Q4 2021 MEG Energy Corp Earnings Call
Good morning, My name is Pam and I will be your conference operator today at this time I'd like to welcome everyone to the Meg Energy's 2021 year end 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'd like to ask a question. During this time simply press.
Star then the number one on your telephone keypad, if he would like to withdraw your question. Please press star followed by Chew. Thank you I would now like to turn the conference over to Mr. Derek Evans CEO . Please go ahead.
Thank you Pam and.
Good morning, and thank you for joining us to review Meg Energy's year end 2021, operating and financial results in the room with me. This morning are toews, our chief Financial Officer.
<unk>, our general counsel, and corporate Secretary and Darlene Gates, our Chief operating officer, I'd like to remind our listeners.
This call contains forward looking information please refer to the advisory is in our disclosure documents filed on SEDAR and on our website.
Keep my remarks brief today and refer listeners to yesterday's press releases for more detail.
Make continues its priority of maintaining safe and reliable operations as we work within the ongoing COVID-19 environment. Our teams continue to respond to the impacts of the pandemic prioritizing the health and safety of our workforce and reliable operations at our Christina Lake facility I am proud to say that we had no lost time.
For our employees or contractors in 2021, the testament to the dedication and diligence of our team.
We exited the exited the year with strong financial and operational results. Our teams focus on safety plant reliability steam utilization and ongoing well optimization have contributed to make strong 2021 results.
Highlights from our year end results include adjusted funds flow of $799 million or $2 57 per share for the year record free cash flow of $468 million in 2021.
We completed or announced the repayment of 325 million U S of outstanding indebtedness.
Record bitumen production volumes for the fourth quarter of 100698 barrels per day as well as for the full year of 93733.
Barrels per day.
Total capital expenditures of $331 million, approximately 2% lower than the July 2021 increased budget were primarily directed towards sustaining and maintenance activities and additional drilling to return bitumen production to 100000 barrels a day.
Net operating cost averaged $6 60 per barrel, including record low non energy operating costs of $4.24 per barrel.
Power revenue offset energy operating costs by approximately 52%.
We released our second ESG report with a new 2030 greenhouse gas intensity target to complement our 2015 net zero greenhouse gas targets and improved alignment on disclosure of climate related risks to SaaS, <unk> and PC FTE guidance.
Meg realized an average AWP blend sales price of $57 59 per barrel U S. During 2021 compared to $28 seven per barrel U S. In 2020.
The increase in the average AWP blend sales price year over year was primarily a result in the of the average <unk> price increase.
Of $28 51 per barrel U S. Meg sold 42% of its sales volumes in the premium priced U S. Gulf coast market in 2021 compared to 40% in 2020.
<unk> invested $331 million of capital in 2021 compared to $149 million in 2020 majority of the capital is focused on sustaining and maintenance activities as well as incremental well capital to fully utilize the Christina lakes oil processing capacity of 100000 barrels per day.
As we disclosed last year. The total investment for this initiative is approximately $125 million.
$50 million being invested in the first half of 2022.
Meg expects full facility utilization in the second half of 'twenty to post our planned turnaround in Q2 of this year.
I'm proud of the efforts and the advancements in our ESG activities from our teams across the organization in June 2021, Meg along with four other oil sands operators created the oil sands pathways to net zero aligns with the objective to achieve net zero emissions from our operations by 2050 in.
In the fall of six company joined the Alliance, which now represents approximately 95% of operated Canadian oil Sands production production.
Our collective purpose is to position <unk> as the preferred global supplier of net zero crude.
Pathways vision is anchored by a major carbon capture and storage system with ACO to pipeline connecting oil sands facilities from Fort Mcmurray, and the surrounding region to a carbon sequestration hub near Cold Lake.
We continue to work with the federal and Alberta governments in support of this emissions reduction project and infrastructure as well as advancing development of new and emerging technologies.
2021 also saw the release of our second ESG report, which outlines the meaningful progress we've made in our priority topics climate change and greenhouse gas emissions water and wastewater management health and safety and indigenous relations. In addition, the report contains our new 2030 Green.
<unk> gas intensity target that complements our 2015 net zero target and improved alignment on climate related risks, where SaaS b and Tcf D guidance.
The report is available on our website at Ww.
<unk> dot and Meg energy Dot com and I really encourage listeners to take the opportunity to read it.
Some detail, it's a fabulous report.
As we exit 2021, Meg is well positioned to continue to deliver on its deleveraging and shareholder return strategy yes.
Yesterday <unk> issued a notice to redeem the remaining 171 million U S of Megs outstanding six 5% senior secured second lien notes due January 2025. This brings <unk> total debt repayment to approximately 2 billion U S. Since the beginning of 2018 continued debt.
The reduction remains a core focus of the company.
As Meg expects to soon reach its previously announced near term debt target of $1 7 billion U S. Yesterday <unk> board of directors approved the filing of an application to allow Meg to initiate a share buyback program, whereby 10% of the corporation's public float maybe brought back back back up to a maximum of approximately <unk> <unk>.
Seven 2 million common shares of Meg Meg.
<unk> intends to allocate 25% of free cash flow generated to share buybacks with the remainder being allocated to debt reduction.
Once <unk> reaches its $1 2 billion U S. Net debt target the corporation intends to increase the percentage of free cash flow allocated to share buybacks to approximately 50% with the remainder being applied to further debt reduction.
In closing, we continue to enhance our competitive position with our work on several priorities, including our debt repayment and shareholder return strategy plant optimization and reliability cost management and advancement of our ESG related activities.
I'm pleased with the more favorable outlook for commodity prices as well as the ongoing global recovery from the impact of the COVID-19 pandemic.
I want to extend my thanks to our team for their performance and contributions to our success in 2021 I'm proud of what we've been able to accomplish and confident in our future and our commitment to sustainable innovative and responsible energy development.
With that I'll now turn the call to our operator to begin the Q&A.
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, you'll hear three tone prompt acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the pooling process. Please press star followed by <unk>.
And I will be using a speaker phone. Please lift your handset before pressing any one.
One moment for your first question.
Your first question comes from Phil Gresh with Jpmorgan. Please go ahead.
Yeah, Hey, good morning, Derek and thanks for taking the questions.
First one just on the.
The takeaway situation for 2022 can you give us any updated thoughts on your ability to use the full contracted amount as the year progresses.
Absolutely.
Phil I think you are referring to our Flanagan South Seaway capacity.
I think the.
We fully expect to be able to use the majority of that 95, 5% of that throughout the year.
Primarily driven by the fact that the Enbridge apportionment.
We expect to see.
And that sort of zero percent range through the summer and maybe a little bit of maybe 5% apportionment in some of the shoulder seasons, but effectively we're going to have.
Full access to that capacity now.
Got it so even here in the first quarter, you feel comfortable with it.
Well I mean, a portion of it was.
It was higher in January and February , but march's apportionment I believe is zero and we fully expect that to continue as we drive forward now.
Got it okay good to hear.
And then any any updated thoughts around the timing of moving to post pay out in this type of macro environment. Obviously, it's extremely volatile right now, but just curious how you would frame the way we should think about that.
Yes, Phil it's Eric.
The best way to think about that is to think about the effective royalty rates for 2022 and 2023. So at the prices. We're seeing today the oil prices, we're seeing today and as you know like there is a bunch of factors that go into calculating the payout oil prices diluent costs foreign exchange capital all of that needs to be put into two.
<unk> payout timing, but the effective royalty rates were seeing for 2022 is probably the 10% to 15% range and then we'd see that at current pricing, we would see that go into 2000% to 25% for 2023. So that's probably the best way for us to frame that for you.
Okay perfect. Thank you I'll turn it over.
Thanks Bill.
Your next question comes from Neil Mehta with Goldman Sachs. Please go ahead.
Hey, Good morning, this is nicoletta plus our own for Neil Mehta. Thanks for taking the time. So the first would just be on cost non energy Opex continues to come in lower versus our estimates and often recent guidance how should we be thinking about non energy opex going forward and is it safe to say the fourth quarter as non energy opex per barrel could be used as a sort of run rate.
Yep.
Great question.
After six years of continuing to reduce our non energy opex.
I think this is the year, where due to inflationary pressures pressures on labor pressures on fuel pressures on services, we could see that.
Start to move up obviously.
We will continue to focus on that.
But I think the guidance we've got out there includes.
Includes all of those.
All of those impacts so I think our guidance range is probably the best view of where we think non energy opex costs are going to be on a go forward basis.
Okay. Great. That's helpful. Thank you and then the follow up with just we're just curious on your outlook for WCS WCS. This year as global demand for Canada heavy crude may pick up in with line three online and then in the medium term how are you thinking about differentials. Following the recent announcement spring team excellent items <unk> 23.
So.
Interesting.
Obviously theres a lot of focus on <unk> today is that the.
Second part of your question I think is the really interesting one is where do we see differentials I mean today differentials are trading in.
In the U S Gulf Coast for.
WCS or AWP in that 2% to $3 range, which is showing the tremendous demand worldwide demand for this product and obviously with.
With some of the.
Challenges that we're seeing in terms of energy supply coming out of.
Europe , we expect to see very low.
Sure.
WCS or slack AWP differentials on a go forward basis, obviously, we can't predict where <unk> prices are going but we do believe that if we look at sort of the.
The amount of Underinvestment in the global oil and gas business.
And the continued focus of investors on a return of capital.
And no growth from oil and gas companies, we think this.
Is it is going to create a.
In an environment, where youre going to see much youre going to see strong <unk> prices for an extended period of time.
Great. Thanks for the color.
Yeah.
Thank you.
Ladies and gentlemen, as a reminder, if you do have any questions. Please press star one.
Your next question comes from Patrick O'rourke with HEB capital. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions just looking at the net debt target and the NCI would be that you are putting in place our model kind of how is it.
You get into that $1 $7 billion threshold at some point in Q2, but is it safe to assume that as soon as you get the approval here you can start executing on that.
I guess the way that we're thinking about that Patrick is we want to make sure we have the cash in the door.
Before we start doing buybacks. So you should expect US you should.
I could see us start that very soon but we want to make sure that we have all the cash in the door after.
Redeeming the second lien notes, we announced yesterday, but we'll we'll started as quickly as we can when the cash is in the door.
Okay, and then a little bit of an improvement on the SLR in the quarter relative to Q3 here.
Wondering after coming out of the turnaround here and you get to the steady state nameplate capacity, how do you guys see the so are trending going forward here.
I think the.
Patrick It's Derek.
Obviously.
The steam oil ratio is a function of where we put the steam to work and what stage in maturity. The wells are at and so part of the reason you saw the steam oil ratio coming down.
And the last part of the year as we were bringing new well pairs on well pairs that we had been steaming.
Warming up but not actually seeing the production from so I think you'll I should expect to see that that steam oil ratio over the year, we will continue to come down gradually.
Okay, and then just one last sort of final question for me.
In terms of <unk>.
Lines for the pathways project something Thats.
Possibly it's really intriguing for us and I think a lot of investors out there, especially in terms of the oil Sands story.
Can you maybe give us an outlook for sort of the timing when we could see sort of more material news on this project.
Absolutely they listen.
<unk> project is.
Exciting on a bunch of different fronts not only is it.
Really Canada's only big project to help meet its 2030.
Aspirations to reduce its greenhouse gas emissions and pathways project represents obviously, 10% of Canada's emissions and we're excited to be able to get that potentially up and running sooner than later with respect to your question.
We are currently awaiting some news from on the investment tax credit, which we hope will be in the next federal budgets.
And that will provide us with some clarity on.
The important financial support that we need to undertake.
This project the other part of this though that is equally as important is the poor space application. So we.
<unk>.
We are very interested in getting our poor space application in with the province of Alberta for that area around the Cold Lake area I saw something come out yesterday that said.
There was an opportunity or are there any requests for proposals on that front.
<unk>.
<unk> has sort of a may deadline, and a October type of timeframe.
With respect to.
When we potentially could find out but.
We will work on that but those are sort of that two key.
Deadlines were working with at the moment when could we see some sort of indication of federal support and when could we.
Achieve some sort of certainty with respect to poor space in the Cold Lake area.
Okay. Thank you very much.
Thank you Patrick.
Your next question comes from Dennis Fong with CIBC World markets. Please go ahead.
Hi, good morning, and thanks for taking my question.
The first one I have here is just with respect to the term notes you've obviously now retired your well soon to have retired.
The entire six 5% senior secured second lien how.
How should we be thinking about the next tranche.
The 2020 Sevens as.
As well as just kind of expectations around capital allocation policies, and maybe ideal capital structure.
Okay.
So I guess I'll take the second question first which is the capital allocation strategy.
I don't think we are in.
Very clear on the.
The allocation of free cash flow too.
Buybacks into debt reduction.
The $1 2 billion, we take that to 50 50, so we don't see that changing we see obviously the.
The trading value and make sure it is well below the intrinsic value so until that fundamentally changes you won't see us change our strategy around that.
With respect to the optimum capital structure, we're going to continue to pay down debt once we hit that $1 $2 billion.
The one twos.
Less than two times at a $50 <unk> price, we want to get that lower.
How much lower will determine that as we get to that $1 $2 billion level.
And then the.
The first is the first question sorry can you repeat the first question.
The $1 2 billion.
The term notes for 2027, Oh, yes, yes, sorry can you generate free cash, yes, sorry, Dennis Thanks, Yes.
We're thinking about that the same way, we thought about attacking the second liens.
Two years ago, which is we'll look at the tranches, which that we buyback based on things like liquidity tenor price the economics to us so.
We have a plan around that and we'll we'll execute that.
Shortly.
Great. Thanks.
Thanks, guys.
Your next question comes from Menno.
<unk> with TD Securities. Please go ahead.
Thanks, Good morning, everyone not just.
One question for me just just a follow up on shareholder returns Youre clearly about to get really aggressive on the buyback but.
What are your current thoughts on Hawaii and statements of our base dividend is a priority.
Yes.
But from our perspective, the buybacks that generates fundamental value for shareholders is demonstrable all else being equal to cash flow per share shrink since our growth story.
The outstanding share shrink and you got to remember we're still in a deleveraging mode here at <unk>. So from our perspective that strategy is somewhat incompatible with a fixed charge dividend at this point in time. So that's the reason why we gravitate towards the buybacks.
So potentially we can start to think about that in 2023 or even further out.
Yes, I wouldn't say that it will just we'll decide that at the time, but.
Right now our approach is buybacks, we think thats the best best approach for our shareholders and we will we'll determine whether we change that.
Once we once we get through the $1 $2 billion target.
Yeah.
I would just add I mean it.
We continue to look at the intrinsic value of the <unk>.
Shares and we still think the.
The best strategy, given our high leverage is to continue to buyback that was shares I mean.
I'll be quite honest, our concern with dividends is people see it as a fixed part of your cost structure and we are now we've got to reduce.
We need to reduce.
Our debt before we start talking about adding anything else to our cost structure.
Yeah.
Got it that's all that all makes a lot of sense. Thanks guys.
Thanks.
Thanks, Matt.
There are no further questions at this time. Please proceed.
Well, thank you everyone for joining us for the call today.
I appreciate the time, you've given us to let US update you on our story and we appreciate your questions and we appreciate your continued support thank you and have a great day.
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.