Q3 2020 MEG Energy Corp Earnings Call

Time, I'd like to welcome everyone to the make energy 2023rd quarter results Conference call.

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After the speakers remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad, if youd like to withdraw your question. Please press star followed by two thank you Mr. dark I've been CEO you may begin your conference.

Thank you Pam and good morning, everyone and thank you for joining US to review Megs Q3, 2020, operating and financial results with me. This morning is our gaze our CFO. She tacky, our chief operating officer, and Lyle you step ski our general counsel and corporate Secretary just.

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

[noise] make continues to proactively respond to the safety and financial challenges associated with the COVID-19 pandemic I'd like to take a second to express my sincere appreciation to all our staff for what they've done and what they continue to do to ensure the health and safety of their teammates as well as the safe and reliable.

The operation of the Christina Lake facility threats. This pandemics period.

[laughter] highlights in the quarter include successful completion of the plant 75 day major turnaround on time and under budget [laughter] continue.

Continued reduction in non energy operating costs and DNA expenses.

Post turnaround production exceeding earlier estimates.

The addition of 2022nd half W.T.I. hedges to ensure a successful completion of the 2020 capital program without drawing the revolver and continuing to build the cash on hand at year end to help fund our 2021 capital program.

As we head into year end, we're increasing annual production guidance decreasing annual gionee and non operating guidance and expect to build free cash flow through the balance of the year with 80% of our fourth quarter WT sales exposure hedged at approximately 46 U.S. dollars.

Per barrel.

We remained well positioned from a financial liquidity perspective, benefiting not only from our six significant 2020 hedge book and the term and structure of its outstanding indebtedness and credit facility.

But also from the low decline and low cost at the high quality cost structure of the high quality Christina Lake asset.

I'd like to touch on some of these financial and operating highlights of the third quarter and great greater detail Mike.

Make realized an average AWB blend sales price of $34.13 us per barrel during the third quarter of 2020.

Compared to $15.12 U.S. per barrel in the second quarter of 2020 makes.

Makes all 62% of its sales volumes to the U.S. Gulf coast in the third quarter of 2020 compared to 35% in the second quarter of 2020.

This increase in sales to the U.S. Gulf Coast in the third quarter of 2020 is primarily as a result of the corporations increased contracted transportation capacity on the Flanagan, South and Seaway pipeline systems effective July 1st increasing from 50000 barrels a day to 100000 barrels a day.

Transportation and storage costs averaged $10.07 per barrel of AWB blend sales in the third quarter of 2020 compared to $5.92 per barrel in the second quarter of Twentytwenty deal.

The increase in transportation and storage costs is primarily due to the fixed costs associated with the increased Flanagan south seaway contracted capacity and lower apportionment on the Enbridge mainline.

The additional transportation capacity afforded by the higher contracted capacity and lower portion that was underutilized by make during third quarter due to the planned turnaround.

Subject to the actual level a portion went on the Enbridge mainline system transportation costs are expected to average between 750 US an 850 us per barrel of AWB blend sales through the remainder of 2020 and 2021.

Bitumen production averaged 71516 barrels per day in the third quarter of 2020 compared to 75687 barrels in the second quarter.

Pitchman production in the third quarter of 2020 was impacted by major planned turnaround activities at the phase one and phase two facilities, which began in early June and were completed in mid August 2022.

2020 turnaround was extended in duration to 75 days expanded in scope relative to base budget in order to minimize staff levels at site during.

COVID-19, and maximize utilization of makes internal resources, thereby lowering overall cash costs make also made the decision to advance turnaround activities from 2021 to significantly reduce the 2021 turnaround requirements Turner.

Turnaround was completed on time and under budget with post turnaround production exceeding guidance.

Notwithstanding multi decade, low crude oil prices make generated $85 million of free cash flow in the nine months ended September Thirtyth 2020, and exited the third quarter of 2020 with its credit facility Undrawn.

$49 million of cash on hand.

For the fourth quarter of 2020, Meg has entered into benchmark Devry CCI fixed price hedges for approximately 80% of forecast bitumen production at an average price.

45, 76 us per barrel.

Based on better than expected production performance during the post turnaround during and post turnaround Meg is revising upward its full year 2020 average production.

78 to 80000 barrels a day to 81 to 82000 barrels a day.

DNA expense is now targeted to be in the range of 45 to 47, and a half million or approximately 17, and a half million lower than our original guidance.

Non energy operating costs are now expected to be in the range of 130 to 135 million or approximately 32, and a half million lower than original guidance.

Of the 50 million aggregate reduction in expected costs. Approximately 22 million are the result of temporary cost reductions while the remaining $28 million in cost reductions are the result of continued optimization of operations reduction in staffing levels and rationalization of ongoing administrative costs.

Finally, the consolidation theme has been front and seven center with a number of transactions announced in the us and the notable transaction announced earlier this week in Canada between Synovus and Husky.

The consolidation theme is something that make us familiar with and we manage our business to best ensure that were on our front foot from a transaction perspective and not vulnerable to market dislocations.

The advantage and make shareholders.

As it relates to oil price volatility, which has been a stated driver of recent transactions, we maintain a constructive view on WCS volatility go forward as we are seeing positive progress on both Enbridges line three expansion expected to be in service in the second half of 2021 and the TMX expansion.

Expected in 2022.

We have 20000 barrels a day of blind capacity on TMX and as you know we have 100000 barrels a day.

Capacity on Flanagan South Seaway.

Anecdotally, we see the Alberta government's elimination of curtailment as further evidence of the positive momentum for light heavy differentials and WCS pricing.

With respect to the benchmark WT I pricing Mega has been relatively successful in protecting cash flow through significant W.T.I. hedges.

Hedges in 2020, allowing for the repayment of $130 million of long term debt as well as the building of free cash flow through 2020.

We are continuing this hedging discipline as we move into 2021 with approximately 25% of expected sales hedged at around $46.

Wi Fi and we look forward to adding more hedges.

The opportunities present themselves.

Our modified Covenant Lite revolver remains undrawn is in place until mid 2024, and our first long term debt maturity isn't until early twentys, pointing for providing us with financial breathing room, as we navigate through cobot related impacts.

Maybe expects to release its 2021 capital budget in early December while development as the that the 2021 capital budget remains in progress you will be designed to be fully funded with internally generated funds. This is consistent with mix financial discipline and 2020, where the current years capital program remains on track to be fully.

Funded with internally generated funds.

Finally, we have an industry, leading cost structure, taking DNA down by 35 million since I joined Meg in 2018, and our non energy operating costs remain best in class once the Synovus Husky transaction is complete Meg will be the only pure play Sag D producer of scale and we will continue to run our business.

On our front foot in the best interest of all shareholders.

With that I will turn the call.

Back to the operator.

For for questions.

Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question.

Please press star followed by one on your Touchtone phone okay.

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Hello.

Using a speaker phone please lift your handset before pressing any keys one moment for your first question.

Your first question comes from Phil Gresh with Jpmorgan. Please go ahead.

Yes, hi, good morning, Thank you for taking my questions.

First question.

Was Derek on the last call you talked about.

$250 million.

Sustaining capital number to maintain production then.

Kind of 80 to 85000 barrels a day range I believe.

It looks like the fourth quarter number the implied guidance is at least that those.

Those types of levels come out of the turnaround size.

So I was just wondering how you're thinking do you have any adjustments to that thinking as you enter 2021 about what kind of production you can maintain and then what kind of what kind of capital will be required.

Phil Thanks for the question as we think about 2021 at this point.

I think we're thinking of profit our capital number in that 200 to 250 million dollar range.

It's still being worked by our technical staff.

And.

So I don't think Thats really changed since.

We would have last talk to market on that.

With respect to what the.

Production number is I think that we're still working through.

I'd say some flush production associated with the the turnaround our production is higher than the 85000 barrels a day that we projected that it would be.

Coming out of turnaround so we're not ready yet to comment on what the production profile is going to look like next year.

Okay, Okay fair enough and.

Just any other.

Thoughts on.

Costs as you enter 2021.

Whether it's non energy opex or just that you know you mentioned that some of those savings or temporary but.

Yes, if we continue to be in a challenged.

Pricing environment with WCS kind of around around $30.

Manage those costs.

Yeah.

So.

Fundamentally.

We manage costs day in day out whether we're in a co bid or in a low price or a high price environment. So I think we've done a reasonably good job pointing out the costs, which would be fundamentally nonrecurring and I think on the.

Operating side.

We're pointing to $15 million in on the G and H side, we're reporting seven.

But I don't think people should take away from that that.

We're going to be we're not going to continue our ongoing work on continuing to reduce gionee and operating costs to the best of our ability each and every day.

Okay. Thank you.

Thank you.

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

Yeah, Thanks, when I get to full start to Barack Hum. So anyway, just a couple of questions.

First of all.

Let me update you are talking about came out of his last conference call the park level for that.

Mentioned looking at using different types of Diluents to reduce your don't need going through the access pipeline.

Well Phil.

I was going to say Phil too but.

Chris.

Hi, guys. Thanks for the question what we've been talking about is a proprietary process that would.

We had hoped.

I hope to have up and running in a significant way that.

There was some new technology that we bolted into Christina Lake that had significant potential to reduce our diluent requirements.

On a go forward basis.

That equipment is being commissioned as we speak.

And we hope.

That.

Over the next couple of months, we're going to start to see whether the bench scale testing that was done it showed a significant reduction.

In the requirement.

Diluent to me pipeline viscosity.

Actually is borne out in the field.

Is this something you're working in conjunction with some sales.

Carl.

No.

We're working with the company that has put this technology forward.

Okay and then just the final question just on the starting.

Turning to turnaround because it was 75 days I mean, it was because of.

Trying to manage around the call would risk but.

Given that you did have that extra time did you was there anything that you discovered maybe any more de bottleneck opportunities or anything like that.

I don't think.

[music].

There was anything that came out of that.

In in terms of Debottlenecking activities I think.

We were generally pleased with the state.

And then the condition of the equipment that we that we saw as we got in and we looked at those things but.

Nothing from Debottlenecking process, and I should basically say de bottlenecking is an ongoing sort of exercise.

With with our facility so.

I guess it would have been surprised if anything unusual it come up in the process as it's fairly continuous exercise that goes on through.

On a day to day basis.

Okay. Thanks, Thats it for me.

Phil just before you go.

Okay.

I think what you may have been referring to was our butane blending offer.

Operator.

Let's see in or out.

So that butane blending pro.

Project is moving forward and.

And we expect to have it in.

Up and operating.

Time and in the new year.

Okay perfect. Thank you.

Thank you.

Ladies and gentlemen, as a reminder, should you have any questions. Please press star one.

Your next question comes from Neil Mehta with Goldman Sachs. Please go ahead.

Hey, good morning.

Early out there in Calgary. So thanks for taking the time guys. That's the first question I had was just around WT Breakevens as you think about 32021.

Where do you see that.

Rick.

On a on a us dollar basis to cover growth.

Sustaining capex next year.

Neil Great question.

And don't worry about us getting up early we're used to.

That.

The the breakeven for.

From a Wi Fi perspective is typically I'm going to say in that mid 42.

Type range, and that's with what I would call a fairly conventional sort of WCS WCS differential.

As youve heard on the call.

We are.

We believe that the WT WCS differential is actually in the process of shrinking as more pipeline capacity becomes available and we're very encouraged about the the movement that we've seen in that regard and what that does for the long term prospects.

For somebody like ourselves, which is pure play.

WCS player so.

You did see in that $45 range.

Is that that the $200 million to $250 million of Capex.

Yes.

Okay and.

Hi.

Question.

Maybe you can comment on both quickly.

Because I think your comments on M&A were intriguing certainly it's been a big focus here in North America over the last week.

Just what role do you see that playing and consolidation over time.

And the other is I just wanted you to flush out your thoughts on WCS, a little bit more here it sounds like you've got a more constructive view.

There are some things that light heavy worldwide now because of.

Incremental barrels coming out of the market.

In Canada, So your perspective on both.

Both of those.

So I just.

On consolidation.

We don't see ourselves being a.

A a.

A driver in the in the consolidation business, we're just going to continue to operate our business focus on reducing our our op costs, our DNA costs and being sort of the premier low cost.

Pure play WCS producer with a 60 year reserve life. So.

I'm, sorry, I can't tell you anything more exciting then we're going to just continue doing what we've been doing for.

The last 10 years.

On the on this.

The second part which was really.

Are we appear to be or sound to be more constructive.

And others may be in terms of the WCS WCS differentials.

We would point to the fact that storage levels in <unk> province.

In Alberta are at some of the lowest that we've seen historically.

We've seen continued small improvements on both the Enbridge system and on the Keystone system, We've got the northwest upgrader actually running and processing heavy.

All three of those at somewhere in the neighborhood of 150000 barrels a day of incremental demand.

We're seeing unprecedented levels of interest in our heavy crude in the us Gulf coast, not only for U.S. Gulf Coast refineries, but.

And in the Caribbean as well as obviously you saw the.

Reliance steel.

And that type of product moving too.

To India. So we think theres been a step rate change.

Even before you start to consider the Enbridge line three.

Project, which replacement and expansion, which should come on in mid 2021, and it's surprising to us but people continue do still think that TMX isn't going to get built even though there is numerous pipeline spreads out with pipe going in the ground and.

As we pointed out here again today.

People have forgotten that we have 20000 barrels a day of of long haul capacity. So.

Yes, I think directionally.

We're back in a position where.

Pipeline capacity egress coupon ability is not going to be as big a problem as it has been in the past that should be reflected in the differentials and that really is our thesis on why we believe.

There has been a step rate change and that's very positive for our business obviously.

Yeah.

Your next question comes from Greg Pardy with RBC capital markets. Please go ahead.

Yes. Thanks, Thanks, good morning, So Derek a couple things.

The the Capex range, you're mentioning here of 200 to 250, and I think thats. The last number I recall you guys talking about was more like 250, but again, if it's if it's equipped to deal with all the sustaining initiatives have you found additional ways to.

So essentially producers sustaining costs is that embedded in that or is the number just not really to two worked at this stage.

The numbers a fluid number and when I talk about 200 to 250 I'm also talking.

We are any capital program is going to be cash based.

So on.

If for whatever reason, if we see crude drop too.

A lower level than sort of that 45 dollar level that we would hope that it could average.

We're going to have to pull back on our capital.

And so I, probably didnt explain that well in terms of that that range is really.

Predicated on.

[music].

Cash being available but.

To fully sustained production next year, we need.

Definitely $250 million.

Okay. Okay. Thanks for clarifying.

And.

Aside from being the only pure player or will become the only pure play oil sands pretty.

Producer you guys are also quite advanced when it comes to solvents could you, maybe just remind us or just bring us up to up to date as to how the Capex program is working and perhaps what you've seen in terms of reduced SLR since alone.

I'm going to ask she tacky too our chief operating officer and really are.

The.

The primary are the principle behind this this whole project to provide that update.

Okay.

Good morning, Greg.

Morning.

Yes, so as you know we have these capex.

Thanks, Hi did something on close to three years now and just to remind everybody thats. The one that we use cocaine instead of steam into the reservoir to reduced.

Skalski the oil so that it can produce at a lower energy intensity.

The post us actually working quite well we.

We executed sub divide the pilot into two pilots so that we can test different aspects of the RFP process.

So far we seeing.

40, good reduction in the steam oil ratio.

Correct.

In some cases, we trending essentially zero, we judges solving with Doe.

With Doe and new steam injection that pool.

So with that must be more regional point of view, if we sell quite well.

What we need a bit more time is understand more on the bitumen recovery and as you know that.

Well life of these studies what was typically 10, plus use and so we would.

Would it be early into the understanding the bitumen recovery aspect of it.

And also another so.

Importantly, Columbus to IPO is the solvent recovery.

How much solvent.

Well, we've come from the process.

And that one by large checks out quite well, we having a good recovery off of the solvent.

There was a war so like I said, we meaning.

Ocwen has always tried to figure out what happens through the.

Each month.

So.

And Thats, what we have today.

Okay and.

Then.

You mentioned you broke in the pilot did too.

So let's get it into two pieces are you seeing similar results from both like what's the difference between the two.

The first pilot was as it was in Wolf. This safety, we'll put that turned on earlier so as more at bonds is it is it is.

Safety process before we implement the solvent.

And then the also the lead a pilot.

Even more as we call we actually feel a solvent recovery facility for the big a pilot so that we can reduce the overall cost of the pilot by recycling has softened as possible. So the second pilot has a more.

Complete tasks of the whole package.

That includes the.

Almost a simultaneous.

Injection of.

Solve and at the same time.

On all the wells as well as testing the we cycle aspect of it.

From a sufficient liquidity point of view.

Okay last two for me so we'll move on but can you what some industry averages I think in terms of recovery rates or mid to high Fiftys I believe but can you can you maybe confirm or deny.

Indicate whether thats, a good range or not for the industry, and where where would you guys see stacking up.

I imagine you referring to solvent recoveries. So your question.

No it's more on the recycling.

Recycling I thought was was actually lower than what people were targeting but.

Yes, so the two yes recoveries as a victim of recovery wanted to talk about and there is a solvent recovery from there was a law and is the third one is once we cover the solvent somebody was how much of that you can actually we cycle and put back to there was a will.

Okay. Okay.

So from a from a wizard world from the recovery of solve them from a reservoir point of view.

And quite well.

I can't give you a pretty specific numbers what is normal.

70%.

So which means the inject a barrel solvent into the reservoir do you get at least 70% of that back.

And then the other aspect is once we get these softened back actually got contaminants methane and not us and now the.

Molecules so.

The wood capacity efficiency of that is close to about 90%.

Does that answer your question.

Did we lose did we lose you.

Yes, it looks like he is no longer in the queue. I believe you must have answered his question.

All right.

Okay.

Mr. Evans there are no further questions at this time you May proceed.

Well listen thank.

Thank you all to everybody that joined the call. This morning was an early morning.

I appreciate your interest and please don't hesitate to follow up.

With either Eric or myself.

And with any further questions you might have with respect to the specifics of the quarter. Thank you for your time today.

Yeah.

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