Q2 2020 MEG Energy Corp Earnings Call
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Good morning, My name is Joanna and that will be a conference operator case.
This time I would like to welcome everyone to them they can achieve 2022nd quarter results conference call.
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After the speaker's remarks, there will be a question answer session if you'd like to ask a question during that time simply press Star then the number one on your telephone keypad. If you looked like to withdraw your question. Please press star followed by Q.
Thank you Mr. Derek Evans CEO you may begin your conference.
Thank you John and good morning, everyone and thanks for joining US to review makes Q2, 2020 operating and financial results and online with me arcades, our CFO and allow used jetski, our general counsel and corporate Secretary just a reminder, that this call contain forward looking information. Please refer to the advisories enter disclosure documents.
Filed on SEDAR and on our website.
[laughter] I'd like to start the call by taking a few seconds to express my thanks, and gratitude for older support that we've received from so many different areas as we navigated our co that experience.
First and foremost I want to thank our staff for all that they've done and continue to do to ensure the health and safety or their teammates as well as the safe and reliable operation at the Christina Lake facility.
I also want to acknowledge in addition to the new and challenging work environments. It site and in Calgary, Our staff. It made major contributions to our business cost reductions, having taken significant reductions in their base salaries and their long term compensation well stepping up to take on additional responsibilities as a result of our recent Oregon.
Organizational review.
If they were on this call they would want or investors and other stakeholders to know that they're doing everything they can to help ensure that we all get through these challenging times together. So that we can continue to grow and thrive.
Our contractors and suppliers have shown up in a significant way throughout this crisis is well they've stepped forward at this critical time to plan, a central role and to be part of the solution.
We wish we appreciate all to support we have received.
Finally, I would also like to acknowledge the report the support we've received from the federal provincial and municipal governments that we work with.
Thank you for the meaningful programs you put in place to support a through these challenging times is appreciated and never taken for granted.
Yeah.
[laughter] make continues to proactively respond to that safety in financial challenges associated with that cobot 19, pandemic and remain committed to ensuring the health and safety of all of its personnel and the safe and reliable operation at the Christina Lake facility.
Second quarter was characterized by extreme negative movements in commodity prices, coupled with unprecedented uncertainty regarding near term crude oil supply.
Demand balances due to cope with Nike our team continued to react quickly during the quarter to protect amags financial liquidity by voluntarily curtailing production, making additional cuts to our capital budget and further reducing DNA and non energy operating costs, all of which were supplemented by our strong hedge position.
A loud, which allowed Meg to exit the corridor with an undrawn revolver and 120 million of cash on hand.
On May four 2020, as a result, or the negative and uncertain commodity price environment at the time make reduced full year 2020 capital investment by an additional 50 million to 150 million or 40% below our original guidance of 250 million.
Approximately 75% of the aggregate hundred million dollar capital reduction in the air was associated with future bitumen production.
Make also reduce non energy operating costs in DNA expense guidance by 20 million and $10 million respectively.
During the quarter decision was made to roll back salaries across the company with an emphasis on board executive and senior leadership compensation effective June 1st 2020 Board members received a 25% based cash compensation reduction presidency, Oh, My annual base salary was reduced by 25% Chief operating officer and Chief financial.
Officer, each took a 15% annual base salary reduction Vice presidents received at 12% annual base salary roll back and all other employees received the 7.5% annual base salary roll back.
In addition, the value of the target 2020 long term incentive awards issued to employees and directors on April 1st were reduced by 20%.
All of these actions are entirely consistent with ensuring that we live within our cash flow and did not impair our financial liquidity.
I would like to touch on some of the financial and operating highlights of the second quarter and the quarter. We produced 75678 barrels per day bitumen production was impacted by planned turnaround activities, where the timing was advanced to June from September and where the scope and duration of the turnaround was expanded relative to the original budget.
Turnaround is expected to be longer in duration with completion expected by mid August while being undertaken at a lower total cash cost by relying on internal resources.
This allows the company to take advantage of the current low oil price environment by reducing turnaround requirements in 2021.
Our continued focused on cost reduction generated net operating cost this $6 in 14 cents per barrel, including non energy operating costs of $4, a nine cents per barrel and record low DNA costs of $1.29 per barrel free cash flow 69 million in the quarter was driven by adjusted funds flow of $89 million are 20.
Nine cents, a share and disciplined capital spending up $20 million [laughter] cash on hand grew by 58 million from Q1 to 120 million at quarter end benefiting from a $250 million realized gain on commodity risk management at the quarter.
The end of Q2, Megs 800 million dollar modified covenant light revolver remains undrawn.
On may 4th leg suspended full year 2020 production guidance due to the global oil price environment at that time, which was experiencing multi decade lows coupled with extreme levels of volatility driven primarily by the unprecedented demand shocked euticals 19, since that time crude oil price levels and volatility of stabilized.
To a level that allows the corporation to reinstate full year production guidance, which is now targeted at 78 to 80000 barrels.
Per day guidance for non energy operating costs DNA expense and capital expenditures remain unchanged from the revised guidance announced on May four 2020.
Make remains well positioned from a financial liquidity perspective, benefiting not only from its 2020 hedge book and the term and structure of its outstanding indebtedness and credit facility, but also from the low decline low cost structure of its high quality Christina Lake asset.
These early as long term debt maturities approximately four years out represented by U.S. 600 million of six senior unsecured notes due March 2024, none of the corporations outstanding long term debt contain financial maintenance covenants. Additionally, makes modified covenant Lite 800 million a revolving credit facility.
No financial maintenance covenants unless drawn in excess of 400 million.
At current strip pricing, we expect to exit the year with cash on hand and to be one of the few companies that is reduced debt by over $100 million in twentytwenty.
As a pandemic continues to evolve will remain nimble and agile and with respect to the execution of our sustained stay nimble business model generates material free cash flow supported by our low decline and low cost structure Christina Lake.
In conclusion, we remain committed to sustainable innovative and responsible energy development and we'll continue to drive efficiencies in our business from a financial operational and cost perspective.
With that operator, we will open the line.
For questions.
Thank you.
Ladies and gentlemen, as a reminder, should you have any questions. Please press star followed by one.
First question comes from Phil Gresh from JP Morgan. Please go ahead.
Hi, good morning.
Good morning first first question is just.
Our latest thoughts around.
Sustaining capital needs for the business. So just to maintain the 80000 barrels a day yeah on a go forward and then if you were to try to wrap that back to 100 Kb de at some point, how you think about the capital required to do that.
Sure I'm, Phil you know I think it's we it's early days for us as we're starting to really put depend depends so our favorite pen to that paper with respect to what our capital should look like for 2021, which should be a very good proxy of sustaining capital required to hold production had that 85000 barrel a day.
Erase.
At this juncture, we think thats about $250 million.
Give or take and as we think about that additional capital that would be required to take production from 85 back to 100 800000 barrels a day, we think that at this point, it's somewhere in the neighborhood.
An additional $150 million.
Okay, Great very helpful. And then second question would just be with the additional pipeline capacity the Gulf Coast second after the year and West where Canadian production is in your view on of course events.
How much of that capacity do you think you'll be able to utilize.
The second half of the who would it be the full amount or something less.
At this juncture I I'd say, we're not planning on moving our own proprietary volumes down through the line will probably be utilized about 70% of the line for our own volumes and we will undertake sort of what we would consider to be or call buy and sell agreements to.
Utilize the remaining 30% of up the lives capacity.
Okay got it alright, thank you.
Thank you. The next question comes from MLB chunk from Goldman Sachs. Please go ahead.
Good morning, guys on my first question is just around what the extended scope of work is being undertaken.
If you during the phase wanting to maintenance activities that sort of eliminates the need for tender activity and 2021.
Good morning, only it's.
What we've done is we've taken 2020 ones turnaround and moved it effectively into twentytwenty. So.
Turnarounds on her say again that GE TG, where our I have been moved up we've pulled those.
Those units apart.
And has that gone into do so does the what I would call. The five year annual inspection type work that needs to be done on on those units we've done it to your early.
And.
I'm happy to say that the turnaround in on time on budget with very very little found work at this point.
Great and just my follow up is around WT WCS differentials. So they do remain quite tight I guess the question is what are you seeing in terms of production across the broader industry and how quickly that's ramping back from Q2 trough levels and then talk to your second part is just around what you've seen tons the U.S. Gulf coast heavy.
Well thank you.
So.
We've seen that well western Canadian production, especially heavy production, there's still a we're not the only party our company. This down on turn around and I think a large part of the the tightness in the differential that you're seeing today is being driven by that lack of production. That's on as you know the.
Enbridge apportionment came in for August at 7%. So it would that that that that's a great sort of harbinger of how tight the market is or the lack of supply fundamentally at this point in time.
Interestingly enough in a in the discussions that we do have a with refiners both the impact to in PADD three.
We see some.
Concern about supply over the long term and we see.
As a result, we've seen very tight gifts in India in PADD, two but in the US Gulf Coast. We're also seeing.
I would call.
Lower than normal.
Differentials at this point in time.
For our particular product which is AWB.
Thank you.
Thank you.
Thank you. The next question comes from Greg Pardy from RBC capital markets. Please go ahead.
Yes, Thanks to my actually is a bunch of good questions have already been asked but Derek maybe you know the hedge book is is in great shape. This year and you and you guys got after that very very quickly.
Back in December January how are you thinking about hedging a in 2021.
So.
Greg It's great question.
Right and it's something that as we sit and we try and figure out the capital program that we want to to bring to the table, which obviously you know our desire at a minimum would be to have a capital program that allowed us to sustain production at.
85000 barrels a day and even sort of better world, where commodity prices generated the cash flow, we had where we could start to journey back to 100000 barrels.
We continue to watch the forward strip Oh and has continued to March up I think yesterday 2021 looks like about $43, Amit starting to get into a range, where we're looking at a variety of different instruments that we could use to ensure that we had the cash flow certainty.
To put a program of that magnitude side I I'd say.
We're.
We're getting closer to making a decision in that regard, but up to this point in time the volatility in terms of crude prices, which are now starting to dampen out.
You know and fundamentally what that supply demand relationship was going to look like across the world with respect to covert we've seen things sort of normalize, but we're concerned about the second wave in the impact that could have on production.
Our Dod oil demand at some point in time, so I'd say, we're being very cautious we're watching very closely and we know that our objective needs to be.
From the hedging program something that will provide us with a high level of certainty to undertake a.
Capital program that would sustain production.
Okay, Great no that's helpful, but nothing nothing in place yet dark ride for 2021.
There is no theres, a few condensate hedges in place, but nothing on the Wi Fi or on the differential side.
Okay second one I'm going to change that's just a little bit and it's not necessarily a planned in all the question per se, but you've.
You've got additional kit now in the Gulf Coast with your storage you re exported to China, you've indicated that theres kind of the supply gap going on in the Gulf Coast are is there any interest do you think on the part of refiners Gulf Coast refiners to get into longer term supply arrangements, you know where were especially now given that you've now.
Doubled your capacity on Flanagan or is this something where they just want to continue to buy spot.
That's very good question I would say.
On on the margin that.
We're seeing more interest in longer term arrangements and not spot arrangements and I I think that fundamentally talks to not only the tightness in the market today, but the perceive tightness in the market on a go forward basis.
Okay terrific, thanks very much.
Thanks, Greg.
Thank you. The next question comes from Manav Gupta from Credit Suisse. Please go ahead.
Oh, Hey, guys, a you'll have some capacity on the MX expansion can you talk about that and also what are the prospect self line when do you actually see better things coming on.
Sherman and the ER.
We have 20000 barrels a day on on on Cmax and we're quite excited that a wide there's multiple construction spreads actually putting pipe into the ground on TMX, we see TMX coming on.
Late 2022, and adding somewhere in the neighborhood of 590000 barrels to the market. So we're excited about the fact that is actually being built.
And.
That capacity will be available to us in late 2022.
And second question was doing one cubic condensate prices at a major economic picture in relation I'm trying to understand during Q1 day silicone winglet. The at the end of May not want a bit absolutely. Yes, no consequence, and then how do you look and I think and peak utilization. Thank you.
I want to say, it's a little bit of everything that you described so if we break it down by month.
April and May I, we still had high condensate prices, but we found that.
We were also in an environment, where WT I was improving.
And by time it got to June if you looked at the actual data for June inside of our books, you see that our condensate price was effectively zero because of the small differential and the fact that the condensate that we bought in April and May to blend in June and so was that a much lower price than what we were.
Yeah I was in June so.
I'd say the beginning of the quarter it was that bit of headwind and by the ended the quarter. It was a full on tailwind.
[noise] just took up there you finished with your question.
Yes.
Thank you.
Thanks, Matt.
Your next question comes from Joe Jamil from Morningstar. Please go ahead.
Great. Thank you.
How sustainable are the energy operating costs that you brought reported this quarter.
And then your guidance.
So.
Joe That's a great question I and the both our DNA costs and are on non energy.
Operating costs are impacted by.
The federal program, the Canadian emergency way subsidy so.
I hope that those are going to be recurring cost because if they are well then we've got much bigger issues to deal with that.
I'd say, if you look at the sort of cost savings that we talked about or reductions on sort of $20 million on 'em operating costs and $10 million on.
DNA.
Hey half of those savings are sort of will be recurring on a go forward basis.
Great. Thank you.
Thank you.
Thank you there no further questions ill now turn it back over to Derek Evans for closing comments.
Thank you dry and thank you all for joining US. This morning as always please do not hesitate to reach out to us if you have any.
Questions more detailed modeling questions were always happy to.
Touch base and.
Answer any and all questions I appreciate all of you joining us this morning and.
I hope that you're all health and safety.
Paul well and safe.
Take care.
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