

Just a reminder, that this call contain forward looking information please refer to the advisories in our disclosure documents filed on SEDAR and on our website.

This is a relatively straightforward quarter instead of rehashing the press release in the Mdna I'll limit my remarks to a few of the key aspects of the quarter to leave more time for Q and eight.

We had an excellent quarter with record low operating costs free cash flow of $152 million and additional debt repayments, bringing year to date debt repayment to $481 million, we remain committed to applying all free cash flow after sustaining capital to further debt reduction and were laser focused.

On reducing all cost structures.

The common production in the third quarter was impacted by ongoing government of Alberta mandated curtailment, we purchased their car third party curtailment credits of approximately 3100 barrels a day in Q3 versus approximately 8500 barrel a day of credit in Q2, allowing us to increase production levels to 93200.

78 barrels a day in Q3 versus.

Q2 production of 97288 barrels a day in Q3 fewer third party curtailment credits were available to purchase.

Make realize the third quarter 2019 average AWB blends sales price of Usforty 563 per barrel compared to Usfifty 172 per barrel in the second quarter of 2019, the change in average AWB blend sales price per quarter over quarter is primarily due to.

A usthree dollar and 37 cents per barrel reduction in the benchmark.

BTI index combined with.

WT AWB differentials at Edmonton widening to $14.52 U.S. per barrel from $12.32 us per barrel and at the U.S. Gulf Coast Whiting to a discount of us to 50 per barrel from a premium of $1.64 per barrel make sold 33% of it.

Sales volumes to the U.S. Gulf Coast marketed in the third quarter of 2019 compared to 34% in the second quarter of 2019.

Excluding transportation and storage costs upstream of the Edmonton Index sales point Megs net AWB blend sales price at Edmonton averaged 40 160 per barrel in the third quarter 2019, compared to the average AWB index price at Edmonton of US 40, 193, notwithstanding that.

And rich mainline apportionment averaged 44% made was able to capture pricing inline with the Edmonton index, highlighting the value of makes north American marketing strategy.

Adjusted funds flow for Q3 was 192 million or 63 cents per share with 152 million of free cash flow after taking into account $40 million of capital expenditures.

For the nine months ended September Thirtyth, we have generated free cash flow of $443 million as of October Thirtyth. We have repaid 481 of outstanding long term debt in 2019, including $385 million during the third quarter of 2019 and 88 million subsequent.

At quarter end.

Annualized interest savings from these repurchases are expected to be $30 million. These annualized interest savings when combined with the annualized $14 million of credit fee savings associated with the amendment of Megs revolving credit facility brings the aggregate credit related cash cost savings contribution to annual free cash flow.

Low to approximately $44 million.

In the first nine months of 2019 capital expenditures totaled 126 million relative to makes 2019 capital budget of 200 million, what was which was set during the implementation of the Alberta governments mandated production curtailment program in January 2019.

Over the course of 2019 Mega it's been successful in finding capital cost savings and undertaking minor scope changes that will allow the corporation to deliver the original 200 million budget for approximately 170 million.

As a result based on the expected operational benefits, including plant integrity and turnaround management Mega shifted into 2019, approximately 30 million of expected 2020 capital expenditures to accelerate the completion of the corporations in progress brownfield project at the phase to be Centro process.

Thing facility, which includes incremental steam generation water handling oil and oil treating capacity. This project is expected to be completed in the first half of 2020 and just as a point of clarification. What we're talking about here is the central processing facility.

There is no incremental capital associated with growing our production.

In this area in this additional $30 million.

Third quarter 2019, non energy operating costs of $4.22 per barrel and strong power sales had the impact of offsetting 95% of per barrel energy operating rig costs, resulting in a net on energy operating expense of only eight cents per barrel.

Resulting in a record low net operating costs of $4 in 30 cents a barrel.

During 2019, the corporation has been able to purchase third party curtailment credit credits, which have positively impacted the corporations production and sales results compared to the original guidance assumptions.

Based on results achieved to date. The corporation has resigned a revised its 2019 annual guidance production volumes are now targeted to be in the range of 92 to 93000 barrels a day and non energy operating costs in the range of for 75 to $5 per barrel General and administration expense remains unchanged in the range of $1.95.

To a five per barrel.

Corporations operational guidance assumes the government of Alberta mandated production curtailment programming remains in place for 2019 and into 2020 .

In conclusion, we remain focused on driving efficiencies in our business from an operational and cost perspective, and we'll continue to direct all free cash flow to debt repayment, our focus on debt reduction would preclude us from growing our production capacity until such time as we see at the end of curtailment and additional egress pipelines built.

We're making great progress on reducing debt and our cost structures as well as focusing on capital discipline and optimizing revenue through marketing and egress option Optionality.

We look forward to providing the market with our 2020 guidance on November 20, Onest of this year.

With that Jessica I will turn the call back to you and to our listeners for their questions.

Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one and you touched on phone you'll hear us three tone prompt acknowledging your request and your questions will be pulled in the order. The are received should you wish to decline from the pulling process. Please press star followed by the Q.

And if you're using a speaker phone please lift the handset before pressing any keys.

Right. Your first question comes from Phil Gresh of JP Morgan. Please go ahead.

Hey, Good morning, guys. This is John Royal filling in for Phil.

So the pull forward of 30 million of brownfield growth capex into this year.

It would be.

20 to income.

Thats correct.

Hello.

Yes, sorry can you hear me.

I'm sorry, I know, we just got disconnected their first second can you just.

We ask your question.

Yes, I'm sorry. This is a this is John Royal sitting in for Phil.

Quick question on the Capex, so with the pull forward of.

The 30 million in brownfield growth.

How much would be left in 2020 to complete phase two.

So when we talk about phase two were just talking about CPF side of phase two and there will be approximately $20 million worth of capital left to be completed in sort of the first four months of 2020.

Okay, great. Thank you and then given your capital efficiency in 2019.

Can you give your latest thoughts on the run rate level of sustaining capex from the business.

I think the easiest way to think about the run rate on sustaining Capex is is really to think that as somewhere between six and $8 a barrel there'll be fluctuations on a year to year basis, given timing, but.

As we model the business going forward, we typically use about a $7 per barrel sustaining capital number.

Good.

Thank you.

Your next question comes from Emily tuning of Goldman Sachs. Please go ahead.

Good morning, I'm just following up on the Capex question, I guess with the pull forward of $30 million into 2019 should we therefore expect.

$30 million reduction not at the 2020 budget from from current levels.

I think it's fair to.

I assume Emily that we've been.

We've been modeling sort of $300 million up to this point so I.

I think as we move towards reducing our 2020 guys are producing our 2020 guidance you should assume that that guidance for 2020 on capital basis is likely to be.

$270 million or less.

Got it that's helpful and just one follow up please on condensate.

Can you remind us again your ability to import from the us Gulf Coast, given I guess, the strength of local condensate pricing and how should we think about the progress you guys made when it comes on the blending bowels ahead of rail are there any sort of cost saving targets that you guys looking out when it comes to condensate management here. Please.

Let me handle the last half of the question then I'll ask Eric talked about the first part, but we continue to work on.

The three initiatives that we have on the going in terms of under blending.

And.

The one with that near term potential is the butane blending and.

We're working with our partners both on the pipeline and the owners of the pipeline to advance that as quickly as possible and.

Realize the significant savings.

We'll see it did with that so.

All right.

I think it's fair to say that butane blending will be up and running in 2020 .

Some of us we'd like to see it up and running a lot sooner than where it is currently scheduled that and.

I know Theres a meeting.

Next week to try and advance that a lot faster than what is currently on the books, which is to have it on in the second half of 22 on this point and Emollients, Eric we move about half of our condensate up out of the Gulf Coast on southern lights on the other half we source in the local markets.

Great. Thank you.

Your next question comes from Phil Skolnick of eight capital. Please go ahead.

Yeah. Thanks couple of questions one.

It was reported in Bloomberg last week that there were some Canadian axis, what from blend that was.

Shifting to west coast and seeing if that was.

Anything from your production and how do you see that progressing from your standpoint.

That that was not our production going to India. So.

That limits the number of players are somewhat substantially.

Okay.

I think more to the point, it's a very interesting.

Market as is that.

China and.

Asia in particular on crude oil to chemicals business. We see this is a growing market and as.

As we said before you know part of the reason Weve added to tankage on the U.S. Gulf Coast and.

I would have the ability to lift cargoes out of the U.S. Gulf Coast is we believe that that market could get over run as a.

With that incremental volume so the development of overseas markets. I think is very very important in terms of the long term viability of the AWB product.

Okay, just back on the to be facility. So.

Next year, I guess, you're going to be having a a a turnaround.

Like how does the should does is provide any kind of flexibility in terms of.

You know steam and been able to use that I guess offset some of the impact to the production side.

The turnaround.

Absolutely.

So the there's the phase to be.

Facility side includes an evaporator into drum boilers to new ground boilers.

So and I think those drum boilers about 13000 barrels a day of.

Theme GTECH.

Oil so.

Then there would be somewhere in the neighborhood of three well three times that so almost 40000 barrels a day of steam so that is.

Highly valuable.

As we go through that turnaround because that part of the facility doesn't get turned around and it allows us to continue to prove scheme.

While the other part of the facility is down is that just for clarity, we're not taking the whole facility down we'll be taking a portion and will provide greater clarity as to what that turnaround could fundamentally look like in terms of time and also.

The amount of oil will that we'll have off production as we drive towards.

Our 2020.

Guidance release on November 20 Onest.

Okay, and then just finally, the Alberta government just announced the circuit curtailment relief for off for rail shipments literally what your conference call story.

Yes, I mean I'm, assuming that you had been talk with them any thoughts in terms of like what the upside is on your production levels based on this.

Hey, Phil it's Eric.

We saw that come across to our were we we have a sense can be a base up Q1, obviously, so we know what that number is it might be.

Eight to 10000 barrels a day for us potentially.

We have to work to though with with our team here with the government.

Is that a blend numbers at a bit from a number.

One.

Okay. Thank you that's it from me.

Ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by the one.

Hey, It appears there are no further questions at this time. Please proceed.

Well Jessica thank you.

And for people to join us on the call. Thanks very much.

I hope everybody has great day look forward to talk to next quarter.

Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and asked thank you. Please disconnect your lines.