Q4 2022 MEG Energy Corp Earnings Call

Speaker 2: Good morning ladies and gentlemen. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to MEG Energies 2022.

Speaker 2: Q4 and full-year results conference call.

Speaker 2: All lines have been placed on mute to prevent any background noise.

Speaker 2: After the speaker's remarks, there will be a question and answer session.

Speaker 2: If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. If you would like to withdraw from the queue, please press star followed by the number two.

Speaker 2: I would now like to turn the conference over to Mr. Derek Evans, CEO . Please go answer.

Speaker 3: Thank you, Michelle. Good morning, everyone, and thank you for joining us to review MEG Energy's 2022 year-end operating and financial results.

Speaker 3: officer and LaLieuse-Devsky, our General Counsel and Corporate Secretary.

Speaker 3: 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 CDAR and on our website. I would refer listeners to yesterday's press release for more detail beyond the comments we've prepared this morning.

Speaker 3: I'm extremely proud of the safety, operating, and financial performance delivered by Megan 2022. Meg's focus on safe, reliable, and sustainable operating performance has once again delivered strong results for investors. Make achieved record production levels of approximately...

Speaker 3: annual bitumen production of approximately 95,300 barrels per day at an SOR of 2.36. We remain committed to ongoing debt reduction and share buybacks having repaid 1.3 billion of debt and bought back 382 million of shares to the end of the year.

Speaker 3: using 2022 free cash flow of $1.56 billion.

Speaker 3: At year end, Meg had outstanding net debt of $1 billion US.

Speaker 3: On a go-forward basis, 50% of free cash flow will continue to be allocated to share buybacks with the remainder applied to debt reduction.

Speaker 3: US 600 million until the US 100 US 600 million net debt target is achieved.

Speaker 3: These results were delivered through the dedication, hard work and innovation of our entire MEG team. I want to congratulate and thank them for their milestone achievements. I'm going to continue with the call format we started last quarter and ask Starling Gates, our CEO , or COO to speak to our operating results and ask Ryan, our CFO to talk to our financial results.

Speaker 3: operations from our Christina Lake asset. In the fourth quarter we delivered strong safety health and environmental performance. No lost time injuries, no recordable spills, and our lowest quarterly emissions intensity rate. This achievement is a credit to our team and contractor partners who come to work committed to ensuring safety is our number one priority.

Speaker 3: Derek mentioned we reached a new quarterly production record of a hundred and ten thousand barrels a day and this was achieved with a nine percent increase quarter over a quarter, a ten percent increase above the fourth quarter of 2021 and it was also done with an improved steam oil ratio of 2.2.

Speaker 3: This milestone was made possible by high field and plant reliability, successful implementation of our optimized well designs, and the execution of short cycle high return drilling program.

Speaker 3: production of 95,338 barrels per day, another record, annual record, and drove non-energy unit operating costs to $4.73 per barrel despite unprecedented levels of inflationary pressure on labor, chemicals, and material costs.

Speaker 3: As we move into 2023, our Q1 production outlook is approximately 107,000 barrels per day, which reflects reduced facility throughput that will be optimized during our second quarter turnaround.

Speaker 3: Full-year production guidance remains unchanged and our team has an intense focus on preparations for the turnaround.

Speaker 3: This turnaround carries a full year impact of 6,000 barrels per day.

Speaker 3: Our $450 million capital development program is off to a fantastic start and is supporting our strategy to extract the highest value of our top tier asset. I am excited and confident that our focus on safety culture and operational excellence will continue to deliver long-term value for our shareholders.

Speaker 3: With that, I'll hand it over to Ryan to discuss the financial performance.

Speaker 4: Thanks, Starlene. The 10% production increase over the third quarter of 2022 delivered by our May team, combined with higher crude oil prices, helped generate $1.9 billion of adjusted fund slow, or $6.26 per share in 2022.

Speaker 4: Our cash operating net back in the year rose to $63 per barrel, up from $33 per barrel in 2021, largely reflecting a 49% increase in our bitumen realization after net transportation and storage expense. Sales at the U.S. Gulf Coast rose to 66% of blend sales in 2020.

Speaker 4: and royalties.

Speaker 4: Operating expenses net of power revenue rose to $7.91 per barrel, mainly due to increased natural gas prices. Crown Royalty's also rose to $6.43 per barrel, reflecting a higher WTI price and revenues.

Speaker 4: as well as a pre-pay out royalty formula.

Speaker 4: We do want to remind investors that Christina Lake reaches payout status in the first quarter of 2023, and will transition to a higher net revenue royalty at that time.

Speaker 4: After funding $376 million of capital expenditures in 2022, free cash flow rose to $1.6 billion from the half billion dollars in 2021. That free cash flow allowed us to reduce our net debt to US $1 billion and significantly improved Meg's balance sheet strength.

Speaker 4: We remain focused on our next net debt target at US $600 million and we'll continue to return capital to shareholders through our share by back program.

Speaker 4: That program reduced makes outstanding sharecrown approximately 7% in 2022 as we we bought back $382 million or 20.7 million make shares.

Speaker 4: Today, our Board of Directors approves a filing of an application to renew our NCIB program, and that will allow us to buy back up to 10% of makes public flow over the next year.

Speaker 4: With those 2022 results, Meg enters 2023 in a strong position to execute our strategy. Combined with our outlook and favorable crude oil prices, we are in a strong and optimistic position as we enter the new year.

Speaker 4: I'm now going to hand it over to Derek for some closing comments.

Speaker 4: to direct for some closing comments. Thanks, Ryan.

Speaker 5: Meg remains committed to its long-term goal of reaching net zero scope one and two greenhouse gas emissions targets by 2050. In early 2023, the corporation replaced its midterm target of reaching a 30% reduction in scope one and two greenhouse gas emissions intensity.

Speaker 5: from 2013 levels by 2030, with the midterm target of reducing its absolutes, scope 1 and 2 greenhouse gas emissions by 0.63 megatons per annum by year and 2030, representing a reduction of approximately 30% absolute emissions from 2019 levels. On the pathways front, I'm pleased to share that Meg and our pathways

Speaker 5: by 2050. In the fourth quarter, Meg and his pathway alliance peers reached a significant milestone entering a carbon sequestration evaluation agreement with the government of Alberta to start a detailed evaluation of its proposed geological storage hub.

Speaker 5: This detailed work enables the Alliance to establish the suitability and capacity of the CCS storage hub. This work is required to continue to advance our project to the next stage in the regulatory process. Significant amount of work is underway with the Pathways Alliance as we progress feasibility studies, environmental assessments, and early engineering work for this Corps of Carbon AND CAP.

Speaker 5: 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 Meg's Board of Directors and our management team, I want to thank you for your continued support.

Speaker 5: With that, I'll turn the call back over to Michelle to begin the Q&A.

Speaker 5: to Michelle to begin the Q&A. Thank you, sir.

Speaker 2: Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad.

Speaker 2: If your question has been answered and you would like to withdraw from the queue, please press star followed by the number 2. If you are using a speaker phone, please lift the handset before entering any keys.

Speaker 2: Question has been answered and you would like to withdraw from the queue. Please press star followed by the number 2. If you are using a speaker phone, please lift the handset before entering any keys. Please stand by for your first question.

Speaker 2: Your first question will come from Patrick O'Rourke at ATB Capital Markets. Please go ahead.

Speaker 6: Okay guys, thanks for taking my question this morning. I guess just wanted to kind of take a look at operations here. You had 111,000 barrels a day of production in the quarter. You're talking about 107 in Q1. A year ago we would have been thinking about this.

Speaker 6: as an asset with 100,000 barrels a day of name plate capacity. Sort of what your view in terms of the right study state or run rate production out of this asset is. And then I know you've talked in the past about some potential. I know that the focus here is returning capital in the department of the balance sheet. But.

Speaker 6: You've talked about some sort of debodled necking or incremental capital that you could spend like steam generating units that might be very capital efficient, sort of what that might look like and also if that could have any impact, what positive or negative on the royalties structure here.

Speaker 5: Patrick, it's Derek. I'm going to let Darleen talk to sort of where she sees steady state production at. I'll take the future capital and I'm going to ask Ryan to deal with the would any future capital be incremental on the royalty. So Darleen, over to you. Okay, thanks, sir.

Speaker 3: Thanks Patrick for your question. I would start with any time you take an asset like ours to that positive step change in production, you're moving into a new operating environment. And as you move into that new operating environment, you see some new constraints with our treating facility. We've been quickly incorporating those learnings to just.

Speaker 3: Our operating strategy has been to spring the results, and we're confident to continue that progress and moderate growth in this asset.

Speaker 5: Patrick, I'm going to take the future capital part of that. You are aware that we have a co-gen and we have two one-through steam generators that are sitting in inventory in various levels of completion that we could bring to the project. I think the easiest way to think about this is there is a runway to 120,000 barrels a day. If it's frameUL.

Speaker 5: would need to bring to the table. I think there's, you know,

Speaker 5: two critical points here, sort of what I call long cycle capital, so new well pads. We would look to develop in that 20 to 25,000 dollars per flowing BLE. But one of the really interesting things that we've been able to develop at Meg in the last little while is what I call short cycle.

Speaker 5: and those are a well that we're redriiling, rehabilitating, on existing pads that are typically two to $3,000 per flowing BLE type of costs.

Speaker 5: very incremental and you know those have been a big part of our success to date. So I hope that covers off sort of where we could go what we're going to do and Ryan's going to tell us.

Speaker 4: whether or not we can actually use those to reduce our royalties. The quick answer is yes, we are moving to a net revenue royalty, so all the capital expenditures and the future will be deductible off of revenue and calculating net revenues for that.

Speaker 4: royalty formula going forward. Any capital we spend in the Christina Lake area is ring fence by that project so you will see that play into the royalty economics. I guess the other point to note is that we are unlikely to transition back to a minimum or a gross revenue royalty.

Speaker 4: These cabalux ventures won't be large enough to kind of move us to that point. We will continue to pay likely net revenue royalties.

Speaker 2: Thank you very much. Thanks, Patrick. Your next question comes from Neil Metta at Goldman Sachs. Please go ahead.

Speaker 7: Hi, good morning. This is Nicolette Plusar on Bernal Mehta. Thanks for taking the question. So just first of all, pathways and understand there was an incremental update here and forth, Q-On and evaluation agreement with the government of Alberta. But if you could just talk a bit more about the agreement and any additional key milestones we should be watching out for in 2023, is it really to progress around the project?

Speaker 5: Sure, Nikolay, thank you for the question. The evaluation that we agreed with that we entered into, Pathway's entered into in October of 2023, provides us with the opportunity to go out and evaluate the suitability of the reservoir. So...

Speaker 5: As you go back through and you look at some of the projects that have failed in the carbon capture and sequesteration area, they tend to fail in two areas. One in terms of the capture component and the second would be the storage component. What we're dealing with here is the evaluation of that storage component.

Speaker 5: and its suitability. And we need to prove to the Alberta government that it's got the injectivity, it's got the permeability and the ability to store the CO2 that we are proposing to store it in. The unique thing about this particular reservoir, it's one in which we're already storing CO2.

Speaker 5: have any surprises. And you know, once we've got that work done, we'll move to the next phase, which is the granting of a license from the Alberta government.

Speaker 7: All right, that's very helpful. And then the follow up here would just be on WCS and the differential is tightened up a bit here more recently. But wanted to get your thoughts around where you see the spread tracking in the near term and then any insight you can provide as well around Meg's expected Gulf Coast exposure in 2023.

Speaker 5: So it's tightened up quite a bit. From our last conference call where the differential was blowing out, we've seen that differential almost fall in half. This morning we're looking at WCS prices on the Gulf Coast of $8 US barrel.

Speaker 5: And those would have been as high as $22 a barrel earlier on. So we've seen a big decrease. And fundamentally, you know, the reason we believe that is happening in, and based on our intelligence on the U.S. Gulf Coast is Chinese demand has picked up substantially. And we can see increased loads across the dark heading off to...

Speaker 2: Ladies and gentlemen, once again, if you would like to ask a question, please press star one at this time.

Speaker 5: Mr. Evans, we have no further questions. I'll turn the call back to you for any closing remarks, sir. Thank you, Michelle. And thank you, everybody, that joined us this morning for our 2022 Year End Conference call. We're excited about what we've been able to achieve this last year and look forward to updating you on our operational performance.

Speaker 5: and return on Capitol ProVogue Program when we release our Q1 results on May 1st.

Speaker 5: program when we release our Q1 results on May 1st. Thank you and have a great day.