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 Meg Energy's 2022 Q2 Results Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 you would like to withdraw your question, simply press star then the number two. Thank you. If you'd like to hear our comments, see you, you may begin.
Thank you, Pam. Good morning, and thank you for joining us to review Meg's energy second quarter operating and financial results. In the room with me this morning, our airtays are chief financial officer, darling Gates are chief operating officer, and La Yudewski are general counsel and corporate secretary. I'd like to remind our listeners that this call contains forward looking information. Please refer to the advisory's in our disclosure documents filed on Cedar and on our website.
I would refer listeners to yesterday's press release for more detail beyond the comments we prepared this morning.
Prior to jumping into the details of the quarter, I want to point out that this is Eric Tase's 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 valuable contributions during his time at May. And I want to thank Eric Tase for his dedication and valuable contributions during his time at May.
Eric has led a number of strategic initiatives which have transformed MEG's balance sheet, including the sale of the Alliance or the access pipeline and the completion of a number of complex refinancing 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's been an amazing partner. I'm 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, Bichmann production averaged 67,256 barrels a day of a steam oil ratio of 2.46, compared to 101,128 barrels per day to steam oil ratio of 2.43 in the first quarter of 2022. In the first quarter of 2022, we've received 18,000 barrels a day of finance. And to be taken on this nation in the blink of dawn,??amiche and pile and massive partnership will be held. Using a lithium-Auto mixture is another significant reason for electric mixtures. India came all the way out in the scope mountains of 2022.
Production in the quarter was impacted by the scheduled major turnaround at the Christina Lake Phase II B 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 2,000 barrels per day.
Christina Lake facility has now returned to full production and MEG's second half 2022 average production 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 92,000 to 95,000 barrels a day from 94,000 to 97,000 barrels per day. MEG also revised its full year non-energy operating costs and G&A expense to 460 to 190 per barrel and 175 to 190 per barrel respectively, reflecting lower full year production guidance.
In the second quarter, MEG initiated its share buyback program and continued to make significant progress on debt reduction. Year to date, we have applied over $1 billion of free cash flow to debt repayment and share purchases.
Highlight from the second quarter results include funds flow from operating activities of 412 million and adjusted funds flow up 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 a completion of the major plan turnaround.
Net operating costs averaged $12.97 per barrel, including non-energy operating costs of 565 per barrel, power revenue offset energy operating costs by 30% resulting in energy operating costs and net-appar revenue of $7.23 per barrel. The net-appar revenue of $7.23 per barrel.
year-to-date debt reduction of $700 million US.
including 370, or 370 9 million US in the second quarter of 2022.
Mague initiated his share buyback program during the quarter, and today has returned 139 million of capital to shareholders to repurchase for cancellation of approximately 7.24 million Mague common shares. Mague has approximately 7.24 million Mague common shares.
During the quarter, MEG renewed its existing modified Covenant Light Credit facilities, resulting in total available credit of $1.2 billion with a maturity date of October 31, 2023.
And on June 16th, 2022, Megan announced the hiring of Mr. Ryan Kubik as the corporation's next chief financial officer, who will succeed Eric Tase's Effective August 1, 2022. The new executive executive will succeed Eric Tase's Effective August 1, 2022.
Meg realized now that the AWB blend sales price of $100.42 per barrel US during the second quarter of 2022 compared to $83.55 per barrel US in the first quarter. The AWB blend sales price of $1.25 per barrel US in the first quarter.
The increase in an average AWB blend sales price, quarter over quarter was primarily a result The average WTI price increasing by $14.12 per barrel US
MEG sold 79% of its sales volumes in the US Gulf Coast market in the second quarter of 2022 compared to 58% during the first quarter of 2022.
The increased quarter over quarter is primarily the result of apportionment on the Enbridge Main Line being 0% in the second quarter of 2022 compared to 10% in the first quarter.
On June 15th, 2022, Canada's major oil sense producers announced a combination of three existing industry groups, all focused on responsible development into a single organization called the Pathways Alliance.
The new organization incorporates the oil sands pathways to net zero alliance launched in 2021. Canada's oil sands innovation alliance, CoSIA, created in 2012, and the oil sands community alliance, OSCA, created in 2013. Combination of these industry groups integrated into a single organization with combined leadership will enhance the alliance's collaborative efforts to advance responsible oil sands development and to progress the alliance's goals.
including achieving net zero greenhouse gas emissions from oil stands production.
Key focus of the new Pathways Alliance will be to continue the considerable work already underway to reduce greenhouse gas emissions from oil sands production by 22 million tonnes annually by 2030 and ultimately achieve its goal of net zero emissions from oil sands production by 2050.
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 US$1.7 billion net debt target in the second quarter of 2022. At net debt levels between US$1.7 and US$1.2 billion, 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 its US$1.7 billion net
1.2 billion US net debt target in October of 2022 and to reach at 600 million US net debt floor in the second half of 2023. In the second half of 2023.
During the second quarter of 2022, Meg repaid 379 million through the redemption, 379 million US through the redemption of the remaining 171 million US of Meg's second quarter, our second lean notes and through the repurchase and extinguishment of 208 million US of Meg's outstanding senior secured notes due to February 20, 2027. Meg has repaid approximately 2.3 billion US of outstanding indebtedness since 2018.
its revolving credit facility and its letter of credit facility agreement guaranteed by Export Development Canada and extended the maturity date of each facility by 2.3 years to October 31, 2026.
Total credit available under the two facilities 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 this modified covenant light structure, meaning it continues to contain no financial maintenance covenant, unless Meg is drawn under the Revolving Credit Facility and excess of 50%. The Revolving Credit Facility
If drawn in excess of 50% or 300 million, MEG is required to maintain a first lean net debt to EBITDA ratio of 3.5 or less. MEG continues to have no first lean 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. and responsible energy development.
on behalf of Meg's Board of Directors and our management team. We want to thank you for your support. With that, I'll turn the call to our operator to begin the Q&A. 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. You will hear a three-tone prompt acknowledging your request.
If you are using a stick of phone, please lift the hands up before pressing any keys.
First question comes from Neil Nara at Goldman Sachs. Please go ahead.
Good morning team and they are at congratulations on your retirement and thank you for the partnership over the years.
Thank you, no, dear.
The first question is on the macro, Derek. We've 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, but part of it seems to be the SPR. We just love your perspective on the sustainability of that wider differential, how you guys are thinking about the 23 and 24 outlook there.
anything you're seeing real time in terms of being able to get the barrels out of the market. Thank you. Thank you.
You know, thanks for the question. It's a very appropriate and 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-old barrels and it had to find a home quickly. What we've seen happen in the market is their year-old barrels, which are now heavy, and the barrel, heavy sour barrel, have been...
marketed to both China and India. And what we've seen is they've been marketed at a fairly deep discount, a deep enough discount to stop some of those US Gulf Coast barrels moving across the dock and 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, you would have seen two to four million barrels a day or a month.
of our product that is brought out the differential. You're right, the SPR releases have had an impact, but that impact was about a million barrels a day. It's waning as they get towards the end of the program. It's currently down at about 700,000 barrels a day. And in that September 16th to October 21st period, it's going to drop down to about 550,000 barrels a day of product. And that product is now going to be predominantly light as opposed to heavy.
across the dock and we're seeing early indications of that already in the coming month. With respect to the SPR, that program is winding down. I think the Biden administration pointed to how they were gonna start refilling the SPR as early as 2023. So we fully expect that these differential levels will return to where they were, you know.
prior to the conflict, the Russian-Ukrainian conflict.
Well, 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's been 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 and taking advantage of any dislocation?
I think, well, any dislocation provides an opportunity for us to continue to buy back shares. I don't think we're going to lean into it disproportionately. We have a program that we have articulated to our shareholders that at this juncture, 25% of cash flow goes to share buybacks. And it's...
very mechanical in terms of, you know, we look at what we have available in any given month for free cash flow. 25% of that goes into the market. So, you know, I'd love to obviously buy back more shares at a, you know, as we've seen this pullback in the market, but, you know, we're not timing the market. We have a program that we've articulated and we're going to continue with that.
Okay, that's helpful. Thanks, Derek.
Thank you.
Next question comes from Manel Hirschbroth with TD Securities. Please go ahead.
Yeah, thanks and good morning everyone. I'll start off with a question on vertical.
integration. We've seen a big move in Aiko and even the Condi premium is sitting at roughly $5 a barrel, which are both obvious inputs in your business, but then there's still this massive ar between Aiko and pretty much every other global benchmark that many think 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 to hedge out some of the price risk on those key inputs?
The short answer is, you know, we have fought about vertical integration in this life and in past lives. And Mano, I would tell you that, you know, we are not in the natural gas business or the condensate business. Yes, they are big inputs, but they're not ones that we feel there's very efficient and effective markets out there. We're delighted with our brethren in the natural gas business.
That being said, 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, in reviewing our court, you'll see that we've locked in 7,000 barrels a day of condensate prices for 2023 at a very significant discount to the market. And if you're looking for us to take action in terms of how we're going to manage those input costs, it'll be through.
strategic hedging of those and opportunities that, you know, are dislocations in the sort of the historic pricing patterns that we can take advantage of.
the next question. Thanks for that, Derek. I guess the second question would be related to the federal discussion paper on oil and gas emissions reductions that was recently published. Maybe this is specific to me, but it came a bit out of left field from my perspective. Certainly surprising given how aggressive the pathways targets already are.
How much of a risk is this from your perspective and how long could this hang out there for? What is your understanding of the next steps?
So, um
Meno, you're not the only person that was surprised last Monday. I think everybody in Calgary is going, where did this come from? We knew there was a, obviously the emissions cap paper is...
We expected something, we just did not expect such a stride and sort of...
You sort of focus on the 42% reserve target, or emissions reduction target.
in that paper. You know, as I, you know, I guess I'd start off by saying, you know, we share the government's goal of tackling the challenge of climate change. I mean, the Pathways group has been upfront. You know, we've been at this now for over 18 months. We've set our own ambitious targets for oil sands sector to achieve a 22 megaton annual reduction by 2030. And you know, that's a very ambitious goal on its own. And you know, obviously the net zero goal.
You can't ignore the reality of the, I want 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 aren't talking. Without those three issues being addressed, you can set whatever ambitious plan you want, but you're never going to be able to achieve them. And... And... And...
This is where, to me, Pathway says, 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 managed, that we can fix these things and move forward? Yes. Do I think we can get to 40%, 42%? Yes, we will get to 42% over time. 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 between 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. Thank you, Derek.
Thank you, Mano.
Your next question comes from Greg Party with RBC. Please go ahead.
Thanks for your good morning and Derek. I hope the press on the line gets that in the global mail or other papers tomorrow morning to send a message. But look, just all the very best, Eric, and welcome, Ryan. Just want to maybe just take it back to the company. I'll maybe just hit three things. How are you thinking about hedging TI?
Does the 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 WTI? No, our philosophy on hedging has not changed. And, you know, just to repeat it, we hedge to protect our capital program. And we look at what commodity price WTI, commodity price would have to be for the year. You know, this year turned out that we'd need an average price of $45 WTI to have sufficient fund flow to cover off our capital program. We thought that that was highly...
hedge our inputs. If we're provided with sort of a dislocation or an opportunity in the market, obviously condensate as we talk, 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, that's another big operating cost for us, even though we can mitigate that with our power sales.
So we will look and continue to look and have targets in place to take advantage of the market should it present the opportunity to do so. With respect to your second question on the dividend, when we reach our net debt floor of $600 million US, would we look to put a dividend in place?
That is absolutely one of the tools that we're going to look at and we will provide greater clarity on that obviously as we move forward and get closer to that target. So you should expect to hear more on that going forward. Just to elaborate on that a little bit, what we have seen others do is put dividends in place and 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 organizations. So we will...
You know, 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 type structure on the dividends when we hit that 600 million US.
On the third part of your question, which I believe was, you know, how do we see CapEx?
2023, you know, we're watching inflation very carefully. Greg, you know, oil field tubulars, drilling service, drilling and service, completion costs, service read costs are up and up significantly, labor, steel are all continuing to move. And I wouldn't say they plateaued. So as we think about what our CAPX program for 2023 will be.
It's going to be larger than it is today, just on an inflationary basis. But there also be another element. Is we move from our existing development area in Alcor, we're going to move further south down to Meizar and that will require sort of an incremental level of sustaining capital that, within what we had in our budget this year as we build the emotional lines, the steam lines, all the product lines in the infrastructure.
Terrific. Thanks very much, Derek.
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.
Thank you, Bamb. 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 reports on our operational performance. And our return of capital program, will release Q3 on November 10th. Turn up the panel.
Have a great day.
Ladies and gentlemen, this concludes your conference culture today. We thank you for participating and ask that you please disconnect your lines. Have a great day.