Q3 2021 MEG Energy Corp Earnings Call
Good morning, My name is Miranda I will be your call.
Operator today.
At this time I would like to welcome everyone to the Meg energy 2021 third quarter results conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask question. During this time simply press Star then the number one on your telephone keypad.
He would like to withdraw your question. Please press star followed by the number too.
Thank you.
Mr. Derek Evans CEO you may begin your conference.
Thank you Miranda good morning, everyone and thank you for joining us to review <unk> third quarter operating and financial results in the room with me. This morning, our case, our Chief Financial Officer, Laura <unk>, Our general Counsel and corporate Secretary and Darlene Gates, Our Chief operating Officer Darlene joined <unk> in September and we're very pleased.
To have her on our leadership team.
I'd like to remind our listeners that this call contains forward looking information. Please refer to the advisories 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 the COVID-19 pandemic, our priority of maintaining safe and reliable operations at the Christina Lake facility remains a top priority.
I want to thank our teams for their diligence and focus as we've operated throughout the pandemic.
<unk> had an exceptional third quarter from both a financial and operational perspective, we benefited from both the strengthening global oil market as well as the improvement in heavy oil differentials, our team's focus on plant reliability steam utilization and ongoing well optimization has have contributed to our strong.
<unk> Corp, third quarter financial and operating highlights and corporate developments include the appointment of Darling Gates to Chief operating Officer in September 2021, Darlene joined Meg from Exxonmobil and brings 26 years of domestic and international industry experience to Meg.
Chi Tak Yee, our former C. O O has treated just transition to the role of Chief Technology Officer, where he will continue in developing new technologies and practices to drive mix top tier operational performance.
Free cash flow of $155 million for the quarter, driven by adjusted funds flow of $239 million or <unk> 70, <unk> 77, a share the.
The adjusted funds flow was impacted by our realized commodity price risk management loss of 66 million or <unk> 21, a share in the quarter.
Quarterly production volumes of 91506 barrels per day at a steam oil ratio of 2.56 based on this strong operational performance. We are once again revising our annual production guidance from 91 to 93000 barrels a day to 92, 5% to 93 5000 barrels a day.
Capital expenditures of $84 million were directed towards sustaining and maintenance activities as well as incremental well capital necessary to fully utilize that Christina lake central plants oil processing capacity.
Yes.
Net operating costs of $7 17 per barrel included non energy operating costs of $4 46 per barrel power revenue offset energy operating cost by 43%, resulting in a net impact of $2 71 per barrel in the quarter.
Debt repayment remains a top priority and during Q3, Meg redeemed $100 million U S of Megs six 5% senior secured second lien notes due January 2000 2025.
Meg released its 2021 ESG report in August the report focuses on priority topics and outlines the ESG activities across our business, including our foremost excuse me, including our formal emissions reduction target on net zero emissions scope, one and scope two by 2050, and our midterm target of 30%.
<unk> and bitumen greenhouse gas emissions intensity scope, one and scope two by 2030 <unk>.
<unk> also continued its involvement in the oil sands pathway to net zero Alliance recently the alliance provided a detailed update of its three phase plan to achieve net zero greenhouse gas emissions by 2050.
The alliance continues to advance its foundational carbon capture and storage project, which includes a 400 kilometer pipeline.
From Fort Mcmurray to Cold Lake and associated sequestration facilities in the Cold Lake area to gather cotwo for more than 20 oil sands facilities. We're pleased to have Conocophillips joined the alliance, which now operates facilities, representing approximately 95% of Canada's oil sands production.
Meg realized an average AWP blend sales price of $59 15, <unk> per barrel during the third quarter of 2021 compared to $56 41 per barrel in the second quarter. The increase in average AWP blend sales price quarter over quarter was primarily there.
Result.
Of the average <unk> price, increasing by $4 $49 <unk> per barrel make sold 38% of its sales volumes at the premium priced U S. Gulf coast in the third quarter of 2021 compared to 45% in the second quarter as a result of higher apportionment levels on the Enbridge mainline.
<unk> continues to execute on its debt repayment strategy and during the quarter redeemed 100 million U S of the Corporation's six 5% senior secured second lien notes due in January 2000 2025.
This brings <unk> total debt repayment to one 6 billion U S. Since the beginning of 2018 contributing to our short term debt repayment target of $2 billion.
Yes.
All available free cash flow generated in Q3, and Q4 will continue to be directed to further debt repayment.
Based on the strong operational performance this year <unk> upwardly revising its full year 2021 average production guidance from 91 to 93000 barrels a day to $92 five $2 93, 5000 barrels a day G&A expenses are now targeted to be in the range of $1 65 to $1 75 per barrel.
Non energy operating costs are now expected to be in the range of $4 40 to $4 50.
Meg invested $84 million of capital in the quarter with the majority focused on sustaining and maintenance maintenance activities as well as the incremental well capital to fully utilize their Christina lakes oil processing.
Capacity of approximately 100000 barrels a day corporation expects full facility utilization in the second half of 'twenty to 2022 post the planned turnaround in the second quarter of 2022.
In the third quarter, we continued to advance our ESG activities and released our 2021 ESG report. This is Megs second ESG report and demonstrates our commitment to providing our stakeholders with disclosures and meaningful updates about our ESG commitments and priority topics. The report is available online at www.
Meg energy Dot com.
We continue to demonstrate our commitment to decarbonization by joining the oil sands pathways to net zero Alliance in June of 2021. This collaboration of Canada, six largest oil sands producers will work collectively with the federal in Alberta government to achieve net zero greenhouse gas emissions from oil sands.
<unk> thousand 50 last week, we were pleased to have Conocophillips, Canada joined the alliance in this effort.
As I bring my remarks to a close I again want to thank our team at <unk> for their commitment and perseverance I am pleased to see increasing signs of industry recovery from COVID-19, and the challenging commodity prices of 2020.
<unk> performance demonstrates our resilience and I am proud of our performance and remain confident in our ability to execute on our business plan and remain committed to sustainable innovative and responsible energy development and look forward to releasing our 2022 capital program and operational guidance on November 29th as well as continuing to up.
<unk> on our debt repayment progress.
With that we'll now open the line for questions.
Ladies and gentlemen, we will now.
You get a question and answer session. You said you have a question. Please press star followed by the number one on your Touchtone phone you will hear us retail and pumped acknowledging your request and your questions will be pulled in the order they are received.
With the decline from the pooling process. Please press star followed by the number to.
If you're using a speaker phone please lift your handset before pressing any keys one moment for your first question.
Okay.
Your first question will come from Phil Skolnick with eight capital. Please go ahead.
Thanks, Good morning, I have a.
Couple of questions just first because we are coming close to that total debt repayment.
What are your thoughts on the Max is at some form of return of capital to shareholders.
Think about that.
Okay.
Yes, we are getting close to our initial target of the U S $500 million debt repayment, Phil we're coming out with our capital budget in November around November 29th and we'll have more details around that so we're still working through that but I would expect us to talk more about that in November 29th.
Okay Cool and just finally, just this is the third time, we've raised or 'twenty one.
Production guidance.
Number one.
What has been driving that has it been reservoir or a combination of that and things that youre doing as well and does that have any downward implications to your maintenance capex.
Phil It's Derek.
Yes. It is the third time, we've increased our guidance I'm pretty sure we're not going to increase our guidance again.
What youre seeing is sort of the cumulative efforts on three different fronts. One trying to ensure that every ounce of steam that we produce is being used to achieve the maximum benefit. It can in terms of liberating oil inside of the reservoir and Youre also seeing.
The impact of improving our efficiency and uptime utilization of our facility as well as some innovative technology that we've been putting to work downhole.
Controlling where that steam goes to ensure that it is impacting the the best test or parts of the reservoir to.
Improved production performance.
So.
Those are the three big drivers on the performance side as you think about.
Does it change the.
Or bring down our sustaining capital.
Ill.
It helps but it's not going to <unk>.
Offset the impact that we're seeing from inflation and the continued work we have to do on the.
The facility side to continue to move increased volumes.
Okay. Thanks.
Thanks Bill.
Your next question comes from Phil Gresh with J P. Morgan. Please go ahead.
Yeah, Hey, good morning, I guess just to follow up on the first question that was asked.
I know you'll give your capital budget later this month, but beyond the capital budget as you think about other capital allocation options, whether it would be.
A dividend or share buybacks or incremental debt paydown, just if you could walk through how youre thinking about the various priorities.
Maybe.
Multi year basis.
Yes, Phil it's Eric.
You mentioned on the first question.
Just be patient, we'll talk about that in the back end of this month, when we come with our capital budget.
We're not prepared to speak to that.
Yes.
We have to work through a little bit more of that.
Okay. Okay.
And then on the last call there was some discussion around.
Some inflation.
You're beginning to see I think Derek.
Derek you Might've mentioned, 10% inflation, if I recall correctly. So what are your latest thoughts on the inflationary environment.
We're still seeing.
And don't believe we're in a stabilized sort of <unk>.
<unk> to talk to what that inflation is going to be but obviously earlier on this year, we saw big increases in the price of steel.
Iron ore prices have almost dropped in half and.
In the last couple of months. So we expect that steel will not be as big a problem.
Going forward as we've seen but there's probably three big issues, obviously the supply chain issues the.
The inflationary issues associated with cost and.
One on chemicals and on products, but also on people and availability of people I'd say when you multiply all of those things together some of its cost and some of it will turn into <unk>.
Incremental cost some of it will turn into sort of a decrease in efficiency and longer timelines. So.
It's something that we've got a sharp eye on and we're continuing to.
Try and figure out what are some of the techniques that we could use to.
Make sure that.
We mitigate those impacts I'll give you. An example, this year, we've been running up to three rigs at site.
And those rigs would run for a month or two months and then be shut down next year. It is fully our intention to keep one rig running throughout the year and DRC.
There is cost savings associated with that you can guarantee the rig company years' worth of work and that should generate a better rate for you.
Probably the biggest upside is though the crews the crews know that they have steady.
<unk>.
Sort of a continuous paycheck and that is a very big deal for the <unk>.
People on the oil sands.
On the service side so.
That's a good example of not only sort of the cost impact but.
If you can get that same crew coming back week after week youre not going to have as many safety incidences and youre going to see great efficiencies.
Got it that's very helpful.
My last question would just be on pipeline takeaway down to the Gulf Coast.
Obviously line three or started up.
Which should give you more capacity to move barrels Enbridge is also talking about potentially expanding some of those downstream pipelines. So.
Would that have any meaningful impact on the way you look at things or are you.
Comfortable that with the commitments that you have.
So we're comfortable with what we have today. We've got 100000 is now going down to the Gulf Coast.
I have another 20000 offline when CMS comes off.
So.
We view, obviously the increase in egress very constructively, but we don't have any intention changes sort of our sales sales market mix on a go forward basis.
Got it okay. Thank you.
Your next question comes from Greg Pardy from RBC. Please go ahead.
Yeah. Thanks, good morning, Thanks for the rundown guys.
So maybe I'm jumping ahead here, but on just.
Just with the turnaround second quarter next year should we be thinking about that as you know.
A typical three week or will it be longer just given the tie ins that you need to go through with with bumping capacity.
Yes.
And so Greg.
As a bigger turnaround in <unk>.
Not so much just on time, so this will probably be 28 days.
As we've currently estimated at but it is our phase II, which is the biggest.
Component, we've got phase one phase two and phase <unk> and phase <unk> is the biggest.
Contributor of our production so the impact is going to be much larger than it would be for.
If we're taking down or turning around phase one or phase two.
Okay, good to know and I'm sure, we'll get the details within the budget.
Alright shifting gears, maybe Derek is wanted to come back a little bit to pathways, but.
Not so much progress on that.
Maybe just the degree of appetite you're finding for Ccs.
I would say not just in Canada, but elsewhere just given some review recent travels.
The appetite for Ccs is growing.
Massively I think people are finally, realizing that the single biggest lever that we have to pull.
In terms of de carbonization is carbon capture and storage.
It is not a new technology, it's been one that's been around for a while.
Scott that the technical Bugs are all worked out the the real challenge is trying to <unk>.
Find the appropriate sort of economic terms.
To get it underway, but.
People are very comfortable with that with the technology, they see it as being sort of the as I say the single biggest lever that we can pull to have an impact on on driving are actually decarbonising, it's really coming down to what we call the fiscal and regulatory regimes that are going to be present for us to create the conditions.
To get these this infrastructure in the ground and up and running.
Okay perfect. Thank you.
Your next question comes from Neil Mehta from Goldman Sachs. Please go ahead.
Hey, Good morning. This is Nicole at foster on for Neil Mehta. Thanks for taking the question. So we would just be curious about your views on line five we recognize this is a light oil line, but if the pipeline has lower flows you could have barrels back into Alberta is this something we should be concerned about or do you think the status quo will prevail.
And the Glen.
Derek Evans.
<unk> five does not carry a huge amount of volume and I think it's about 330000 barrels a day it tends to be light product.
I would say our view on line five at the current time with line three up and running the replacement.
We don't expect if line five got shutdown that those volumes would back into.
Would would negatively impact the <unk>.
Our ability to continue to move heavy heavy oil down to the U S. Gulf Coast I guess, one thing we would point to is with line three now up and running.
Theres actually appears to be incremental space on the light system that.
<unk> can utilize.
With the way that line is now configured so you could.
We're even more comfortable today that.
The shutdown of five line five would negatively impact our our operator.
Long haul capacity.
Okay. That's great. Thanks for the clarification there.
And then just a follow up on production here we are.
Curious if there are any thoughts to raising production above the targeted 100000 barrel per day level or if there were any optimization projects underway. In addition to ramping production to that full processing capacity.
We have no plans to to grow our production at this time.
And the 100000 barrels a day.
Steam day capacity.
Okay, great. Thank you.
As a reminder, ladies and gentlemen should you have a question. Please press star followed by the number one your next question comes from Matt.
Wholesale from TD Securities. Please go ahead.
Good morning, everyone and thanks for taking my questions I'll just start with one on the the mainline renegotiation my understanding is that a ruling is expected.
Take by the by the end of this month. So could you just walk us through the the range of outcomes and more specifically.
What are your expectations for apportionment and your own Gulf Coast access in Q4 and into 2022.
Yes.
As much as we do about the mainline contracting so.
I'm not sure you want to speculate on the range of outcomes at this point in time, we do expect like you mentioned too.
Here here here outcomes.
The back end of this month's avoid.
We're going to hear that.
Would you be willing to take a stab at.
Apportionment.
The end of the year in 2022 or is it just too uncertain at this time.
Im sorry, I missed that question metal into the end of the year. We look it was 12% in November we think is sub 10%, maybe even 5% in December and then as we look into next year.
It's probably it's less than 20, maybe it's 10% on the mainline, but we'll see what that looks like as we move through 2022, but.
We've seen it come down quite sharply.
Over the last couple of months.
Okay. That's good.
Great to hear and then I guess my second question just relates to earlier stage pilot activity can you just remind us of.
Some of the earlier stage pilots do you currently have underway and how they would tie into your 2030 target about 30%.
Emissions intensity reduction.
Sure.
We're just.
It's Derek.
We're in the process of winding down our <unk> pilot that was the Sullivan pilot that we have been running and we're just looking at.
Where the recovery factors.
We're going to play out in terms of resource recovery, but also in terms of the solvent recovery what are we leaving in the reservoir. So.
Depending on how that all looks that could be a technology that we put to work in terms of.
Meeting our 2030 targets, we have a project called.
Erase.
Which is a shallow sequestration.
Initiative.
Funding for on.
From.
Yes.
The government of Alberta.
And that is something that also could be very impactful in terms of.
Yes.
Finding sort of a more local area in which to.
<unk>.
Decarbonize or at least a dispose of.
C O two.
No.
Other projects that we have on the go would be ones.
<unk>, where we're looking at reducing the amount of diluent that we currently use so.
We've got a low temperature low pressure sort of upgrading technology that.
Would allow us to cut the amount of diluent by almost half so obviously.
The greenhouse gas emissions associated with the diluent would be significantly reduced but also there would be fairly significant cost savings.
To the corporation in terms of diluent as you know diluent is probably our single biggest cost.
No.
That's another initiative that.
We have on the go.
One initiative that we had talked about in the past.
Is the.
Facility, where we were going to inject butane to trim blend the.
Yes.
Due to the discussed the reduction to enter our long haul pipelines that is up and running as of the third quarter and is will generate somewhere in the neighborhood of probably a $1 million of incremental cash flow on a monthly basis as.
As we supplement.
<unk> four.
Condensate.
That's very helpful. Thanks, a lot guys.
Thank you.
Your next question comes from Patrick <unk>.
Eight ATB markets. Please go ahead.
Oh, Hey, guys patchwork HIV capital markets.
Just curious in terms of the Gulf Coast marketing, we've seen a little bit of a widening of the differential down on the Gulf Coast for heavy is <unk> wondering if you can give us a bit of an outlook there I think.
Common thinking is that maybe increased natural gas prices are leaning on heavy refinery margins and what you see the outlook.
For that heading into 2022.
Yes, Patrick I guess from our perspective, just generally what we see driving December and Thats, where in the December sales cycle right now and it is wider than we would normally expect to see it probably by two to $3 and we think thats primarily driven by.
Elevated levels of storage in Western Canada, and that was driven.
We believe.
Planned and unplanned outages in pad two refiners, so we expect to see that inventory get trained.
And given the steepness of the WCS curve, we expect that to happen reasonably quickly. So we believe its transitory we expect to see it normalized.
At least by the end of the year and get back to sort of that that range of $5 to $6, where we think it should be trading against WT WCS against <unk> in the Gulf Coast.
Okay. Thank you.
Okay.
There are no further questions at this time. Please proceed.
Thank you operator, and thank you everybody for joining us for our third quarter call and update I'd remind you to look for our 2022 capital program and operational guidance, which we plan on releasing on November 29th.
And wish you all a pleasant <unk>.
Profitable day.
Yes.
Ladies and gentlemen, this concludes your conference call for today.
Thank you for participating and ask that you. Please disconnect your lines.