Q1 2021 MEG Energy Corp Earnings Call
Good morning, My name is calm and I'll be your conference operator today at this time I'd like to welcome everyone for the Meg Energy 2021 first quarter 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 this.
Time simply press Star then the number one on your telephone keypad, if you'd like to withdraw your question. Please 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 Meg Energy's first quarter operating and financial results in the room with me. This morning are Eric Toews, Our Chief Financial Officer Chi Tak Yee, our Chief operating officer, and low you step ski our general counsel and corporate Secretary.
Like to remind our listeners that this call contains forward looking information. Please refer to the advisory in our disclosure documents filed on SEDAR and on our website.
Keep my remarks brief today and refer listeners to yesterday's press release for more detail.
Meg continues to proactively respond to the safety challenges associated with COVID-19, and remains committed to ensuring the health and safety of all of our personnel on business partners and the safe and reliable operation of the Christina Lake facility.
The screening procedures and protocols implemented by the company's COVID-19 task force during the first quarter of 2020 continue to be enhanced to ensure continued safe and reliable operations flexibility and.
Adaptability continue to be integral to the company's response to the pandemic.
We continue to monitor the developing COVID-19 situation to determine what if any additional measures might be needed to be taken to ensure the health and safety of our people remain a top priority.
On a commend our teams for their outstanding diligence and focus that they have exercised and helping to ensure the health and safety of all of our employees and contractors.
Meg had a strong first quarter from both a financial and an operating perspective on the financial side of the business. We benefited from both the strengthening the global oil market dynamic as well as the structural improvement in heavy oil differentials. We remain very constructive that these changes will persevere and the headwinds that we battled over the last.
Six years with respect to egress and weakness in oil prices will abate and become tailwind that will continue to drive significant free cash flow from our low decline and low cost business.
On the operational front, we've now had two solid quarters of strong production performance at full capacity post our extended 75 day turnaround in the summer of 2020. This has given us the confidence to increase our production guidance from a range of 86 to 90000 barrels a day to 88 290000 barrels a day.
2020 turnaround was extended to bring forward 2021 turnaround activities and eliminate the need for a turnaround. This year. The elimination of a 2021 turnaround has been extremely helpful. In managing the number of people at site for my COVID-19, 19 perspective, and the health and safety of our employees and contractors.
Our strategy remains unchanged and remain focused on executing on our capital program as efficiently and as effectively as possible continuing to work on all our cost structures and using free cash flow to reduce debt.
First quarter financial.
Operating highlights include adjusted funds flow of $127 million.
Impacted by our realized commodity risk our price management risk loss of approximately $69 million quarterly production volume Zev 90842 barrels per day at a steam oil ratio of 237.
Net operating costs of $5 25 per barrel, including non energy operating costs of $4.05 per barrel.
In that corridor power revenue offset energy operating costs by 72%, resulting in a net impact of $1 21 per barrel with.
We successfully refinanced our 600 million U S of existing indebtedness at a coupon of five and seven eighths due February 22009, which pushed out the earliest outstanding long term debt maturity to 2025.
Total capital investment of $70 million in the quarter was directed to sustaining and maintenance capital, resulting in $57 million of free cash flow on the quarter, we exited the quarter with $54 million of cash on hand, and our $800 million modified covenant light revolver essentially undrawn.
It makes bitumen realization averaged $52 34 per barrel in the first quarter of 2021 compared to $38 64 per barrel in the fourth quarter of 2020.
The increase in average bitumen realization was due to a higher debit ti price quarter over quarter offsetting the increase in bitumen realization during the first quarter of 2021 compared to the fourth quarter of 2020 was our realized commodity risk management loss of $8 80 per barrel in the first quarter of 2021 compared to a realized commodity risk management.
Gain of $1 31 per barrel in the fourth quarter of 2020.
This reflects stronger wty settlement prices compared to WTO fixed price contracts put in place in late 2020.
Corporations are.
Cash operating netback average $26 three per barrel in the first quarter of 2021 compared to $18 66 per barrel in the fourth quarter of 2020 increased cash operating netback drove the increase in the corporation's adjusted funds flow from 84 million in the fourth quarter of 2000 $20 million to $127 million in the first quarter for the line.
Last nine months of 2021, Meg has outstanding benchmark <unk> fixed price hedges enhanced W. Ti fixed price hedges with sold put options for.
For approximately 37 per cent of forecast fisherman production on an average price of U S. $46 20 per barrel no new debit ti fixed price contracts have been entered into since mid January 2021.
Previously mentioned based on better than expected production performance in the first quarter. Meg is revising its full year 2021 average production from 86 to 90000 barrels a day to 88.
290000 barrels a day.
Due to increased apportionment on the Enbridge mainline.
We're revising downward our expected sales into the U S Gulf Coast via the Flanagan, South and Seaway pipeline system from approximately two thirds to a full year average.
AWP leash black W. B blend sales volumes to approximately 50% as a result.
Meg is revising down its estimated full year 2021 transportation costs from 775 to $8.
25 U S per barrel Avi, but at W. B blend sales to a range of $6 75 to $7 25 U.
<unk> per barrel for AWP blend sales.
As I bring my remarks to a close again want to thank our team at Meg for their commitment and perseverance through these exceptionally challenging times makes performance continues to demonstrate our resilience and I'm proud of our performance and confidence in our ability to continue this momentum throughout 2021 looking ahead, we're confident in our.
<unk> 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 on the coming quarters.
With that we'll now open the line for questions.
Thank you ladies and gentlemen, we'll now begin the question and answer session I.
To ask a question. Please press star followed by one on your telephone keypad, if you'd like to withdraw your question. Please press <unk>.
Star followed by two you'll hear three Ah Okay and.
Alright, and if you're using a speaker phone. Please lift the handset before pressing any keys on your first question comes from Phil Gresh from J P. Morgan Phil. Please go ahead.
Yes, hi, good morning.
Derrick for first question for you would just be on the takeaway situation in your revision to.
The percentage you're planning to send down to the Gulf Coast. This year due to a portion of it just wanted to get your broader thoughts.
Just how you think portion of Mednet and takeaway will play out as we exit the year on into next year.
A great question, Phil I'm going to ask Eric gave should take that one.
Okay.
Phil.
The reason why we took down our demand for barrels we think we're on a mood of Gulf coast simply mathematics.
When we put on our budget in early December we expect that a portion of it to be around 35 per cent for average for 2021.
What we've seen through the first free.
This first part of 'twenty.
2021 is about a 10% to 15% higher level than that and so simply.
Mathematically with higher portion meant less barrels get taken down the Flanagan Seaway pipeline I mean, we sell sell less down there now as it relates to what we see going forward.
We expect that apportionment and level to go down to that sort of.
10% level plus or minus once line three comes on and I think the general view is that comes on it comes on in late Q3 early Q4.
We are aware of the ongoing legal challenges to that but I think enbridge has tried that ground pretty well over the past. So we expect that that pipeline comes on in that timeframe. So and then and then we'd see that that level mitigates. So obviously the amount of barrels we move to the Gulf coast on the backend of the year.
If line three.
If that proves to be true when it comes on what you should expect to see our barrels a ramp back up that would get down that pipeline.
Maybe so I can just add.
Two quick reminders I know people are.
I hope people remember that even though we make do not move those barrels or cannot move those barrels that there is no take or pay on those barrels those barrels.
On the cost of moving those barrels has not incurred those barrels just get moved to the end of our contract and I guess the other thing I'd just point out that there has historically been a.
A negative price associated with high apportionment levels on that.
That is not the case with the apportionment levels that we're seeing today in fact, we can show you that in months.
Texas February of this year when the post apportionment barrels I E that barrels that had to be turned back from the line actually sold at a premium to the pre apportionment barrel. So I guess the long on the short here is that although apportionment levels are high we're not seeing.
While we would have seen previously in terms of.
On a higher differentials.
Sure I mean, I guess, just a follow up as you look at it and say 2022 and assuming line three is on relative to your 100000 barrels a day as a potential takeaway I mean would you.
Do you think that the production environment, it would be such that you'd be able to fully utilize that in 2022 and our full line three case.
Yeah. So Erika we think that that proportionate level that we talked about for the back end of the year sort of carries through 2022.
When you factor in what.
What approximate come on.
Ah in 2022.
Right. Okay. Okay. Just one other quick one for me.
Non energy Opex costs.
Were quite solid in the quarter and well below the full year guidance. So maybe you could just share your thinking there on on how that would progress like is there something specific David make the non energy opex per barrel will be going higher the rest of the year or is it just some conservatism since it's still early.
Yeah.
Our non energy operating costs tend to typically be.
If we look across the year they tend to be the lowest.
And then.
They grow as we bring in sort of more maintenance type activities through.
Q2 end.
Q3 through the summer months, we try and minimize the amount of work that we do outside in the cold in the winter and as a result, it's the.
The operating costs in the first quarter tend to be a little bit lower than on average we do not see any reason to change our operating cost guidance at this juncture.
Great. Thank you.
Your next question comes from Greg Pardy from RBC capital markets. Greg. Please go ahead.
Yeah. Thanks, Good morning, Derek if you commented on your production rates being.
Great shape here for a couple of quarters, which is which has caused you to change your guidance, but what are the main drivers then on keeping those rates higher than what you might have expected.
Yeah.
I was going on at <unk> E. Our chief operating officer to take that question.
Yes, good morning, Greg.
One of the main things for the first quarter is we have a free high reliability performance of the plant.
But we typically at about 97%.
Type of reliability, but first quarter is about 98% 99% of that that will be held.
And also.
As Derrek talked about earlier the turnaround we did last year that 75 day turnaround we put the.
They are in good shape. So we've been able to do to get that type of reliability and also we've been doing a fair bit of optimization on the existing production as well and that was transparency into our expected performance in Q1.
And then.
Scott will be able to expect that momentum will carry through Q2 on the rest of the year.
Okay, Okay terrific and it.
Is it just related to everything you sit around pricing and deaths and production rates. It's kind of a question for Eric I guess is cash.
Cash, obviously sitting at $54 million, what what's the path to that that you would see through the next three quarters I mean, we've modeled it but I'm curious as to what you see coming.
I guess, the only way to answer that I guess when you look at that.
Derek talked about the.
For hedging.
Hedging losses, we had in the quarter that dissipates as we move through the year as you can see from our table on the hedging barrels we have hedged. So I think when you model <unk> and if you keep the dips. We think we think this for the rest of the year are in that sort of 11 to $12 range WCS Stiffs Gulf Coast has obviously been very tight we don't see that changing for the rest of the year. So.
As the back end of the curve has moved up here I think you should expect to see.
Higher cash flow.
Each quarter as we move through the year at the current strip pricing.
Okay perfect. Thanks very much.
Your next question comes from.
Your next question comes from Neil Mehta from Goldman Sachs. Neo. Please go ahead.
Hi, Good morning. This is Charlie on for Neil Thanks for taking the questions today.
The first one was just kind of around the balance sheet, which which has been a big focus for you guys. So can you just talk a little bit about how you're thinking about the path of debt reduction and kind of what you view as the optimal leverage level on a sort of normalized basis going forward.
Yes sure. The first the first part I guess every I think it's as Eric said outside of the call all the free cash flow right now is going to go towards debt repayment. That's basically what we've been doing for the last.
A number of quarters on a number of years.
The second question is we've talked about sort of a $1 75 to $1 85 U S $1 billion of U S.
Our level of <unk>.
Of that on a sort of first stopping off basis, that's about a two on a quarter to two five times debt to EBITDA multiple on.
Based on the based on the quality asset in a sort of a low decline rate. We think that's a that's an acceptable for stopping off levels thats about another $500 million use for debt reduction that we have targeted on.
Our intention would be to stop there, but that's our that's our first starting off point from a leverage reduction perspective.
Great Super helpful. And then the follow up is just around hedging you know commodity prices have recovered quite nicely here. So can you just talk about how youre thinking about the hedge book you are moving into the end of the end of the earn into 2022.
Okay.
Yes.
We haven't put on any new debit tail hedges since our very early in 2021.
We haven't we haven't looked for 2022, yet, we obviously need to work through our capital budget.
We're.
We've seen the strip like everyone else has.
As of right now we haven't we haven't put any 2022 hedges on but we'll consider that as we move through the back end of this year and whether or not we do that from a.
Sustaining capital for preservation perspective.
Did you have a follow up.
Good good good on line.
Thank you.
Your next question comes from William Lacey from ATB capital markets. William Please go ahead.
Derek you've been pretty acutely focused on the whole issue of carbon in.
The government of Canada with the announcement on the budget it was notably vague and obviously it's evolving.
Just wondering what you would be looking to see from I guess, both for federal and provincial governments in terms of our.
Policies incentives in order to encourage investment in <unk> and the others script related technology.
Sure.
Good morning, Thanks for the question.
Okay.
Uh huh.
Meg has been a leader in reducing the intensity of carbon on a per barrel basis.
On utilizing our <unk> <unk> P.
And our.
Co Gen facilities that we've put in the field and I think a number of years ago, we realized that there were still some work to do there.
But that ultimately that carbon capture and storage was going to be the way that we decarbonize our barrels.
We have been looking to both the federal and the provincial government too.
To support that.
Idea not only in terms of coming to the table with some level of fiscal support.
To help put in place the.
The facilities to enable that but also from a regulatory on a pricing perspective.
We can't continue to work in a or you can't put capital to work on carbon capture and storage until you know that every time the provincial government changes that youre carbon regulations are are are going to change or that.
On the federal provincial jurisdiction is still under sort of question.
That of course as you know has been sorted out by.
The Supreme Court here recently, I think what we were looking for in the budget was a much stronger sign of support from the federal government. We saw it in two fronts.
In terms of <unk>.
On incentive that is currently going to be worked on.
Income tax incentive.
That could be transferable, and we think that held some promise thats very similar to what the 45 Q program is in the United States, which is up to about $80 U S.
A barrel of carbon now as well as.
We'd be looking for.
Some sort of certainty obviously that.
Carbon regulations aren't going to change.
We haven't seen that we saw.
Sort of $319 million I think of R&D type expenditure. So we will continue to work with both levels of government. We believe both levels of government are interested in and trying to find a path to get carbon capture and storage going on.
Obviously, we're not spending any money on this we're spending a lot of time.
Trying to figure out how and what is the best way to to navigate this.
Carbon capture and storage on a go forward basis, but it is the single biggest lever that we have as an industry to pull to put carbon away and it's absolutely critical.
On two to find a way to make that happen and it's not something that Meg can do on its own it's something that our industry.
On the oil sands industry needs to find a way to collaborate on and with the assistance of both the provincial and federal government.
Thanks, Derek and they had an opinion on that so thanks for sharing that.
Youre welcome.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by one.
Okay.
Got a question from Menno.
Minto wholesale from TD Securities. Please go ahead.
Good morning, everyone and thanks for taking my question Derek on the last call you talked about potentially.
Potentially taking capacity of 100000 barrels per day on a capital efficiency of I believe it was around 15000 per daily flowing if you believe that oil prices were supportive.
Have your thoughts evolved at all since the on that front since the last call.
Yes, our thoughts continue to evolve on that on obviously.
Obviously, we've seen on some good strong performance in the.
In the first quarter.
I think a large part of whether we would put any capital back to work is really predicated on the <unk>.
Strength and lack of volatility that we would want to see in terms of the <unk> oil price and obviously the differential I think where we're very encouraged by.
By what we've seen but obviously, we're not ready at this point in time to put additional capital to work, but we're reevaluating that on a quarter by quarter basis.
Thanks, Eric that's a that's all I had.
Thanks Menno.
There are no further questions at this time. Please proceed.
Well, thank you very much everyone for joining our call today for.
It's going to be a busy day hub.
Everyone has a good one and we look forward to updating you on our continued progress at our next quarterly conference call take care.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Okay.