Q2 2022 MEG Energy Corp Earnings Call
Good morning, My name is Pam and I will be your conference operator today at this time I would like to welcome everyone to make Energy's 2022, Q2 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.
Like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question simply press Star then the number to you. Thank you Mr. Derek Evans CEO you may begin.
Thank you Pam.
Good morning, and thank you for joining us to review Meg Energy's second quarter operating and financial results in the room with me. This morning are Eric Toews, Our Chief Financial Officer Garden Gates, Our Chief operating officer, and Laura <unk>, Our general Counsel and corporate Secretary I'd.
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.
I would refer listeners to yesterday's press release for more detail beyond the comments we've prepared this morning.
Prior to jumping into the details of the quarter I wanted to point out that this is Eric Toews last quarterly conference call before retiring on August 1st on behalf of the entire board and management team I want to thank Eric for his dedication and invaluable contributions during his time at Meg.
Eric has led a number of strategic initiatives, which are transformed <unk> balance sheet, including the sale of the alliance or the access pipeline and the completion.
A number of complex refinancing tracks transactions, which have been instrumental in getting us to the place. We are today, where we're returning capital to shareholders on a personal note Eric has been an amazing partner I am grateful to have had the opportunity to work alongside him. These last four years and wish him all the best in the future.
In the second quarter bitumen production averaged 67256 barrels a day at a steam oil ratio of 246 compared to 101128 barrels per day at a steam oil ratio of 243 in the first quarter of 2022.
Production in the quarter was impacted by the scheduled major turnaround at Christina Lake Phase <unk> facility, despite a tight labor market and supply chain challenges. The turnaround was completed safely on time and on budget.
Following the turnaround the Christina Lake facility experienced an unplanned electrical event, which resulted in a slower than forecast production ramp up during the month of June which impacted full year 2022 average production by approximately 2000 barrels per day Christina Lake facility has now returned to full production and make second half 2022 average.
Reduction levels are expected to meet or exceed the record production levels. The corporation reached in the first quarter of 2022.
Due to the slower post turnaround production ramp up Meg revised its full year 2022 average production guidance to 92% to 95000 barrels a day from 94 to 97000 barrels per day <unk> also revised its full year non energy operating costs and G&A expense to $4 60 to $4 90 per barrel and $1 75.
To $1 90 per barrel, respectively, reflecting lower full year production guidance.
In the second quarter, Meg initiated a share buyback program and continued to make significant progress on debt reduction year to date, we've applied over $1 billion of free cash flow to debt repayment and share repurchases.
Highlights from the second quarter results include funds flow from operating activities of $412 million and adjusted funds flow of 478 million free cash flow of $374 million total capital expenditures of $104 million, primarily directed towards sustaining and maintenance activities.
Including approximately 44%, which was directed towards the completion of the major planned turnaround.
Net operating cost averaged $12 97 per barrel, including non energy operating cost of $5 65 per barrel power revenue offset energy operating costs by 30%, resulting in energy operating costs net of power revenue of $7 23 per barrel.
Year to date reduction year to date debt reduction of $700 million U S.
Including $370 $379 million U S. In the second quarter of 2022.
<unk> initiated the share buyback program during the quarter and to date has returned $139 million of capital to shareholders through the repurchase for cancellation of approximately 724 million common shares during.
During the quarter Meg renewed its existing modified covenant light facility credit facilities, resulting in total available credit of $1 $2 billion with a maturity date of October 31 2023.
And on June 16th 2022, Meg announced the hiring of Mr. Ranck cubic as the Corporation's next Chief Financial Officer, who will succeed Eric Toews effective August one 2022.
Meg realized an average to AWP blend sales price of $100 42 per barrel U S. During the second quarter of 2022 compared to $83 55 per barrel U S. In the first quarter.
The increase in average AWP blend sales price quarter over quarter was primarily primarily a result of the average wty price increasing by $14 12 per barrel U S may.
<unk> sold 79% of its sales volumes in the U S. Gulf Coast market in the second quarter of 2000 to 2022 compared to 58% during the first quarter of 2022.
The increase quarter over quarter is primarily the result of apportionment on the Enbridge mainline being zero percent in the second quarter of 2022 compared to 10% in the first quarter.
On June 15th.
2022 candidates majors Oilsands producers announced combination of three existing industry groups all focused on responsible development into a single organization called the pathways Alliance.
A new organization incorporates the oilsands.
<unk> to net zero Alliance launched in 2021, Canada's oil Sands Innovation Alliance <unk> created in 2000, 2012, and the oil Sands community Alliance Oscar created in 2013 combination of these industry groups integrated into a single organization with combined leadership.
We will enhance the alliances collaborative efforts to advance responsible oil sands development and to progress the alliance's goals, including achieving net zero greenhouse gas emissions from oil sands production.
Key focus of the new pathways alliance will be to continue the considerable work already underway to reduce greenhouse gas emissions from oil production by 22 million tons annually by 2030, and ultimately achieve its goal of net zero emissions from oil sands production by 2050.
It makes capital allegation strategy is designed to provide increasing return of capital to shareholders as progressively lower net debt targets are reached.
Meg reached its $1 7 billion U S net debt target in the second quarter of 2022 at net debt levels between one seven and $1 2 billion U S. Approximately 25% of free cash flow generated is being allocated to share buybacks with the remaining free cash flow applied to ongoing debt reduction.
In the current commodity price environment, Meg expects to reach it.
$1 2 billion U S net debt target in October of 2022 and to reach its $600 million U S. Net debt floor in the second half of 2023.
During the second quarter of 2022, Meg repaid $379 million.
Through the redemption of 379 million U S through the redemption of the remaining 171 million U S of <unk> second quarter, our second lien notes and through the repurchase and extinguishment.
208 million U S of makes outstanding senior secured notes due 2000 Twenty's February 2027, Mega has repaid approximately $2 3 billion of outstanding indebtedness since 2018.
During the quarter.
Corporation initiatives initiated its share buyback program in the second quarter Meg purchased for cancellation for $4 5 million common shares returning $94 million to make shareholders year to date <unk> has purchased for cancellation 724 million common shares returning $139 million to make shareholder.
<unk>.
During the second quarter, Meg amended and restated its revolving credit facility and as letter of credit facility agreement guaranteed by export Canada export development, Canada and extended the maturity date of each facility by two three years to October 31, 2026 total credit available under the two facilities.
<unk> was reduced from $1 3 billion to $1 2 billion and is comprised of $600 million under the revolving credit facility and 600 under the EDC facility. The revolving credit facility retains its modified covenant light structure, meaning it continues to contain no financial maintenance covenants, unless Meg has drawn under the revolving credit.
<unk> in excess of 50%.
If drawn in excess of 50% or $300 million Mega.
<unk> is required to maintain our first lien net debt to EBITDA ratio of three five or less made continues to have no first lien debt outstanding.
As I bring 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 confident in our future and our commitment to sustainable innovative and responsible energy development.
On behalf of <unk> Board of directors, and our management team and want to thank you for your support with that I'll 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 the star followed by one on your Touchtone phone.
Here with me Tom from Technology in your question.
If you are using a speakerphone please lift the handset before pressing any keys.
First question comes from Neil Mehta at Goldman Sachs. Please go ahead.
Good morning, Tim and Eric Congratulations on your retirement and thank you for the partnership over the years.
Okay.
The first question is is on the macro.
Derek.
<unk> been a little surprised to see WCS widen out as much as it has.
In light of inventories in Alberta, and I guess part of it is.
Gulf Coast fuel oil part of it seems to be the SPR.
Just love your perspective on the sustainability of that wider differential how you guys are thinking about the.
23, and 'twenty four outlook, there and anything you're seeing real time in terms of being able to to get the barrels out of the market. Thank you.
Yes.
Thanks for the question, it's a very appropriate.
Topical one at this time one of the things that has happened.
As a result of the Russian Ukrainian sort of conflict is that Russia has had to find a home for its year olds barrels and it had to find a home quickly.
What we've seen happen in the market as their euros barrels, which are heavy terrell heavy sour barrel.
Have been marketed to both.
China, and India, and what we've seen.
Seen is they've been marketed at a fairly deep discount a deep enough discount to stop.
Some of those U S Gulf coast barrels moving across the dock and move in moving to Asian markets in particular, India. So if we look at that dynamic that existed in late Q4 and early in Q1 of this year.
Would've seen two to 4 million barrels a day or a month of product heavy product moving across the dock too.
To Asia those volumes have dried up.
<unk>.
Indian companies and Chinese company source those barrels.
From the deeply discounted Russian market, so that would be the number one factor that is driven on it.
Increase of sort of.
The supply on the U S Gulf coast of our product that has broadened out the differential youre right. The SPR releases have had an impact.
But that impact was about 1 million barrels a day it's waning.
As it gets towards the end of the program program. It is currently down at about 700000 barrels a day and in that September 16th to October 21st prior period, it's going to drop down to about 550000 barrels a day of product and that product is now going to be predominantly light as opposed to heavy.
So our view is.
On both of these factors.
Is that a deeply discounted a Russian barrel is what you would do if you were Russia and trying to find a home for your product quickly, but we don't think that thats going to.
<unk> per severe or continue on the market, we will take our tighten up that arbitrage and we do believe that Asian suppliers will be back buying product across the dock and we're seeing early indications of that already in.
In the coming months.
With respect to the SPR out that program is winding down I think the.
Biden administration pointed to how they were going to start refilling the SPR as early as 2023 so.
We fully expect that these differential levels will return to where they were.
<unk>.
Prior to the conflict the Russian Ukrainian conflict.
Alright.
That's kind of the follow up is to the extent you think that some of this macro distortion is temporary and you've seen while the stock has been an extraordinary over the last two years, it's pulled back meaningfully from over the last six weeks.
How does that influence your thinking around leaning into the buyback at taking advantage of any dislocation.
I think as well.
Any dislocation provides an opportunity for us to continue to buy.
Buy back shares.
I don't think were going to lean in it leaned into it disproportionately we have a program that we have articulated to our shareholders.
At this juncture, 25% of cash flow goes to.
To share buybacks and it's very mechanical in terms of we look at what we have available in any given month for free cash flow, 25% of that goes into the market. So.
I'd love to obviously buyback more shares at day.
<unk>.
As we've seen this pullback in the market but.
We're not timing the market, we have a program that we've articulated and we're going to continue with that.
That's helpful. Thanks Derek.
Thanks, Dan.
Your next question comes from Menno <unk> with TD Securities. Please go ahead.
Yeah. Thanks, Doug.
Good morning, everyone I'll start off with a question on vertical.
Integration, we've seen a big move into <unk> and even the colony prepayment sitting at roughly $5.
A barrel, which are both obvious inputs in your business, but then there is still this massive are between eight go in pretty much every other.
Global benchmark that many things will tighten in the coming years. So I guess my question is how much time are you.
Spending thinking about vertical integration these days and would you ever consider an acquisition too.
Some of the price risk on those those key inputs.
The short answer is yes.
We have thought about vertical integration.
In this life and in past lives and.
I would tell you that.
We are not in the natural gas business or the condensate business, yes, they are big inputs.
But they are not ones that.
We feel there is very efficient and effective markets out there.
Lighted with our brethren in the natural gas business.
As you look at April production of today, it's reaching all time highs.
As.
Naturally the Canadian natural gas business response to the very strong price signals that we see so we're not planning on vertically integrating the business. We are very good and very effective at controlling our cost structure.
Inside of.
Inside of the oil sands space, all that being said we.
We do look for opportunities to take advantage of dislocations in the market on the condensate side and on the natural gas side and I think if you add in reviewing our quarter Youll see that we have locked in 7000 barrels a day of condensate prices for 2023 at a very significant discount to the mark.
And if you are looking for us to take action in terms of how we're going to manage those input costs it'll be through.
The strategic hedging of those and opportunities that.
Yes.
Dislocations in the.
Can you sort of the historic pricing patterns that we can take advantage of.
Got it got it thanks for that Derek and then I guess the second.
Question would be related to the federal discussion paper on oil and gas emissions reductions that was recently published in May and maybe this is specific to me, but it came a bit out of left field for my perspective.
Reopens the debate on cap and trade among other things.
Surprising given how aggressive the pathways targets already or so.
Much of a risk is this from your perspective.
How long could this hanging out there for what is your understanding of the of the.
The next steps.
So.
Menno, you're not the only person that was surprised last Monday I think everybody in Calgary is going where does this come from.
We knew there was a.
Obviously, the emissions cap paper as we expected something we just did not expect.
Such as driving sort of.
Sort of focus on the 42%.
Our reserve target.
Emissions reduction targets.
In that of that paper.
I guess I would start off by saying we shared the government's goal of tackling the challenge of climate change I mean, the pathways group has been upfront we've been at this now for over 18 months, we set our own ambitious targets for oil sands sector to achieve a 22 mega ton annual reduction by 2000.
30.
That's a very ambitious goal on its own and obviously the net zero by 2050 so.
We're we have a plan and we think it's one of the few plans out there its ambitious at 30% I don't know how we get to 42% I think that personally is in my humble opinion is almost unrealistic endy.
It's not that we wouldn't want to try and get $2, 42%, if we could but you can't ignore the reality of the regulatory environment in this country you can't ignore the reality of the.
I'm going to say that the carbon pricing regime, and the ability to trade carbon credits from a pan Canadian.
Perspective, and you can't ignore the reality of the fact that the federal government and the provincial government arent talking.
Without those three issues being addressed you can set whatever ambitious plan you want but you are never going to be able to achieve them.
This is where to me pathway has.
Differentiated and distinguished itself. It has a target out there it's got the 30% yet those three items that I mentioned stand in our way of us even getting to the 30% let alone the 42% so.
Do I think these things are manner.
That we can fix these things and move forward yes.
I think we can get to 40%, 42%, yes, we will get to 42% overtime, but unless there is a concerted effort to address all three of those issues in the very near term and to bring a sense of urgency to fixing our regulatory environment better communication.
All levels of government and creating a price of carbon that we can take to the bank and finance some of these projects on.
If that does not happen then these targets are unrealistic.
I agree with all of that thanks Derek.
Thanks Menno.
Your next question comes from Greg Pardy with RBC. Please go ahead.
Thanks, Hey, good morning.
Eric I hope the depressed on the line against that in the global mail or other papers tomorrow morning to send the message, but look just all the very best to Eric and welcome Brian .
Just wanted to maybe just take it back to the company I'll, maybe just three things how are you thinking about hedging ti.
Dividend become a part of the conversation at that floor level of $600 million and then how should we be sort of thinking about 2023 capex.
Okay.
Are we thinking about hedging WTO no.
Our philosophy on hedging has not changed.
<unk>.
Just to repeat it we hedge to protect our capital program.
And we look at what commodity price WTO commodity price.
Would have to be for the year.
This year it turned out that it would do.
We'd need at an average price of $45 <unk> to have sufficient funds flow to cover off our capital program, we thought that that was highly unlikely and decided.
Probability of that was very very low and we werent going to hedge that will be the same way, we look at hedging <unk> in.
If we are going to hedge W. Gi on a go forward basis. So.
Not planning on doing that but as you would have heard in previous.
Color.
Where we were talking about condensate in a little bit about natural gas, we will hedge our inputs.
If were provided with.
Sort of a dislocation or an opportunity in the market, obviously condensate as we talked.
And as you know is our single biggest cost so being able to lock down 10% to 15% of your condensate at a significant discount to historical market prices is important.
And on the natural gas side Thats, another big operating cost for us, even though we can mitigate that with our power sales.
We will look and continue to look and have targets in place too.
To take advantage of the market.
Should it.
Present, the opportunity to do so with respect to your second question on the.
The dividend.
When we reach our net debt floor of $600 million.
U S would we.
Look to put a dividend in place.
It is absolutely one of the tools that we're going to to.
To look at.
And we will provide greater clarity on that obviously as we move forward and get closer to.
To that target. So you should expect to hear more on us.
On that going forward.
Just to elaborate on that a little bit what.
What we have seen others do is put dividends in placed in special dividends in place.
We have a unique opportunity to be able to watch and see how those are.
Reflected in the price of the underlying equity of those organization. So we will.
We're not sitting on our hands over here, we're watching we're looking at how the market is responding to.
Dividends and special dividends and.
Those will help inform how we put in place a return of capital structure on the dividends when we hit that $600 million U S.
On the third part of your question, which I believe was.
How do we see Capex.
2023, where.
We're watching inflation very carefully Greg oilfield tubular as drilling service drilling and service.
Completion costs service rig costs are up and up significantly labor steel.
Are all continuing to move in I wouldn't say they've plateaued so.
As we think about what our Capex program for 2023 will be.
It's going to be larger than it is today.
Just on the non inflationary basis, but there'll also be another element as we move from our existing development area in our core we're going to move further south down to <unk> and that will require sort of an incremental level of sustaining capital.
Within what we had in our budget this year as we build.
The motion lines, the steam lines, all the product lines and the infrastructure to move a significant difference into a part of the reservoir.
Debt.
Is likely.
Likely going to have a much lower steam oil ratio by virtue of the fact that we don't see any underlying water. There so kind of excited about getting down there and.
Continuing to.
Not only expand the infrastructure, but move into.
Another new area.
Terrific, Thanks, very much Darren.
Thanks, Greg.
Ladies and gentlemen, as a reminder, if you do have any questions. Please press star one.
There are no further questions at this time. Please proceed.
Thanks, Pam and thank you everybody that's joined US This morning for our second quarter call. We're excited about what we've been able to achieve in the first half of 2022 and look forward to report on our operational performance and a return of capital program. When we released when we release Q3 on November 10th.
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.