Q4 2020 MEG Energy Corp Earnings Call

[music].

Good morning, My name is called and I'll be your conference operator today at this time I'd like to welcome everyone to the Meg Energy 2020 year end results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session if you'd like to ask a question during.

And this time simply press star.

<unk> followed by the number one on your telephone keypad, if you'd like to withdraw your question simply press Star followed by two thank you Mr. Derek Evans CEO you may begin your conference.

Thank you Colin and good morning, everyone and thank you for joining us to review Migs, Meg Energy's full year operating and.

Financial results for 2020 in the room with me. This morning are Eric Toews, Our Chief Financial Officer Chi Tak Yee, our Chief operating officer, and allow us <unk>, our general counsel and corporate Secretary I'd.

I'd like to remind our listeners that this call contains forward looking information. Please refer to the advisory and our disclosure documents filed on SEDAR and on our website.

Keep in mind my remarks brief today and refer listeners to yesterday's press release for more detail.

Meg continues its priority of maintaining safe and reliable operations as we continue to face the hurdles associated with the COVID-19 pandemic.

And the safety of our staff is our top priority and I commend our teams for exercising diligence and focus as we've operated through the pandemic we.

We had not a lot we had no lost time accidents.

Per employee in 2020, which is a tremendous accomplishment, particularly given the turnaround activities that are ongoing and site. This summer.

As well <unk>.

Not had any COVID-19 outbreak at our site or our office and our focus remains on keeping each other safe and maintaining reliable operations.

In 2020, notwithstanding the incredibly challenging environment, our industry faced we continued to execute on our strategic focus of improving overall cost efficiencies preserving financial liquidity and enhancing <unk> competitive position.

And keeping with this strategy, we significantly reduced G&A repaid indebtedness and extended the maturity runway of outstanding long term debt and began moving the majority of our barrels to the U S Gulf Coast.

In 2020, our emphasis on cost efficiencies sauce decrease our G&A expenses by $19 million, a reduction of 28% compared to 2019.

Our net operating costs of $6 18 per barrel were supported by record low non energy operating costs of $4.38 per barrel and strong power sales, which offset 45% per barrel energy operating costs.

Free cash flow of $129 million per the year was driven by adjusted funds flow of $278 million and a disciplined cash capital spend of $149 million.

We exited 2020 with $114 million of cash on hand, and maybe $800 million modified covenant light revolver essentially undrawn.

Debt repayment remains a priority for us and 2020 with the repayment of $132 million of long term debt concurrent with the refinancing of U S $1 $2 billion of existing indebtedness in January 2020.

Subsequent to year year, and we entered into a further refinancing of existing indebtedness with the refinancing of U S $600 million and aggregate print and aggregate principal of $5, 875% senior secured notes due February 2029 per.

These refinancing.

Meg maintains a four year runway until its next debt maturity represented by the remaining U S $496 million of six 5% second lien notes due January 2025.

And the last three years. The company has replay aid approximately U S. One 5 billion of our initial debt repayment and target of USD 2 billion.

Meg realized an average AWP blend sales price of U S $28 and <unk> per barrel and 2020 compared to U S. $46 19 per barrel in 2019, the decrease and the average AWP blend sales price year over year was primarily primarily a result of the average <unk>.

Ti price decreasing by U S $17 63 per barrel make sold 40% of its sales volumes to the U S Gulf Coast, and 2020 compared to 33% and 2019.

Increase in sales to the U S. Gulf Coast is primary primarily a result of the corporation's increased contracted blend transportation capacity on the Flanagan, South and Seaway pipeline systems effective July 2020 from and moving from 50000 barrels a day to 100000 barrels a day.

Transportation and storage cost average U S $6 74 per barrel of <unk> blend sales in 2020 compared to U S. $5 70 per barrel of AWP blend sales and 2019 increase and transportation and storage costs is primarily due to the fixed costs associated with increased.

Flanagan, South and Seaway pipeline.

Pipeline contracted capacity, coupled with lower year over year sales volumes.

Meg AWP blend sales by rail were approximately 17000 barrels a day in 2020, representing 14% of total blend sales compared to approximately 20000 barrels representing 15% of total blend sales and 2019 Meg is not anticipating undertaking any ada.

<unk> sales by rail in 2021.

2020, we continued to advance our environmental social and governance activities and strategies with corporate commitments to support the Paris agreement the approval of our long term ambition of reaching net zero.

Greenhouse gas emissions scope, one and scope two basis by 2050, and our commitment to human rights as reflected in the UN Universal Declaration of human rights.

We remain committed to ESG leadership and look forward to updating our performance in that regard with the release of our 2000 2000 and sustainability report mid 2021.

As announced on December seven 2020, Megs capital investment plan for 2021 up $260 million includes 245 million to be directed towards sustaining and maintenance capital and the remaining $15 million towards non discretionary field infrastructure regulatory and cap.

<unk> costs.

Corporate capital costs excuse me makes 2021 annual average bitumen production volumes are targeted to be and the range of <unk> 86 to 90000 barrels a day and the corporation's 2021, non energy operating costs and general and administrative expenses are targeted to be and the range of $4 60 to $5 per barrel and 170 to 180.

Per barrel respectively.

To support makes 2021 capital program budget announced December seven 2020, Meg entered into benchmark Debbie.

<unk> fixed price hedges and enhanced <unk> fixed price hedges with sold put options for approximately 47% of forecast bitumen production weighted at 60% and the first half and 30% and the second half at an average price of U S. $46 66 per barrel. These hedges were put in.

And place to protect funding of the Corporation's 2021 capital program with internally generated cash flow down to a U S $30 per barrel WCS price and to protect <unk> balance sheet.

First half weighting of these hedges at approximately 60% of forecast production reflects the first half weighting of <unk> capital investment profile as well as the uncertainty regarding the pace of 2021 economic recovery at the time of fusion.

As I bring my remarks to close I again want to thank our team at Meg for their commitment and perseverance through and exceptionally challenging year makes performance in 2020 demonstrates our resilience and are proud of our performance and confident and our ability to continue this momentum into 2021.

Looking ahead, we're confident and our ability to execute on our business plan and remain committed to sustainable innovative and responsible energy development. We look forward to updating you on our progress in the coming quarters.

With that we will now open the lines for questions.

Thank you, ladies and gentlemen, as a reminder, should you have a question. Please press star followed by one on your Touchtone phone and Youll hear with three total pulp acknowledging your request and your questions will be pulled and the order. They are received should you wish to decline from the polling process. Please press star followed by two if you're using a speaker.

Phone please lift the handset before pressing any keys.

Your first question comes from.

Phil Skolnick from eight capital. Please go ahead.

Yes, thanks, and good morning.

Can you just talk about your debt reduction policy and.

And that same.

Framework just.

What do you need to see to put on that incremental I think it is $150 million per spend to get to the 100000 barrels a day and all other priorities and.

The use of free cash flow.

Why don't I take the first part and I'll, let Eric take.

Eric talk.

Talk about that.

Clearly, we're going to add at these sorts of commodity prices Phil.

We have incremental free cash flow above and beyond what we're going to need to fund our capital program.

People are asking is what one would you make any decisions with respect to whether you would put more capital back to work and quite frankly.

And we love what we're seeing in terms of commodity prices and differentials, but wed.

We'd like to see them for a little while longer to know that they have actually got some staying power.

Obviously, we've got and OPEC meeting today, which could be positive or negative or neutral and.

As to that but as we think about incremental free cash flow I think obviously there is the opportunity to put a little more money back to work on the business and start that progression from essentially 90000 barrels a day back to a 100000 barrels a day, we anticipate that day capital cost associated with it.

That is somewhere in the neighborhood of $15000 are flowing Boe.

And I would caution that the timelines on putting that capital back to get it from the time, we put the dollars to work to when we actually see the production can be anywhere from.

Yes.

And 12 to 18 months.

No.

To the extent that we started to put some incremental capital back to work.

And the middle <unk> and the second half of this year, you likely wouldnt see any incremental production until the end.

And you started the and early 2023.

So.

In terms of.

Cost to get US back there I think that $15000 per flowing BOE number is.

And is pretty good one in terms of timing yet to be determined.

But before turning it over to Eric here to talk about sort of and we're planning on going in terms of long term debt targets and the only thing I would say is that we are definitely committed to reducing our debt and I think.

One of the key highlights.

And I hope the market picks up from our press release is the fact that.

We're in a bit of a unicorn. This year, we developed we not only had free cash flow, but we also reduced our debt.

And.

And I always tell people and you shouldn't listen to her blood anything we say just watch what we do and I think our track record in terms of debt reduction is something that we focused on and we told the market that we're focused on and.

We will definitely.

The part of any plan as we move forward.

Hey, Phil It's Eric just respect with respect to the debt repayment strategy. It really hasnt changed since 2019 and early 2020, we did the last tranche and debt repayment in January and then the.

The strategy is going to derail with Covid and the impact on on our oil price as we head into 2021, and and we see the see what's happening on the oil price.

Our plan is to reinstitute the debt repayment, we want to obviously take.

And take free cash flow and put that against <unk>.

Debt repayment, our first dropping off point, which we've talked about before is sort of another $500 million U S that would get us to the $2 billion and use that Derek talked about and that's not a absolute target. It's more of a a metric target, which is what two and a quarter to two five times debt to EBITDA and a.

Trough price of around $50 U S for WTS, so that strategy remains top of mind for us and I think as it relates to any increase and cap rates. I think we would tell you that you shouldnt expect to see increase and capital Standalone I think can see debt repayment.

Beside that we are ahead of that.

Perfect. Thank you.

Thanks Bill.

Your next question comes from Neal motto from Goldman Sachs. Neil. Please go ahead.

Thank you and good morning, guys and just wanted to talk a little bit about your hedging strategy I think in the release you indicated your 46% hedged for 2021 volumes at this point and how are you just thinking about that program is very much front half weighted I think and the second half.

And if commodity prices hold here and go higher and you should have a lot of torque to a more open and <unk>.

Monty price environment, and then what's the strategy for 'twenty two given the curve is backward dated and there are a lot of moving pieces and theres a lot there derik, but if you can unpack your hedging strategy that'd be great.

Sure and thanks for the question Neil and.

I think we.

We had a very.

And when we when we hedge we have to have a purpose there has to be a reason why we do that and the.

And the hedges that you see the.

Our weighted about 60% for the first half and about 33% to the second half. So the purpose for putting in place the hedges that we did to support our cap was primarily to support our capital program to ensure that we had a.

Visibility on the cash flow, which was going to be needed to execute the program and we did that at the end of last year.

We have not hedged <unk> since early January and at this juncture, we don't have any plans to add any WT has <unk>.

Hedges in 2021.

We haven't looked in great depth at 2022.

At this juncture we haven't.

But I think you should expect to see us if we do hedge that we will have a reason for why we hedge.

And.

And over the last couple of years, it's been.

To protect our capital program, So really can't give you a lot of visibility on on 22, yes, we note that the backward areas.

And there is fairly steep backwardation.

But.

And as time goes forward and <unk>.

We've got a better idea of when the Saudis are going to bring.

Our OPEC plus are going to bring incremental barrels back. We we expect some of that backwardation will come out of the margin.

That's great and the follow up is just around the differential.

Outlook, and just how youre, how youre thinking about it where do you see Alberta inventory levels right now and then how do you see that playing out over the course of this year.

As you see it.

And then it looks like we've got some egress solutions, particularly.

The three years and 70000 barrels a day coming in from Enbridge line, three and the year. So do you see a structurally tighter differential outlook in Alberta, and if you can weigh in on the U S. Gulf Coast differentials that'd be helpful as well because of how many barrels you are able to export.

And to the Gulf Coast area.

Hey, Neil it's Eric Yes.

The starting point for differentials as the Gulf Coast.

And structurally very tight for the last six months.

And we don't frankly see that changing and I think if you look at the strip for WCS and either it would be in the Gulf coast that would echo that comment it's around WCS is around $3 off <unk> and the Gulf Coast.

And we've seen very and.

And our peers are seeing very significant demand from Asian refineries will both Chinese and Indian.

It's been been drawing those barrels out of the Gulf coast as well as the pad III refiners.

So that we don't see that structurally changing as we move through 2021, and frankly into 2022 and onward.

And the egress that you talk about out of Alberta Theres been marginal.

Improvements, which we've been I think those differentials and episode of and benefiting from.

With 50% apportionment and the first quarter you expect to see this blowout and Edmonton, we haven't seen that I think thats because of the incremental storage has been built.

As well as the rail capacity, which isn't fully utilized frankly, so we expect to see differentials and Emerson and around 10 to $13. So that's why we've been layering and picking away a differential hedges around that $11 range.

So we think structurally there's a lot of tailwind from a differential perspective.

Inventories and.

Albert I think around 30 million barrels.

So we've had.

Storage has been there to soak up the portion of it.

As has the incremental egress, so very positive from a differential perspective Neal.

Thanks, Eric Thank you Sir.

Thank you.

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

Yes, thanks, good morning.

Just wondering if we and shift gears, a little bit into India technology, obviously with 2020, it would've limited the ability for you to to do probably as much as you wanted to one things like <unk> and so forth, but I'm just wondering if there is any update there.

Okay.

Sure.

And ask <unk>.

The principal driver on <unk> to provide an update.

Yes, good morning, Greg.

Yes on the E&P capex.

And with fund.

Finished.

Pumping injunction phase now on these home injunction phase now and we are transition into what we call the <unk>.

Loss phase will kind of hold onto us and try to recover.

The poll gain that slowly and it was one and also observe what the ultimate recovery looks like so and Thats, we did the DMT and for this year.

For the for that and maintenance pilot.

In terms of technology in general.

Shifting and a focus on looking at some of the carbon decarbonization technology to see how we could manage our cash.

Carbon emissions going forward.

Okay terrific.

Is there anything specifically and just trying to Decarbonize and you wanted to highlight or is it too early.

I think it's too early to discuss at this moment and we will.

Talk about that into <unk>.

ESG, we point that is coming along and to meet you.

Okay. Okay. Thanks for your last question is what are you targeting that recovery rate and the propane.

While we hope to get to.

Ultimately and poverty about 80% to 85% recovery.

At the end of the process.

Okay terrific, thanks very much.

Thank you.

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

Okay and it appears there are no further questions at this time. Please proceed.

Well.

Just a quick thank you for everybody that's joined US for the call. This morning.

As I have indicated.

We are.

Very positive not only about what we've been able to do but also more about the.

And the macro environment.

Eric alluded to it a little bit in his remarks here with respect to the fact that.

Our business has seen fairly significant headwinds for the last six years and it feels like those headwinds have come around and are are becoming tailwind. So we look forward to.

Bringing you up to date on our progress and our quarters.

In the coming quarters. So thank you for joining us and listening to our call. This morning.

Yes.

Good day.

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