Q2 2021 MEG Energy Corp Earnings Call
Good morning, My name is Dennis and I'll be your conference operator today at this time I would like to welcome everyone should emerge energy.
1 second.
Second quarter results conference call all lines are in place on mute to prevent any background noise. After the.
The Speakers' remarks, there will be a question and answer session.
Question, there just simply price.
Sure.
I'll keep it short.
Draw your question lease price this jives full of bite to chew. Thank you Mitch.
Your day Kevin.
You may begin your conference.
Thank you Vanessa and good morning, everyone and thank you for joining us to review Meg energy second 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 Laura <unk>, Our general Counsel and corporate Secretary.
I'd like to remind all of our listeners that this call contains forward looking information.
Please refer to the advisories in our deck.
Disclosure documents filed on SEDAR and on our website.
Keep my remarks brief today and refer listeners to yesterday's MD&A financial statements and 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 our personnel and the safe and reliable operation of the Christina Lake facility.
I want to commend our teams for the outstanding diligence and focus that they have exercised and helping to ensure that the health and safety of all our employees and contractors remains a top priority.
Make it a strong second quarter from both the financial and operational perspective on the financial side of the business. We benefited from both the strength in the global oil market dynamics as well as the structural improvement in heavy oil differentials, we remain very constructive that these changes will persevere.
That the headwinds we battled over the last 6 years with respect to egress and weakness in oil prices will abate and become tailwind that will continue to drive significant free cash flow flow from our low decline low cost asset base.
On the operational front, the second quarter was another strong quarter for Meg, giving us the confidence to increase our full year 2021 production guidance begin the work to bring the Christina Lake facility back up to full capacity and re initiate debt reduction.
Our strategy remains unchanged, we remain focused on executing on our capital program as efficiently and as effectively as possible continuing to work on all all of our cost structures and using free cash flow to reduce debt.
Second quarter financial and operating highlights include adjusted funds flow of 166 million or <unk> 53 per share impacted by our realized commodity price risk management loss of $87 million quarterly production.
Production volumes of 91803 barrels per day at a steam oil ratio of 239.
Net operating costs of $5.54 per barrel, including non energy operating costs of $3.84 per barrel.
Our revenue offset energy operating cost by approximately 60% in the quarter, resulting in a net impact of $1.70 per barrel.
<unk> of non core industrial lands near Edmonton for cash proceeds of $44 million.
Total capital investment of $70 million on the quarter directed to sustaining and maintenance capital, resulting in $96 million of free cash flow in the quarter and $153 million on free cash flow in the first half of 2021.
In June 2021, Meg along with 4 other oil sands operators, who collectively represent 90% of Canada's oil sands production from the oil Sands pathway day net zero alliance to work collectively with the federal GAAP and Alberta governments to achieve net zero greenhouse gas emissions from oil sands operations by 2050.
Went to the end of the quarter Meg issued a notice to redeem $100 million U S of Migs 6.5% senior unsecured second lien notes due January 2025.
Meg realized an average AWP blend sales price of $56.41 per barrel during the second quarter of 2021 compared to $48.39 per barrel in the first quarter.
The increase in average AWP blend sales price quarter over quarter was primarily a result of the average <unk> price increasing by $8.23 U S per barrel.
Meg sold 45% of its sales volumes into that premium priced U S. Gulf coast market in the second quarter of 2021 compared to 38% in the first quarter.
Inclusive of the non core at 44 million dollar asset sale and Meg generated approximately 200 million on cash in excess of invested capital in the first half of 2021.
This amount the corporation will direct an additional $75 million to make 2021 capital investment program.
This $75 million of capital investment represents the majority of the estimated 125 million of incremental well capital necessary to allow the corporation to fully utilize the Christina Lake facilities oil processing capacity of approximately 100000 barrels a day prior to any impact from scheduled maintenance.
Turnarounds are outages.
The estimated 125 million total cost is less and Meg previous estimate of $150 million due to year to date field wide production outperformance, resulting from increased Jeep steam utilization improved yield reliability and completed and ongoing well optimization and re completion work.
This year to date outperformance provides the confidence for the company to increase full year 2021 average production guidance from 88 to 90000 barrels a day to 91200.93000 barrels a day.
Meg expects to invest the estimated $50 million of remaining incremental well capital required to return the Christina Lake facility to full utilization in the first half of 2022.
Just on this level of incremental capital investment the corporation expects to be able to fully utilize the oil processing capacity at Christina Lake facility in the second half of 2022 post the planned turnaround at Meg phase 2 b facility in the second quarter of 2022 turnaround, which is scheduled for may of 2022.
<unk> is currently expected to impact full year 2002.
Production by approximately 5000 barrels a day.
Meg announced yesterday that the corporation has issued a notice to redeem a $100 million U S. Meg 6.5% senior secured second lien notes due January 2025 at a redemption price of 103.25% plus accrued and unpaid interest too but not incur.
<unk> the redemption date redemption is expected to be completed on or about August 23.2021.
Based on the current commodity price environment, Meg anticipates generating approximately $275 million of free cash flow in the second half of 2021, which will be directed to further debt repayment.
Based on better than expected production performance in the first half of 2021 Meg is revising its full year 2021 average production guidance to 91% to 93000 barrels a day, we are increasing the 2021 capital program by $75 million to our full year 2021, Capex budget of 330.
$5 million as we add incremental well capital to return on their Christina Lake facility to full utilization.
G&A expense is now targeted to be in the range of $1.65 to $1.75, a barrel and non energy operating costs are now expected to be in the range of $4.40 to $4.60 per barrel.
As I bring my remarks to a close I again want to thank our team at Meg for their commitment perseverance and hard work through these exceptionally challenging times I am proud of our performance and confident in our ability to continue this momentum through 2021.
Looking ahead, we remain confident in our ability to continue 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 on.
Operator, we will now open the line for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have any questions. Please press star followed by 1 on you touched on film.
You'll hear from acknowledging your request on your questions will be full <unk> received.
Should you wish to decline from the <unk> process. Please press star followed by <unk>.
Using a speaker phone. Please if you have to be compressed in any case.
On a moment for your first question.
First question comes from Phil Gresh with Jpmorgan. Please go ahead.
Hey, good morning Derek.
Good morning, Phil.
The first question here just around.
The Capex plans.
Is there a way to think about the 2022 capex all in at this point.
Obviously, youre spending the incremental $50 million on the growth capital, which is actually less than this year's 75 billion of growth capital, but maybe some color around sustaining capex or just all in thoughts I know, it's a little bit early.
It is a little bit early so anything I say has got.
Major error bars around it but.
We generally talk about sustaining capex, starting at about $300 million on any given year.
So.
I think at this stage and it's very early on.
Where we're really looking at something in that $350 million range $300 million of sustaining plus the incremental 50 day, we will need to invest as we bring that facility back up to full utilization.
Yes.
Okay got it.
And then on the production obviously you continue to have strong performance. This year and then you are.
Youre going to be.
Ramping up to the full amount, but I was just curious if through the experiences of this year.
If you might actually be able to debottleneck, even a bit more.
Then on 100000 barrels a day, given youre already tweaking up into the low ninety's.
I feel it's a good question.
Lot of the work that is being done is being done on the field side as opposed to the facility side. So it's really continuing to ensure that we are.
Getting full utilization of all the steam that we're trading out of the feel out of the facility that would be the facility component, but also making sure that the field's operating.
That is close to 100% reliability and availability as we possibly can and then there is a significant component.
Our production outperformance that we've seen year to date, which really is.
Continued work on the downhole or subsurface side of the business, where we're seeing significant improvements.
On exciting technological innovation.
Okay.
Last question would just be with your free cash flow you are talking about for the second half.
Youre pretty rapidly approaching the interim target leverage that you've talked about so any additional thoughts you have on capital deployment opportunities in 2022.
Yes, Phil I can take you back to last November when.
<unk>.
And how quickly our business changes.
In the last 6 months, we havent given a huge amount of thought to where we might be in the middle of next year, which is really what I think you're alluding to that we could have enough free cash flow to have met that $500 million U S.
First stopping off point in terms of debt reduction.
Yes.
It is important to us.
Obviously to execute on that and we'll be delighted when we get there but.
I think the.
The 1 thing that I would want to our listeners to take away is that we are committed to debt reduction and continued debt reduction and even though we're going to get to that target that looks a lot sooner than we'd originally thought you should expect that incremental free cash flow. After that will there's a disproportionate amount will go towards debt reduction.
Okay that makes sense, thanks a lot.
Thank you.
Thank you.
Your next question comes from Greg Pardy with RBC capital markets. Please go ahead.
Yeah. Thanks. Thanks, Good morning, maybe to follow up a little bit on on what Phil was asking could you could you frame.
What the plan is for the balance of the year, Derek maybe just in terms of like well pairs. It sounds like all of this is just going to be.
In the field, you've already got capacity at the plant.
So Greg.
Greg Thanks.
For the question, it's really business as usual and.
It will be more well pairs all of this work.
<unk> 2 ex.
Our facility is now up and running.
We've got.
Our incremental boiler capacity and the steam and we're now going to utilize that.
Steam on.
To help us get back to that full facility utilization on the oil production side of 100000 barrels a day so.
All of the work now is really directed towards incremental well pads.
Okay terrific and then.
Let's just assume line trees on at the end of the year what goes.
Is the expectation then that youll be able to fully utilize your access to the Gulf Coast Nextera Flanagan.
Yes.
Yes.
<unk>.
Well, 1 another Eric take that 1 yes.
Yeah, Greg I think once once line 3 comes on we expect a portion of the day less than 20% that's on a consistent message we've had.
What that is under 20%.
On all but that would be the application against 100000 barrels a day and our plan remains to get as many barrels as we can down on the Gulf Coast.
We're still making premium dollars on those versus what we're selling in imaging. So.
We will continue to work to get as many barrels as we can down the Gulf coast.
Okay and last.
Last question from me is obviously, the big announcement pathways to net zero.
There's a consultation period going on Meg as a part of this this quintet just any thoughts.
Around that process, what this means pretty open ended questions on interesting.
So.
This is an unprecedented alliance among 5 oil sands companies that represent 90% of the production.
But it's not just the oil companies. This alliance is working collectively with both the federal and the provincial governments to try and get.
Carbon capture and storage and greenhouse gas emissions reductions 68 million tonnes per annum of cotwo sequestration or.
Abated.
By 2050.
Big deal.
Huge project unprecedented level of.
On the sort of commitment and working together collaboratively to make this happen in the first stage of this is a very important enabling piece of infrastructure of 400 kilometer pipeline from Fort Mcmurray, all the way down to.
Cold Lake, where the sequestration of this.
2 is is going to happen.
This is a bold plan its bold action and I would.
This is something that.
We all believe speaking for everybody. That's involved in this alliance is something that we need to get done and get done as quickly as possible and.
It will be very exciting to get this first stage of this project up and running with this enabling pipeline and.
And storage facility.
Okay terrific. Thanks, guys.
Thank you.
Thank you we have a following question from Neil Mehta with Goldman Sachs. Neil. Please go ahead.
Good morning, guys and congrats on a strong start to the year.
Just wanted to build on the question around the Western Canadian oil macro how do you think about differentials Derik as you get into 2022, you have a bunch of OPEC barrels coming back as the market, but at the same time you have line 3.
The curve is relatively fairly price and then to build on that on the flat price broadly do you think about how do you think about hedging 'twenty 2 the curve is decently backward dated here.
How do you think about.
Managing risk.
And Neil Thank you for those questions I'm going to ask.
Our teams to take both of those hey, good morning, Neal just first on the hedging piece as Derek said, we're refining our 2020 to sustaining capital and when we look at the supply demand fundamentals for 2022, our current intention right now is not to hedge 2022 benchmark WCS prices.
And on the differential side.
I guess talk about the current current differentials on the current apportionment on the mainline.
Which we'll get to the point about 2022.
We saw on August 54% apportionment on the mainline that's actually as far as we know our record apportionment on the mainline.
Whats interesting about that those inventories on western Canada.
Went down in May from 38 million barrels down to 35 million barrels rail is running less than 100000 barrels a day.
In the post apportionment market in August is trending sort of below $2 off the index, which is at the low end of the sort of the historical range of force portion.
Pricing so when we think about difference youre seeing in the market as the pricing.
<unk> versus the Gulf Coast is still within pipeline economics.
Which makes sense given the narrative I just went through as we move through this year.
We started to see differentials for the backend of this year, the 13.50 to $14 <unk> WCS differential.
And then as we go on to go into next year with line 3 coming on in Q4, which is our expectation we expect.
A portion of the drop below 20%. So we would see differentials should tighten against what we're seeing for the back end of this year, but your point about the Saudi barrels coming on.
A lot of that is going to be heavy so we would expect to see differentials, maybe GAAP up maybe maybe $1.25 on the back of that so net net we still see differentials in 2022 and that sort of 13 to $14 range.
That's great and then just following up on Greg's question about de Carbonization here.
1 of the areas that seems like it could be particularly successful in western Canada would be carbon capture and sequestration can you talk specifically about whether that's an opportunity per Meg as you think about financing any projects is it best to be done within your existing house.
Or is the optimal financing structure tracking company or an independent company outside.
Meg if that makes sense Derek.
Yeah.
Very interesting question, let me start with the first part carbon capture and storage is the single biggest lever we have to Decarbonize today, you are familiar with.
<unk>.
History in.
Reducing intensity greenhouse gas intensity and are sort of leading.
Sector performance in that regard you should expect that as we start to look at finding ways to decarbonize that seems sort of innovation.
And execution will prevail and.
We will be finding looking and finding ways to do that cheaper and faster.
<unk>.
As we get this enabling piece of infrastructure.
The pipeline from Cold Lake down to Earth from Fort Mcmurray down to Cold Lake and the sequestration facility in place.
<unk>.
<unk>.
Yes.
There's lots of challenges around the financing of.
This is the sequestration that sequestration, but the capture part is the most expensive part of this and we have yet to look at what the most optimal way of financing. This is.
Say we are.
We're looking and hoping for some degree of support from both federal and provincial governments too.
Help us get started and up the learning curve on this but.
It may make sense for us too.
Use of different vehicles that will be able to attract green financing.
2 the sequestration part of this as opposed to.
Utilizing the existing Meg sort of.
Our capital structure.
Alright, we will stay tuned thanks again.
Thank you.
Thank you. Your next question comes from Dennis Fong with CIBC Denis. Please go ahead.
Good morning, and thanks for taking my question, maybe just to follow along the lines of what Phil Gresh was discussing on maybe beginning on the question period.
When we think about.
The focus on debt repayment.
Should we be thinking about the potential I guess immediate allocation towards repaying additional tranches of your term debt.
Especially as we think about free cash flow allocation beyond the end of this year into 'twenty, 2 and beyond that.
Follow up.
Oh.
Dennis It's Eric speaking.
We've been pretty consistent with the messaging around that and what we look at is a number of things with respect to debt repayment.
Firstly, how restrictive covenants are secondly, the terms on the debt.
Thirdly, the price of the debt. So I think youll see us continue to do that as we look at that for the debt repayment.
Great and then just maybe on derek's comments with respect to some of the improvements that you're seeing in well performance as well as the focus on downhole optimization can you maybe talk towards how that could potentially.
Impact sustaining capex costs, especially as we look into the back half of next year. Once you ramp back up to 100000 barrels a day I know you indicated around $300 million is the number that you have prescribed it as being traditional sustaining capex, but can you maybe discuss some of the items that could drive that number potentially lower.
Especially with some of the well performance that you're seeing more recently with the optimization that you've seen kind of at the beginning of this year.
So I can add to talk a little bit about the optimization work that we've been doing and whether that's going to grow or.
But.
And then I will jump on and talk about how we're going to.
How thats going to impact from macro at the sustaining capital level.
Yes, good morning.
So.
A few things that really got us the better production this year and Eric I think spoke to most of them already.
Amazing obviously, we haven't reduced.
Plant reliability.
This year as well as well.
The uptime has been quite strong.
The other thing that we spend on all the time as to walk on the downhole aspect of these wells.
No. These disclose operating long so we will key parties to get the whole wellbore contributing to production and we would be doing favorite on work both on the producer and also on the injector to optimize that production and steam injection performance and we also trying some.
Newer completion technique.
For some of the new wells going forward to try to promote that type.
Type of performance that RMR performance, even faster than we have seen historically.
So that obviously had an indication on how many well pace when we need going forward on this from a capital standards.
Tom you want to comment on the Okay sure. Thanks Chi Tak.
As we think about this notion of $300 million debt.
As our sustaining Capex there is a lot of puts and takes on it. So I think what <unk> talked to and provided you some color on is.
Excellent work that we're doing on the subsurface side, ensuring that we're spreading the steam as.
As uniformly across the reservoir and.
Improving that not only the rates, but the recovery factor the 1 big piece, though.
We need to be thinking about and are spending some time working on is really that maybe the inflation impact.
We drive forward, we're seeing services.
Starting to the cost of services increasing.
And we think that the potential impact from inflation, we will have a much bigger impact on that $300 million.
Sustaining capital program net.
Yes, and then some of the improvements that we're making so currently we are estimating it somewhere in the neighborhood of potentially.
Potentially 10% of the capital program. So we're trying to refine that number but.
That is going to be 1 of the big drivers that we haven't seen for a long time.
On.
As we move forward next year.
Great I really appreciate the color. Thank you very much.
Thanks Dennis.
Thank you.
There are no further questions at this time Mr. Evans you May proceed.
Thank you very much operator, and thank you everyone, who joined us on the call. This morning.
You all have a great day.
8 weekend and enjoy their remaining summer and we look forward to updating you again on our progress.
At our next conference call with the reasons are with the release of our third quarter results take care everybody.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask could you. Please disconnect your lines.