Q1 2022 MEG Energy Corp Earnings Call
Okay.
Good morning, Ladies and gentlemen, my name is Michelle and I'll be your conference operator today at this time I would like to welcome everyone to the Meg Energy's 2022, Q1 results conference call.
All lines have been placed on mute at this time to prevent any background noise.
After the Speakers' remarks, we will have a question and answer session.
If you would like to ask a question. During this time. Please press Star then the number one on your telephone keypad and if he would like to withdraw your question. Please press the star followed by the Chill.
I'd now like to turn the call over to Mr. Derek Evans CEO you may begin your conference Sir.
Thank you Michelle good.
And thank you for joining us to review Meg Energy's first quarter operating and financial results in the room with me. This morning, our case, our Chief Financial Officer, Leigh <unk>, Our general Counsel and corporate Secretary and Darling Gates, our Chief operating officer.
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.
I would refer listeners to yesterday's press release for more detail beyond the comments, we have prepared for this morning.
<unk> continues its priority of maintaining safe and reliable operations as we work through 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 commend our workforce for their efforts over the last two.
Years, and look forward to our continued focus on safety as we execute this year's turnaround.
We had a record quarter from both an operational and a financial perspective, we continue to benefit from strong oil prices and low heavy oil differentials.
Additionally, our team's focus on safety plant reliability steam utilization and ongoing well optimization have contributed to our record quarter in terms of production.
Highlights from the first quarter include record funds flow from operating activities and adjusted funds flow of $587 million or $1 87 a share.
Record free cash flow of $499 million.
Record debt reduction, having completed or announced the repayment of 396 million U S or approximately 499 million Canadian outstanding indebtedness.
Record bitumen production volumes of 101128 barrels a day.
We exited the quarter with $1 72 billion U S of net debt total expenditures of $88 million.
We're primarily directed towards sustaining and maintenance and maintenance activities in the quarter.
Net operating costs averaged $8.98 per barrel, including non energy operating costs of $4 74, a barrel higher revenue offset energy operating cost by 38%, resulting in energy operating costs net of power revenue of $4 24 per barrel.
We received approval from the Toronto stock exchange on March 7th for our normal course, issuer bid, which will allow make to buyback up to 10% of its public float as defined by the <unk> over a one year period.
And on March 16th 2022, Meg announced the planned retirement of its Chief Financial Officer, Eric Toews effective September one 2022.
<unk> is conducting an external search for our next chief financial Officer, and will provide an update on the successful completion of that search.
Meg realized an average AWP blend sales price of $83 55 per barrel U S. During the first quarter of 2022 compared to $65 42 per barrel U S. In the fourth quarter of 2021 the.
The increase in the average AWP blend sales price quarter over quarter was primarily a result of the average <unk> price increasing by $17.10 per barrel U S.
Meg sold 58% of its sales volumes into premium priced U S. Gulf coast market in the first quarter of 2022 compared to 48% during the fourth quarter of 2021 as a result of apportionment on the Enbridge mainline decreasing from 21% in the fourth quarter of 2021% to 10% in the first quarter of 2012.
<unk> two.
<unk> invested $88 million in the first quarter compared to $106 million in the fourth quarter of 2021 capital invested in the quarter was primarily directed towards sustaining and maintenance activity and included incremental capital to allow the corporation to fully utilize the Christina Lake facilities oil processing capacity of approximately 100.
<unk> barrels a day.
Last month's has also provided important developments relating to our continued involvement in the oil sands pathways to net zero Alliance, which aims to achieve net zero emissions from our operations by 2050.
On April seven 2022, the Canadian Federal government announced an investment tax credit for carbon capture and storage projects for industries across Canada May believes this announcement is a positive step in the oil sands, our pathways to net zero Alliance.
Efforts to co work collaboratively with governments to health, Canada and achieve its climate goals and ensure our country can be the world's preferred supplier of responsible oil.
The pathway is alliance anticipates that this tax credit together with support from the Alberta government will help advance the pathways alliances unprecedented plants to achieve meaningful emissions reductions by 2030 and ultimately the goal of net zero emissions from oil sands operations by 2050.
<unk> continues to execute on its deleveraging and shareholder return strategy.
<unk> redemption of the remaining 171 million U S outstanding of its second lien notes was completed on April 4th post. This redemption Meg will have paid approximately $2 billion U S of outstanding indebtedness since 2018, Meg exited the quarter with $1 72 billion of net debt.
As Meg expects to assume reach its previously announced near term debt target of $1 7 billion U S <unk> and CIB, which became effective on March 10th allows the corporation to initiate a share buyback program, whereby 10% of the corporation's public float as defined by the Toronto stock exchange.
May be brought back.
Up to a maximum of approximately $27 2 million common shares of Meg Meg intends to allocate approximately 25% of free cash flow generated to share buybacks with the remaining being allocated to debt reduction until the corporation net debt balance reaches $1 2 billion U S. In the current commodity price.
Environment may expects to reach its $1 2 billion U S net debt target in the third quarter of 2022.
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.
Excuse me to further debt reduction until the corporation reaches net debt floor of 600 million U S at which time, a 100% of free cash flow will be returned to shareholders.
Our current production levels. This net debt floor implies a net debt to EBITDA multiple of approximately one times at a long term $50 per barrel U S oil price.
As I bring my Mark My remarks to a close I once again want to extend my thanks to our team for their commitment and perseverance I'm proud of what we've been able to accomplish and are confident in our future and our commitment to assist sustainable innovative and responsible energy development.
Behalf of the board of directors and our management team I want to thank you all for your support with that I will turn the call to our operator to begin the Q&A.
Thank you Mr Robbins, ladies and gentlemen, we will now conduct a question and answer session.
If you would like to ask a question. Please press star one.
If you would like to withdraw your question. Please press star two.
One moment. Please for your first question.
Your first question comes from Phil Gresh of Jpmorgan. Please go ahead.
Yeah.
Hey, Good morning, guys. This is John Royall sitting in for Phil.
The 600 million. Therefore, I think there is a new concept for you guys in terms of the framework you laid out in the prior quarter can you just talk about the decision to put in the floor and why 600 million ultimately the right number.
About one times leverage.
Just a little more color there.
Yeah.
Sure John It's Eric speaking.
We spent a lot of time thinking about that not that floor. The key drivers for us or theres basically three or four one is we've always prided ourselves on financial liquidity and we think of the U S $600 million floor. When you couple that with the structure of our credit facility, which is a modified covenant light.
<unk>, which continues to provide us with.
If we needed it.
Quiddity unencumbered by covenants up to $400 million Canadian.
So that was an important factor and then the other thing was we look at our term structure of our debt we've always tried to maintain.
For a balanced term structure and in this concept. The first maturity. We'd have is 2029, so that is well out into the future and the third piece, which I think is important is the ability to actually refinance that debt. When it came to that $600 million U S. And we think at that level given the credit quality of Meg we will not have.
An issue.
In enrolling that debt, whether that's in the capital markets, whether it's in the bank market wherever that market is so from that perspective, we feel very comfortable that that's sort of a bullet proof that number.
And it's one we want to apply against that one times at $50 Wty maybe.
Maybe I'll just jump in and say, it's entirely consistent with where we were before at two times.
Net debt to EBITDA at a $50 <unk> price.
We pointed to that as being one of our first shopping off points.
And now we've laid out our.
Our final landing spot at 600 million at that $50 WTO price.
Thank you that's very helpful and then.
We can switch off just to speak a little bit to inflationary pressures you are seeing out there I know you maintained your guidance but.
What are you seeing on the Opex and Capex side, and how does that compare to what you expected going into the year.
Darlene.
Thanks, So starting gate and we're definitely seeing inflationary pressures and continue to watch the space very closely.
About 10% in the 2020 to budget, but we are seeing pressure upward pressure on labor steel fuel and chemicals and this is probably pushing us closer to about 15% as we continue to watch the market and how things are evolving.
Very closely with the contractors, we will see how that evolves through the year. As we look ahead into 2023, we continue to expect upward pressure on inflation and believe this could translate into an additional 15% again those are perspective, probably will change with time, but just to give you a little bit of what we're seeing.
A strong dialogue with our community.
And with our contractors to manage this space.
Okay. That's very helpful. Thank you very much.
Thank you.
Your next question comes from Greg Pardy of RBC. Please go ahead.
Thanks, Good morning, Thanks for the rundown.
Derek.
The 600 million U S net debts floor.
The trailer on that is shareholder returns as opposed to a buyback right, which is which is attached to the other two I'm just curious would that begin to include.
Concept around a dividend or not.
Hey, Greg its Eric I think I think right now it's too early to tell.
From a modeling perspective, that's always though we will consider all avenues that make sense for shareholders, but right now our focus is on buybacks.
Okay. Thanks for that and then just a couple of quick ones have you moved into turnaround Chris.
Christina and how should we sort of think about the paths of the utilization on Flanagan seaway through the balance of the year.
Darren you want to talk about <unk> alright.
So sterling.
We have started on April 24 in the protest of the execution of the turnaround so far the team and so we've got very experienced team and they're managing very well every day is a new day, but they are prepared and have our.
Plans in place to manage that the changes that may occur, but also all is going well so far keep our fingers crossed.
Im pretty confident in the team and it's about a 30 day turnaround do you expect to be done.
At the end of April and May sorry.
Yeah.
Flanagan sorry, Greg you were asking about the utilization on Flanagan South.
So you ran 58% rate in Q1, obviously with the turnaround you're you're not going to have the volumes, but as I sort of think about the back half of the year with very limited apportionment.
I'm, assuming that you'll be using probably a good chunk or all of your capacity.
Absolutely.
Obviously through turnarounds will be training will be pulling on.
Volumes out of storage to utilize that space and we've also made some alternative arrangements too.
Make that space available to other people on a discounted basis, but you should expect us to be running with <unk>.
Effectively zero apportionment.
Through the remainder of the year.
Terrific. Thanks, a lot.
Greg.
Your next question comes from Neil Mehta of Goldman Sachs. Please go ahead.
Yes, congratulations on good results and the continued progress around capital returns.
I wanted to get an early flavor I recognize that we're early here in 2022, but your thoughts around 2023 and whether it makes sense.
To build out capacity.
At Christina Lake.
<unk> growth be a bigger part of your Capex budget or do you feel like youre still in relative sustaining.
Investment mode.
As you go into 'twenty, three as well in it and tying that into your capital budget, which do you see that moving higher.
If there is a growth component to it.
So Neil I mean, I think we should be asking you. The question whether our shareholders are what you are hearing from our shareholders with respect to growth but.
Fundamentally as we drive forward.
We are.
Very very focused on debt reduction that is our primary goal and our responsibility and return of capital to shareholders.
And that has been sort of the.
Yeah.
A major focus we haven't turned our mind to two gross or two optimization not other than to say, it's an ongoing part of Darlene responsibilities is to find ways to.
Make our central processing facility and our capital dollars go further.
In terms of.
Expanding the capacity and.
Adding to R. R.
Our production capabilities.
I'll tell you at this point, we have no plans to.
Expend capital above and beyond what we consider our sustaining capital at this point, but.
If we got a strong message from our shareholders that.
Once we were at certain depth levels or whether they were they saw the level of commitment to debt reduction and that share buybacks are starting to happen.
If there was a change in the tone and there was an opportunity to put more capital to work.
In sort of.
A small percentage of free cash flow, that's something we definitely look at trying to achieve on their behalf.
And so as you think about $375 million capital budget next year.
We are this year what are all the moving pieces as you go into next year, what are things that are going to be rolling off.
Potentially inflationary factors, we should be watching.
So.
We haven't talked about this.
Nor have we landed on a number but if we're thinking about capital for 2023.
Notionally I think we're thinking of that sort of in the $400 million range at this point obviously.
There is a big inflationary impacts that we're seeing.
This year and as you heard Darlene a little bit earlier talking about that we expect that inflationary impact to continue.
In the 375 this year, there was $50 million for ongoing sort of.
Facility and well work to keep this at that 100000 barrels a day.
Next year, we've got some fairly significant pipelines that we're going to be moving.
<unk> got a built to move from one of our producing areas into our next.
And that likely will take us, but will cost us somewhere in the neighborhood of $30 million to $40 million so far.
$400 million number is not a bad place, but I yeah.
That's right off the top of my head that is not something that.
We've got any precision too and the biggest part of that in the most concerning part is going to be the impact of inflation in 2023, which at this juncture.
We're having we've.
We've talked about it in that 15% range, but.
And we hope that that's where it's going to land, but it could be.
It's obviously been significant this year and could be significant next year.
Thanks, and then the follow up is just around royalties can you just talk about how we should be thinking about that as a good problem to have as a cash flow continues to ramp but any modeling considerations that we should take into account as we think about.
When the project goes into postpaid.
Hi.
I think.
Yeah.
These sorts of commodity price, we expect to be too.
To hit a payout sometime in the fourth quarter.
And Neil Eric I mean, it's consistent with last quarter, if you assume sort of 10% to 15% for this year in 2000% to 25% next year and effective royalty rate. That's that's good from a modeling perspective.
Alright, Thanks, guys I appreciate it.
Thanks Neil.
Your next question comes from Menno <unk> of.
TD Securities. Please go ahead.
Hi, good morning, everyone and thanks for taking my question. So I've just got a two part.
Question on <unk> and the pathways.
Alliance given given the news from the Feds, but you mentioned the the province, so so when can we expect news from.
The the province in terms of what they would be prepared to chip in and what are you thinking in terms of the possible outcomes there.
And the second part of the question relates to the U S.
Spend profile over the next several years when do you expect that to start to show through in your own budget.
Mentioned sort of rough numbers 400 million for next year. So I don't think it's next year, but.
Is it 22004 2825 is that is that a reasonable expectation.
So menno. Thanks for the question on sort of on pathways.
We are extraordinarily pleased that the federal government stepped up.
With their 50% in.
Investment tax credit that is a huge start to getting us over the line.
We are very interested and are waiting with bated breath when the province is going to two step up we have talked publicly about the need for 75% support at the capital level. So obviously, we'd love to see the province finding.
Finding a way to bridge that gap in that 75% is not a number we picked out of the year, 75% and sort of there is a number that other constituencies that we need to be competitive with be the Netherlands, or Norway or the U S have received in terms of.
Capital support for this.
<unk>.
Province is we expect to hear from the province sometime before.
In late May.
With respect to we know theyre looking at the various different ways.
Debt finance could potentially help to make this happen but.
At this juncture, we don't have any firm handle on what the timing would be but we're very hopeful.
They will find a way to.
Two to step to the table and help us make this happen.
On the <unk>.
Sorry.
The spend profile.
Now I'll stop interrupting you.
Yes.
No no obviously.
I was just going to follow up on the spend profile, so youre going to hit it.
So.
It's very hard to predict what the spend profile is until we know we have a project so.
Obviously that provincial support is important but also we don't have the poor space as of yet the poor space application went in at the end of April we expect to hear some time.
Throughout the summer, but at the very latest by the end of October .
And.
Fundamentally the most important part for US is once we got that.
Then we would go to work on putting the pipeline and we don't expect that pipeline and.
Poor space or.
Our storage facility would be available till likely late 2028. So then you would start to back into your own carbon well.
Obviously there'll be some capital associated with that but I don't think youre going to see significant spending.
Much before 2025 2026 and.
When you do see that spending that capital spending we're hoping that it is going to be at.
It's going to have the 75% sort of.
Investment tax credit type of impacts so are our contribution would be in that 25% of the capital.
Terrific. Thanks, Derek that so that's all I had.
Thanks Menno.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star one now.
Mr. Evans, there are no more questions from the phone lines I will turn the conference back to you for closing remarks.
Thank you Michelle and thank you everybody that joined US This morning for our first quarter call.
I said a little bit earlier, we're very excited about what we've been able to achieve and very confident in.
What the remainder of the year is going to bring forward, we look forward to reporting on that at our next.
When released Q2 on July 27th so have a great day, everyone. Thank you for your attention.
Ladies and gentlemen, this concludes the conference for this morning, we would like to thank you all for participating and ask that you. Please disconnect your lines.
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