Q3 2022 MEG Energy Corp Earnings Call

Good morning, My name is calm and I'll be your conference operator today at this time I'd like to welcome everyone to the Meg Energy's 2022, Q3 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 you'd like to withdraw your question. Please press star followed by two thank you Mr. Derek Evans CEO you may begin your conference.

Thank you Colin and good morning, everyone and thank you for joining us to review Meg Energy's third quarter operating and financial results.

In the room with me. This morning are Ryan <unk>, our Chief Financial Officer, Darlene Gates, our Chief operating officer, and Laura <unk>, Our general Counsel and corporate Secretary I'd.

I'd like to remind our listeners.

Call contains forward looking information please refer to the advisory is in our disclosure documents filed on SEDAR and on our website.

I would refer listeners to yesterday's press release for more detailed beyond the comments we have prepared this morning.

<unk> focus on safe reliable and sustainable operating performance has once again delivered strong results for investors.

In the third quarter Mega achieved record production levels that are a reflection of our continued focus on operational excellence, including optimizing well spacing enhanced completion designs capital efficient well redevelopment programs and steam allocation techniques that are lowering steam oil ratios and associated greenhouse gas.

<unk> intensity.

We remain laser focused on debt reduction and share buybacks, having repaid $1 1 billion of debt and bought back $186 million of shares to the end of the third quarter.

Net debt at the end of the quarter hit U S $1 2 billion.

And as a result, we are increasing our free cash flow allocated to share repurchases to 50%.

These results were delivered to the dedication hard work and innovation of the entire make team I want to congratulate and thank them for their milestone achievements.

I'm going to change the format of the call this quarter and Thats Darlene gates, our CLO to speak to our operating results and ask Ryan <unk>, our CFO to talk to our financial results.

Before I open the call to questions I'll provide an update on the pathways alliance efforts during the quarters.

Charlie over to you.

Thanks Derek.

As a leader in innovative and responsible energy development and our team continues to focus on the delivery of safe and reliable operations from our Christina Lake asset.

This year, we've taken several important steps to restructure and strengthen our operating organization to drive efficiencies and improvements in our performance.

We've invested in a new safety leadership development program for both our employees and contractors and elevated our attention towards operational excellence in the third quarter, we achieved record bitumen production of 101983 barrels per day exceeding our previous record achieved in Q1 2022.

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We also achieved this production with an improved steam oil ratio of 239.

These results were driven by a capital efficient while redevelopment program and the startup of our recent pad in August , which we accelerated through an improved <unk> utilization strategy.

We are excited because this is the first pad that fully implement our optimize well spacing and enhanced completion designs.

So far results have been encouraging and we recently achieved a new monthly production milestone of over 110000 barrels per day tober.

Strong field and plant reliability, coupled with targeted high quality resource additions have been key in our ability to achieve increased throughput of our central processing facility.

This positions Meg to deliver another strong quarter and to achieve the upper end of our June 29, 2022 production guidance range.

We also continued to deliver this production efficiently in the third quarter, our non energy unit operating cost declined to $4 50 per barrel, helping reduce our year to date cost of $4 90 per barrel.

While we continue to experience higher than planned inflationary impacts we are on target to deliver at the low end of our June 29, 2022, non energy Opex guidance range.

This performance is a testament to our operations and technical teams and their continuous efforts to generate the highest value from our top tier asset.

We are encouraged with how our continued focus on operational excellence positions make heading into 2023 I look forward to updating you on the continued progress of our operating plans for the next year. When we release, our 2023 guidance with that I'll hand, it over to Ryan to discuss the financial performance.

Thanks, Charlie.

<unk> remains focused on allocating free cash flow to debt reduction and returning cash to shareholders through share buybacks.

In the first nine months of this year, we generated $1 $3 billion of free cash flow, allowing us to reduce debt by $1 1 billion and returned $186 million to investors through the repurchase of $10 1 million shares.

As a result of that strong free cash flow, we reached U S $1 $2 billion net debt.

Our net debt target at the end of September and we've increased our free cash flow allocation to share buybacks to 50%.

The remaining free cash flow will be used to reduce net debt further towards our net debt target. Our next target at U S $600 million.

Adjusted funds flow in the third quarter of 2022 rose to $496 million.

Our $1 61 per share as lower bitumen realization compared to the second quarter of 2022 was more than offset by higher sales volumes.

Third quarter Wty prices declined $16 86.

<unk> per barrel and the Edmonton WCS benchmark widened $7 <unk> per barrel from the second quarter.

As a result, our bitumen realization after net transportation and storage declined 28% to $74 75 per barrel.

Bitumen sales rose 31% to 95759.

Barrels per day, a 31% increase over the second quarter as we came out of turnaround at our Christina Lake facility in Q2.

Make sold 66% of its sales volumes in the U S Gulf coast in the third quarter.

Non energy operating costs decreased to $4 49 per barrel of bitumen sales in Q3 'twenty two from $5 65 per barrel in Q2, 'twenty, two mainly reflecting increased volumes fall following the turnaround.

Energy operating costs net of power revenue averaged <unk> 96 per barrel in Q3 dollars 22 compared to $7 32 per barrel in Q2 'twenty to.

The decrease reflects a lower natural gas price and higher Alberta power prices.

Our third quarter realized power price.

<unk> power sales price rose to $217 per megawatt hour from 118 per megawatt hour in the second quarter.

As a result power revenue offset 84% of our energy operating costs in the third quarter, demonstrating the value available from our cogeneration facilities.

With our major second turnaround complete capital expenditures declined to $78 million in the third quarter of 2022, resulting in $418 million of third quarter free cash flow.

We use that free cash flow to repurchase <unk> $262 million.

We're about $350 million Canadian our senior notes in the quarter. In addition, we repurchased $92 million or $5 6 million <unk> shares.

These results demonstrate our commitment to executing on our financial strategy, our realized debt reduction has materially reduced makes financial risk and our focus on production operating and capital cost discipline has allowed us to return significant cash to shareholders.

With that I'm going to hand, it back to Derek for some comments on pathways Alliance.

Sure Ryan.

I am pleased to share that Meg and our pathway Alliance partners are making significant progress in advancing the early work to build one of the world's largest carbon capture and storage facilities. The goal of this unique alliance and the project is to support candidate in meeting its climate commitments position, Canada as a preferred global supplier of crude oil.

To achieve net zero greenhouse gas emissions from oil sands operations by 2050.

On October 4th the Alliance was one of 19 Ccs proposals chosen to proceed to the next stage of evaluation by the Alberta government.

Securing the right to exploratory work enables the alliance to establish the suitability and capacity of the Ccs storage hub, which is which is an essential part of its plan to reduce emissions by 22 million tons per year by 2030.

We'd like to acknowledge the Alberta government's continued support as we work together to Decarbonize emissions from the oil sands.

Stakeholder engagement and engineering work to develop the project is already underway. The alliances progressed engagement with more than 20 indigenous communities along with the proposed <unk> storage corridor and completed pre engineering for the Cotwo line. In addition to the alliances conducting field programs to support regulatory applications and end.

Nearing studies related to the <unk> capture facilities.

Alliance partners have also identified $24 1 billion in investments in Ccs and other emissions reduction projects by 2030 as part of the first phase of its goal to reach net zero emissions from the oil sands by 'twenty five.

The alliance continues to work with the federal in Alberta governments on the appropriate co investment mechanisms. In addition to the planned federal investment tax credit required to get major Ccs projects off the drawing board and into the field.

Encouraged by the urgency expressed by the federal government to advance major energy infrastructure projects and to stay globally competitive on clean technology investments in Canada. We appreciate the recognition by the federal government that Canada must be on a level playing field with incentives equivalent to those contained within the U S inflation reduction Act.

In order to kickstart major projects the <unk> introduction of the Canadian growth fund with mechanisms that include carbon contracts for differences in offtake contracts could offer added certainty for major de carbonization investments and help get project to final investment decisions faster.

As I bring my remarks to a close I once again want to extend my thanks to our team for their commitment and their perseverance.

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 want to thank you for your support with that I'll turn the call to our operator to break it to begin the Q&A.

Thank you Derek ladies and gentlemen, we will now conduct a question and answer session. If you'd like to ask a question. Please press star followed by one on your telephone keypad, if you'd like to withdraw. Your question. Please press star followed by two if you're using a speaker phone. Please lift the handset before pressing any keys one moment for your first.

Questions.

Okay. Your first question comes from John Royall from Jpmorgan John Please go ahead.

Hi, guys. Good morning, Thanks for taking my question.

So on production.

Looks like <unk> implied by the top end of the full year guidance range should be a very strong numbers. So I'm wondering how sustainable that <unk> run rate is into next year and I. Appreciate that you have turnarounds every year, which means it's not going to be the full year run rate, but just I'm just trying to understand if this strength in production can continue.

Okay. Thanks, John this sterling.

That answer your question I think as you look into 2023, we have plans in place we're working through our development plan right now into 2023 and we are.

We're expecting a strong year to take the results from 2022 and feed that into 2023 of course youre going to see the impacts of the turnaround in some of our planned maintenance that will bring that number that you are hearing in the fourth quarter down, but overall, we're expecting a strong 2023.

Great. Thank you and then just sticking with guidance just looking at your cost guidance and how it evolves it's.

It's impressive that you guys have grown the whole year and when we had a very modest bump to the.

Opex guide at least on the on the non energy side.

And now guiding to the low end and no increase in Capex. So obviously on the energy side <unk> had to deal with some inflation there, but can you talk about how you've been able to manage cost.

This inflationary period, both the non energy Opex and the Capex.

Certainly John at Sterling.

Go after that one as well.

First of all I think we got to give the credit to our teams.

They have done an outstanding job of looking at their development opportunities at re prioritizing and looking at their supply chain management as also the partners and the relationships with our contractors theres been strong engagement in the collective disc.

The discussions that are helping us really forecast how we're moving in you would probably recall that we started the 2022 budget with about a 10% contingency in the last quarter. We mentioned we were seeing an upward pressure, 15% team has been working very well to try to find the offsets on that in our <unk>.

Operating and our capital budget as we look ahead, we're expecting to see that that while the inflation is moderating we are still expecting to see.

Still upwards of close to 10% in 2023.

Thank you.

Your next question comes from Neil Mehta from Goldman Sachs. Neil. Please go ahead.

Hi, Good morning. Thank you for taking the time this is Nick <unk> on for Neil Mehta. So.

So the first question, we wanted to ask about with any commentary around further leverage reduction after meeting the recent at that target and then on shareholder returns if a relative preference would still be around buybacks versus some sort of dividend.

Yes for sure we are going to continue on with the current strategy here of reducing net debt. So 50% of our free cash flow is going to be allocated to share buybacks that will continue as we move forward in time, the other 50% is going to be allocated to reducing debt as.

We move forward in time, we added a next debt target at U S $600 million when we approach that target we will consider looking at other alternatives, whether it's reducing debt even further introducing a dividend.

As part of the return of capital strategy et cetera, but as we move through 2023 here you are going to continue to see us execute the existing strategy that is share buybacks and reducing our debt down to this U S $600 million target.

Okay, great. Thanks for the color there and then just on the more macro side of things. How are you thinking about the recent WCS widening and the differential into next year until <unk> is set to come online.

Nick glad it's Derek Evans.

Honestly, we are not very pleased with the recent.

Lightning, but we believe it's a really a temporary change in the global supply demand balance for heavy sour crudes, we expected deaths are going to moderate as we move into next year and they will tighten in line with reduced supply.

Increasing demand if we go in and fundamentally look at what those factors are what changes between now and then.

We see the SPR releases, concluding we see expanding Russian sanctions taking effects.

Obviously opex planning on cutting some production and we believe that will be how our heavy sour.

A big factor in the whole dip is really the COVID-19 sort of positioning of China, we expect that.

That will.

As we move through the first quarter, they will relax and move out of their current Covid stance and you should see a supply or demand increase there.

And I.

I'd say that as we look at Europe and there.

Current natural gas prices, which is really sort of curtailed.

Processing of heavy crudes, given the amount of natural gas they need.

We fully expect that.

That will as gas prices come down there'll be more demand there for heavy sour crude so.

As we roll all that up we think the fourth quarter of.

This year, we'll probably see WCS in that $28 region start to moderate in the first quarter down to 24 Q.

Q2, and Q3 sort of 16 and 14 and in Q4 with <unk> coming on late in the quarter. We expect the WCS differential to be in that 12 to $14 range really fully reflecting pipeline economics and a more.

A better supply demand.

Balance for for heavy crude.

Very helpful. Thank you.

Your next question comes from Menno <unk> from TD Securities. Please go ahead.

Thanks, and good morning, everyone, maybe I'll just follow up on the base dividend.

Question is there a scenario in which the intrinsic value of your stock becomes an issue and accelerates and statement of the base dividend and I think we can all agree we're definitely not there today, but maybe we get there in the future or is the strategy just due to formulary likely buy back your stock through the cycle.

Yeah.

Hi, Matt.

It's Ryan.

There is a scenario where the intrinsic value gets higher the share price rises that is a good result, we're and we're all happy with that.

But to your point, we're not there today. So we believe that we're going to continue with our strategy of share buybacks here through 2023, and as we approach. This use $600 million target. We will look at other alternatives such as a base dividend to returning that cash to shareholders. So for now I think you should expect US just to continue on with the share.

Buybacks and we will assess that isn't just at all Costco and buyback stock, we'll look at the intrinsic value, but today, we're comfortable that that's not an issue.

Got it thanks, Thanks, Brian and then maybe.

A question for Derek higher level on a higher level question on pathways.

The alliance generally satisfied with the.

The pace of progress or is everything taking a little longer than expected and what are the key deliverables for 2023.

That's a very interesting question are we satisfied with the pace of progress I think there's a couple of critical timelines.

There is a regulatory timeline, obviously in terms of getting the pore space getting it evaluated and getting that.

Exploratory license turned into a.

Development license, we're moving that as forward as quickly as we can.

We have a 2030 target too.

Or this this pipeline to be up and running.

I will tell you, it's very very challenging.

Timeline without the sort of regulatory certainty or the financial.

<unk> certainty that we're going to need to make an FID decision but.

Yes, I would parse it down into two things we are progressing the.

Engineering work. The survey work, we just let a contract for multiple millions of dollars to get the survey is done on the right of way.

So we are moving forward sort of faster than you normally would in a company you would wait typically until you have approval on some of the expenditures that we're moving forward on today.

With the assumption.

That we will be able to sort out the regulatory aspects of this as well as the financial incentives that we need to make this to achieve so I.

I don't want it.

I think it's easy to say we could be frustrated.

But this is the first time something of this size has been done I think in the world certainly in Canada and.

We're breaking new ground with both the federal and the provincial government as we try and figure out just how to make this all work so.

I don't think were frustrated but I think we are tired I mean, we've got over 200 engineers and <unk>.

Support people working on this project and we are trying to move it forward as quickly as we possibly can there is no lack of commitment. There is no lack of will there is no lack of desire to make sure that this happens.

And but we do realize this is the first time, it's happened and it's going to take.

We're creating new rules and regulations for future projects that will follow.

Thanks Derek.

Thank you.

There are no further questions at this time I'll turn it back for closing remarks.

Thank you Colin and thank you everybody that joined US. This morning for our third quarter Conference call. We're excited about what we've been able to achieve this year and look forward to releasing our 2023 capital program and operational guidance.

On November 28, and we look forward to getting that press release to all of you at that point in time, 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.

Thanks, Paul.

I'm going to hang up.