Q4 2019 Earnings Call

Good morning, My name is Joanna and I will be a conference operator today.

This time I would like to welcome everyone to make and achieve 2019. Your emphasis conference call. All lines have been placed on mute to prevent any background noise.

The speakers remarks, there will be a question and answer session.

If you would like to ask a question. During this time somebody press Star then the number one on your telephone keypad <unk>.

I'd like to withdraw your question. Please press Star then the number two.

Thank you Mr., Doug you May begin your conference.

Thank you drill and good morning, everyone and thanks for joining US review makes full year 2019, operating and financial results in the room with the me. This morning I had their case, our CFO. She tacky, our chief operating officer and allow you to Gatzke, our senior VP of legal General Counsel and corporate Secretary.

Just a reminder that this call contains forward looking information.

Please refer to the advisories in our recently.

Loaded up disclosure documents filed on SEDAR and of course on our website I'll limit my remarks to a few key highlights of the year to leave more time for questions.

In 2019, our priorities were to improve overall cost efficiencies preserve financial liquidity and enhanced makes competitive position since making that commitment to shareholders. We've had an extremely strong year, we remain steadfast in maintaining long term financial liquidity, while aggressively pursuing cost.

An ongoing debt repayment.

Since the beginning of 2019. The corporation has repaid 633 million up long term debt, including 501 million of long term debt in 2019, and an additional 132 million subsequent to year end.

Additionally in July 2019, the corporation entered into I knew five year revolving credit facility and letter of credit facility. The total borrowing capacity under the two facilities was proactively reduced to 1.3 billion comprised of 800 million under the revolving credit facility and 500 and there's a lot.

Her up credit facility the facilities contain no financial maintenance covenants unless make has drawn in excess of 400 million under the revolving credit facility.

Cash cost savings from the reduction in credit fees and interest savings on debt repaid in 2019 are expected to be 45 million annually.

In January 2020, the corporation successfully closed a private offering up 1.2 billion U.S. in aggregate principal amount of seven an eighth senior unsecured notes due February 2027, the net proceeds of the offering plus cash on hand, we're used to fully redeem 800 million you asked a 6.38 seen.

Your unsecured notes due January 2023, and partially redeem 400 million U.S. of the.

1 billion U.S., 7% senior unsecured notes due March 2024.

Post this refinancing make has a four year one runway until its next debt maturity represented by the remaining 600 million U.S. of March 2024 notes.

[noise] 2019, like a year of exceptional operation performance 2019 annual bitumen production and up 93082 barrels a day was a record high and a 6% increase over.

2018, non energy operating cost averaged a record low a $4. The 61 cents per barrel as a corporation continues to drive efficiency gains into its operations, while maintaining production levels.

General and administrative expenses 68 million or $1.99 per barrel a production in 2019 compared to 83 million or to 58, a barrel of production in 2018.

15 million.

Dollar decrease in aggregate Gionee year over year is primarily due to the reduction of staffing levels and rationalization of ongoing administrative costs.

And lastly, we have continued to improve market access and maximize the pricing we receive make realized an average AWB prep blends sales price of 46 19 U.S. per barrel in 2019 compared to 41 25 U.S. per barrel in a 28 team the average.

W.G.I. price decreased $7.74 U.S. per barrel year over year, but this was more than offset by 15 dollar and four cents U.S. per barrel narrowing of the average W.T.I. AWB blend our excuse me AWB differential at Edmonton also contributing to the relied AWB.

Blend sales price in 2019, once the corporations ability to deliver 33% of its blend sales volumes to the less Gulf coast, where the WT AWB differential averaged $1.77 U.S. per barrel comparatively in 2018, the corporation delivered 30% of its blend sales volumes to the U.S.

Coast, where when the average MP Ty AWB differential was $6.68 U.S. per barrel.

Excluding transportation and storage costs up stream of Ed I'd, The Edmonton Index sales point Megs NAFTA AWB blend sales price at Edmonton averaged 42, 20 U.S. per barrel in 2019 compared to the posted AWB index price at Edmonton, and 42 await U.S. per barrel notwithstanding that the.

Bridge mainline of course remit averaged 43% during 2019 make was able to capture better pricing.

Then the Edmonton Index as a result of its marketing and storage assets and the ability to move barrels into the higher priced us Gulf coast market Megs average pricing against the AWB Index I price at Edmonton is expected to further improve once megs contracted capacity on the Flanagan Seaway pipeline system doubles to 100000.

Barrels a day blend in mid Twentytwenty.

Looking out at 2020 in November of 2019, Megs, Meg announced a capital investment program planned for 2.4 2020 of $250 million that includes 200 210 million to be directed towards sustaining and maintenance capital 20 million to be directed towards the completion of.

The in progress phase to be brownfield expansion expected to be completed in the second quarter of 2020.

And the remaining $20 million of capital spending is required for Nondiscretionary field infrastructure regulatory and corporate capital costs.

For the first half of 2020, Meg has entered into benchmark heavy T.I. fixed price swaps of approximately four approximately 70% of forecast first half 2020 production volumes at an average price of 50 915 at U.S. per barrel on a full year basis make has hedged approximately 55%.

Our forecast Twentytwenty production by a benchmark Debbie CCI fixed price swaps and WT I fixed price swaps with sold put options. Additionally, the corporation has hedged approximately 30% of its Wi Fi WCS differential exposure at an average price of U.S. $19.39 per.

Barrel and approximately 50% of condensate exposure at an average price of 101% of WT I.

Looking forward, our objectives and priorities for 2020, our focus on capital discipline and free cash flow generation improved market access with our additional 50000 barrels to add Flanagan South seaway capacity coming on in July.

Reduction and financial liquidity, we're all cash flow will continue to be earmarked for debt reduction.

We remain committed to driving efficiencies in our business from a financial operational and cost perspective as I said just said, we will continue to direct all available cash flow to debt repayment.

With that.

Operator.

Can we please open the lines for 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 on your Touchtone phone.

If you why isn't it speakerphone, please let the handset before passing any Keith.

And your first question is from chunks of Goldman Sachs. Please go ahead.

Hi, Eric Thanks, very much the time today I'm just curious if you guys have the latest all your latest thinking is on each of the three major pipeline expansion for that for Jackson.

Your best guess to Wow, when estimated startup timing would be.

I I don't think it's really changed very much from our last week I don't have the.

The exact date in front of me, but.

We continue to see that line three is making progress and we expect that it.

Either late this year or I am I think it was Q1 up 20.

2021, TMX looks like it.

Sometime in 2022 towards the end of 2022 and Keith on the one is the one that's up in the air and.

We would hope that that's coming on earlier then.

What is expected we see some.

Some interesting movement in terms of people trying to push that had faster.

Great and just one follow up if I may.

Given the current macro environment, which lies today in today is there scenario that capex can be further reduced from the 250 mill in 2020 or should we expect that to be limited flexibility yeah.

Thank you.

Emily I think as we think about Capex.

You know my Chief operating Officer will tell me, if I continue to drive down as Capex and still expect him to to make miracle our drive miracles into the business I. So I think there may be some room, but.

The way we've tried to manage.

For the downturns in commodity prices. There we've seen is with a very very aggressive hedging program and when you see that 70% of first half production at a hedge that 70% and day.

Price at 50, 915, U.S., we've got the ability to ride out some of the volatility there, we're seeing and W.P.T. Rowe price. So we'll continue to look at driving efficiencies into the capital side of the business, but I'm not a big fan of Whipsawing the capital in the business that poor planning on.

The financial side of the business if.

We're reducing and an increasing.

Our capital in response to short term volatility in commodity prices.

Great. That's helpful. Thank you.

Thank you.

Thank you. The next question comes from many Gupta from Credit Suisse. Please go ahead.

Hey, Derek fast you have indicated that you are looking at least to reduce the amount of diluent to use rather than investing in a D. R. U can you talk a little bit about that.

Absolutely I mean, we haven't size.

Three sort of areas that we continue to look at in terms of deal you went reduction the.

Probably the single biggest one in the one that we're hoping that will be on stream with a permanent application is our butane blending facility. So minimizing are taking out some of the condensate that we're using.

To blend and really bring into the mix.

You came we think that this could have an annualized savings to the organization of somewhere in the neighborhood of $20 million here and we continue to look at the concept of partial up or not partial upgrading that partial bye.

Partial blending of condensate too.

In our product so instead of blending up to full pipeline spec could we.

Blend up to half of pipelines back end use rail for that product in railcars and move it to refineries in the United States and the final.

Sort of five pitchman.

Our sort of.

Condensate reduction initiatives that we have is a black box technology that has arrived.

At our site that we're quite excited about that could have quite a bit of impact. So this would be a.

Hey, technology that is set up to a fundamentally there has been bench scale tested but to set up to reduce the amount of condensate bye.

The low pressure low temperature catalytic reaction.

Thank you for a very detail on so I have one quick follow up you on net operating costs for the quarter was fine 87, which was slightly higher losses. The last quarter. This only a function of higher energy costs or and how should we model. This number four one Q 2020.

It's definitely a function of higher higher energy costs.

I think you know a.

Our our operating costs will vary with.

Energy and the.

Energy component Thats, why we really try just speak to the non energy piece I.

Thank you should expect that Q1 will have higher gas prices and therefore.

Slightly higher prices.

Thank you so much for taking my questions.

Q.

Thank you. The next question is from Benny Wong from Morgan Stanley. Please go ahead.

Hey, good morning. Thanks for taking my question just wanted to follow up on the hedging question. Obviously you guys are very active in that part of the strategy. There just just remind us if theres any parameters are guiding principles of your strategy on on the hedges is there a max amount of Uh huh.

Hedging that you would would do and your and your volumes.

Hi, Ben Thanks for the questions or call talking.

There's a strategy really is twofold one is.

Consistent with what we've done the past, we look to hedge our sustaining capital. So that's what we've got we did.

Probably the middle last year, we completed that for 2020.

And then what well listen we look at its opportunistically protecting debt repayment, because obviously as Derek so thats the.

Touched on that we're focused on in the in the medium term.

So I will look to do that with W. CCI and we did that obviously is Dirk mentioned, we're sort of Sun has on.

For the first half and 55 for the full year since I've said for the full year. So you'll see us do more of that obviously not in this environment, we won't but as we move forward to see a sort of hedge the front end months.

Ah, yes in excess of that 50%, but we also focus on where are our volatility exposure is which is and how to so when we think about hedging differentials. We don't hedge we don't hedge through our Edmonton exposure.

Got it that's it that's very helpful. Thanks very much.

Just my follow up is you guys don't a tremendous now working to reduce our costs. Just wanted just to see is do you guys see more opportunity to further reduce.

Your non energy op costs.

Even lower relative to your guidance is you're going forward.

Then I'm going ask keetac to take that one.

She is actually in.

In terms of the non NGL Opex, let's say last component business Ics.

People aspect in the cost and if you look at our last several years, we kinda reaches that is state in terms of the absolute component of it and I think those opportunities we need in the board of my aspect of it.

To further driving lower we obviously, we look at incremental.

Reduction from this point on that but those would be when at the mine in that sense.

Understood. Thank you for that and just finally, just one final question. Yes. She is clearly something to investors are increasingly focused on.

There are just curious to see and get a sense of your conversations with investors and what does like do you think.

The market recognizes the technological advancements you guys made or has discussions really the dominant they'd be okay, bye-bye focus on leverage and address.

Had been that's really good question.

Obviously.

The the leverage and debt reduction is a is a big part of our story and you know you've heard us continue to make sure that the message that really people with the days that were going to continue to focus on that.

The grasp.

Interestingly enough is one that we find.

New investors.

That message isn't getting out you know, we've got 33% of our production that is going on Flanagan, South and Seaway and and we're going to go to two thirds of our production in the second half of 2020 and that has a pretty big impact on terms of our annualized cash flow.

As we move forward. So people are maybe a little bit more preoccupied with line three and TMX, whereas we are delivering in the second half 2020, a substantial increase in NRT grass. So.

Maybe that's my bad for not stressing that enough and making sure that people know that we have.

We're not waiting on pipeline progress, we actually have realizable pipeline incremental significantly incrementally beneficial pipeline progress, it's going to show up.

Here in the second half 2020, the that third aspect SG.

We are working harder on this to try and explain.

Just exactly the trajectory that we've been on really since the company started or.

One of the reasons.

So excited to join Meg was that tremendous innovative nature.

The company and the work that had been doing on reducing.

Greenhouse gas intensities.

You know and different technologies that we could bring to the table to positively impact, though so well be doing a better job of trying to connect to that innovation to the intensities and to the U.S.G., but.

We are definitely seeing a much higher level of interest in SGN and quite frankly, we welcome the.

Great. Thanks, guys appreciate it.

Thanks Ray.

Thank you, ladies and gentlemen, as a reminder, should you have any questions. Please press star followed by one.

The next question is from Phil Gresh JP Morgan. Please go ahead.

Hey, Hey, good morning, guys. This is John Royal sitting in for Phil. So my question is on transportation, what's the actual volume you expect from 2020 for probably to a Gulf Coast given me Mike worsen.

Related we how should we think about the evolution.

Overall transportation cost per barrel.

<unk>.

John I'm, good I'll, let Eric take that one John it's Eric speaking of the answer your first question isn't the backend of a you know depends on what's your view on a portion as if you assume.

Say, a 40% Unfortunately for 2020, we expect through rail and pipe to get about.

55% of our volumes down to the Gulf Coast Us with a portion of it.

I'm, a transportation cost perspective, you'll see a go up.

Marginally due to the fact, we're going from 50000 barrels a day capacity our funding into 100000 barrels that capacity. So you'll see that in the back end of 2020.

And sorry on the cost as well.

Cost per barrel.

Or the cost on flat again as about a $758 U.S. and barrel.

Thank you.

Thank you so no further questions at this time you May proceed.

Well operator, thank you and I'd just like to thank everybody that has joined just on the call. This morning, and remind them that you should you have any questions or follow up request. Please don't hesitate to reach out to us were more than happy to talk to you about the results.

And I.

Get you answers in a.

An appropriate fashion. So thank you all and I have a great day.

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

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