Q1 2023 MEG Energy Corp Earnings 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 this time, simply press star, then the number one on your telephone keypad.
Speaker 2: If you would like to withdraw your question, please press star followed by the number 2.
Speaker 2: At this time, I would like to turn the conference over to Mr. Derek Evans, CEO . Please go ahead, sir.
Speaker 3: Thank you, Michelle, and good morning, everyone, and thank you for joining us to review Mega Energy's 2023 Q1 operating and financial results.
Speaker 3: With me on the call this morning are Ryan Kubek, our Chief Financial Officer, Darlene Gates, our Chief Operating Officer, and Lyle Juszdzewski, our General Counsel and Corporate Secretary.
Speaker 3: I would 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.
Speaker 3: I will keep my remarks brief today and refer listeners to yesterday's press release along with the MB&A and financial results that you can find on CDAR.
Speaker 3: Our top priority at MEG is our focus on health, safety and the environment that ensures nobody gets hurt, eliminates serious incidents and delivers operational excellence.
Speaker 3: I'm extremely proud of the safety, operating, and financial performance delivered by our team. Their focus on safety, plant reliability, steam utilization, and ongoing well optimization have all contributed to a strong operational quarter.
Speaker 3: Our operations team have begun our scheduled turnaround at the Christina Lake facility. Our priority is to maintain safe and reliable operations throughout the turnaround.
Speaker 3: Before I turn the call over to Darlene and Ryan to share details of our results, I'd like to briefly touch on some of the first quarter highlights.
Speaker 3: Pitchman production rose 6% to approximately 107,000 barrels per day, an industry-leading steam oil ratio of 2.25, with an operating cost structure that was positively impacted by low natural gas and higher power prices.
Speaker 3: These strong operational results enabled our ongoing commitment to debt reduction. We continue to execute on our debt repayment strategy, repaying approximately $117 million Canadian with net debt declining to US$1 billion approximately, or approximately $1.4 billion Canadian at the end of this year.
Speaker 3: and a pre-cash flow to our shareholders.
Speaker 3: to speak to our operating results and ask Ryan Kubik, our CFO , to talk to our financial results. Before I open the call to questions, I'll provide an update on the Pathway Alliance's efforts this year.
Speaker 4: Darleen, over to you. Thanks, Derek. Good morning, everyone. In the first quarter, Meg maintained its position as a leader in innovative and responsible energy development. The continued strong operational performance I will highlight today.
Speaker 4: is underpinned by a commitment at all levels of our organization to ensure we take care of the safety of our employees, contractors and the communities in which we operate.
Speaker 4: In the first quarter, we executed a high level of activity while achieving one of our lowest quarterly total recordable injury rates in the past several years at 0.24 incidents for 200,000 work hours.
Speaker 4: Our first quarter production averaged 107,000 barrels per day, a 6% increase over the same period.
Speaker 4: This production was delivered from Christine Lake at a talk to your steam oil ratio of 2.25. Since exiting 2022 at record production rates, we've gained valuable knowledge surrounding water treatment optimization associated with the higher throughput rates at the facility.
Speaker 4: Our team's continuous improvement mindset has been instrumental in proactively managing this. Total operating expenses comprise of non-energy and energy costs of $6.13 per barrel for the first quarter. This is a 31% reduction from the same period last year. In the quarter, we continue to realize substantial benefits from our co-generation facilities, which helped reduce energy operating costs net of power revenue of $1.36 per barrel.
Speaker 4: Non-energy costs remained essentially flat from the same period a year ago at $4.77 per barrel, and that's in line with our full-year guidance of $4.75 to 505 per barrel.
Speaker 4: As Derek mentioned, executing a safe and effective turnaround is a top operational priority for us in our second quarter. This return round will be focused on our phase one and two facilities and is expected to have a full year production impact of 6,000 barrels per day. This translates into a second quarter volume's outlook of approximately
Speaker 4: on short cycle labor availability and associated service rates. I believe we're well positioned to deliver a productive and impactful turnaround.
Speaker 4: Turning to development, this quarter we executed a robust winter drilling program. Preliminary results continue to validate quality of our long-term resource base.
Speaker 4: We also kicked off for 2023 Infill and Redevelopment Drillin program, which pairs high quality resource with proven innovative subsurface technologies.
Speaker 4: The supports are previously announced production guidance of 100 to 105,000 barrels per day. Looking ahead, we're focused on continuing to maintain a strong safety and environmental performance record to consistently deliver sustainable value to our show.
Speaker 5: With that, I'll hand it over to Ryan. Thanks, darling. Meg generated $274 million of adjusted funds flow or 94 cents per share in the first quarter of 2023.
Speaker 5: The 6% production increase over the first quarter of 2022 was more than offset by a 49% decrease in our vitamin realization after after net transportation and storage expense.
Speaker 5: As a result, cash operating netback declined to $34 per barrel from $70 per barrel in the first quarter of 2022.
Speaker 3: of the Carbon Capturing Storage Project and also advance other technologies. This quarter, the Alliance made progress in engineering by awarding a contract to a global engineering firm to continue development plans for the 400-kilometer CO2 transportation pipeline. Conversations with the provincial and federal governments about their role in partnering with us.
Speaker 3: two advance. Decarbonization efforts continue to go well. On March 28th, the Canadian Federal Government announced measures in its 2023 budget to provide greater policy certainty to support and incentivize investment in clean technologies, including CCS projects that are critical to meeting Canada's emissions reduction goals.
Speaker 3: We continue to engage with federal and provincial governments in aligning how the Pathways Alliance can support Canada in reaching its climate commitments.
Speaker 3: As I bring my remarks to a close, I once again want to extend my thanks to our team for their commitment and 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.
Speaker 3: On behalf of Meg's Board of Directors and our management team, I want to thank you for your continued support. With that, I'll turn the call back over to Michelle and to begin the Q&A.
Speaker 2: Thank you, sir. 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. And if you are using a speaker phone, please lift your handset before pressing any keys.
Speaker 2: One moment please for your first question.
Speaker 2: Your first question will come from Greg Party at RBC Capital Markets. Please go ahead.
Speaker 2: Mr. Party, your line is open.
Speaker 2: Your next question will come from Menno Hulse Off at TD Securities. Please go ahead.
Speaker 6: Thanks, and good morning, everyone. I'll start with a question on growth. On the last call, Derek, I believe you talked about potentially growing production to 120,000 barrels per day over the next two to three years. But can you just elaborate on how you arrived at that target? Is it largely being driven by the...
Speaker 6: 20,000 barrels per day increased at takeaway capacity that you're going to get through TMX or do other factors come into play. And then...
Speaker 6: When we think about capital efficiencies for that growth, how much of it can be delivered through lower capital efficiency opportunities like redrilling of existing pads versus
Speaker 3: higher cost options like new pads. I'll take a cut at that in Darlene. We want to step in with some details on regiurals and the capital efficiencies associated with those. You know, our, the...
Speaker 3: The growth that I talk about, the small moderate growth of 2 to 3% going from 110 to 120,000 is really predicated on two things. It's predicated on.
Speaker 3: Well, it's really 3-1 that our investors do not want us spending large amounts of capital growing. These typically types of expenditures we're talking about are really debondling expenditures inside of our facility as well as short cycle redrioles and that sort of work that have very high capital.
Speaker 3: We see the biggest value of the takeaway capacity being that it's really going to tighten up that WCS differential even tighter as it pulls you know up to 600,000 barrels a day a product away from the US Gulf coast and puts it on the West Coast
Speaker 3: I don't know if you want to talk a little bit about capital reinvestment efficiencies.
Speaker 4: Thanks, Mano and thanks, Derek. I think Derek hit most of the main points, but a couple ads I would throw in there is we have some pretty exciting new pad development from our pad design that the team is working on pretty hard that we'll see come out in the next one to two years.
Speaker 4: just keep dialing in the reservoir as we learn it to get more familiar with it. And then looking to the future, our winter program, as I mentioned, looks pretty exciting to us. We've got a lot of great reservoir to go pursue. And then the surface side of it is really going after that capital efficiency cost opportunity. So a lot of exciting work on the way. And I think we'll really help capture those capital efficiencies. Excellent, thanks, darling. And Derek, for that, just the second question relates to the 500,000 barrels per month of contracted docks based on the Gulf Coast.
Speaker 6: I guess my question is, is that the end game for dog space or is there potential to expand that? And then I guess if we take it to a higher level, what are your midterm goals for growing?
Speaker 3: export capacity. So, um, now, and, Derek, I'll look, 500,000 barrels a day is basically the, um, and the US Gulf Coast about what you can put in an Afro Mac. So, um, you know, that we, we have the capability of.
Speaker 3: effectively loading an affer-max a month at the current time. That is not our ambition. We would love to be able to have a better or a clearer site to increase volumes off the U.S. Gulf Coast or across the dock. www.xfm.co2.ca
Speaker 3: You should think about it as a starting point, not a end point, and that if it's going to grow, it should grow in, you know, sort of, 500,000 barrel-a-date type of pieces. As we think about our export strategy.
Speaker 3: I think it's a long been a desire of Western Canadian producers to get their product, their heavy oil to the US Gulf Coast. And now that everybody's successfully doing that, we've managed to move the pinch point in terms of pricing. I'm going to move the pricing power away from pad 2 down to pad 3.
Speaker 3: I don't want to get into too much specifics, but you've heard us continue to talk about the big driver and the WCS differential coming in as tight as it has been. Incremental barrels moving across the dock and in this last quarter to China. India has also been in a big fire of this.
Speaker 2: Thanks, now. Your next question will come from John Royale at JP Morgan. Please go ahead.
Speaker 7: Hi, good morning. Thanks for taking my question. I just wanted to see if there was an update to the timing on reaching your net debt for, I think year end 2024 was the most recent in your release from one queue just says beyond 2023 at current oil prices. So is year end next year still the right timeline to think about or is there any update there?
Speaker 5: Hi, John , it's Ryan. I would say that with the narrowing differentials we've seen in order the last little while, we've seen the cash flow, free cash flow coming in a little bit higher than we had anticipated. And that's allowing us to repaid debt maybe a little bit sooner. So it is into 2024 at current oil prices, maybe in the second half of 2024 at this point in time relative to the...
Speaker 7: 10 million. Do you expect any reversal in 2Q or in 2023 in general?
Speaker 5: Modeling depends on the oil price. The biggest driver is our accounts receivable rising. This quarter we did see an increase in AR around purchased product sales. Actually we did see WTI go down relative to the first quarter of the prior period. Or relative to the end of the year I should say.
Speaker 5: We still saw our accounts receivable go up because we did sell some purchase product. So that was the main driver. We did have some interest payments that always impacts the first quarter as well. Those are probably the two big drivers. We could see it reverse if oil prices fall, I guess, but...
Speaker 5: I would say that the best view is that we'll see a pretty stable at this point in time.
Speaker 5: that we'll see it pretty stable at this point in time. Thank you very much.
Your next question will come from Neil Metta at Goldman Sachs. Please go ahead.
Good morning and Derek and team thanks for taking the time. I guess the first question is around sustaining catbacks. It's tracking around $400 million this year. How do you see that evolving over time and what are the puts and takes, bringing from inflation to bonds? Not really strong, but not strong.
And what is the impact? So over the last two years, you've seen that sustaining capital move up fairly aggressively to that $400 million dollar number as a result of, you know, over, I would say, more approximately 20% inflation. You know, we're in the process of, and continuing to watch inflation this year. We're still seeing inflationary pressures on two fronts, on, on, on basically salaries, wages are still a hot button moving anywhere in that five to seven percent in both the field and in the office side of the business. But I'd also say the other aspect on this is availability of people.
the single biggest driver at this point time.
Thanks, Derek. And the follow-up is on WCS and then KMX associated with that. So we've seen WCS tighten up a lot here. How much of this is, do you think structural versus seasonal and there's an element to us that seems more structural and major, especially given the OPEC cuts, but curious on your perspective on that. And then...
And the relates to TMIX and the cost overruns. How should we think about any financial impact that would have on the shippers recognizing that's a moving target right now?
Yeah, so structural versus seasonal on WCS.
My thesis at Art thesis at Meg has been that this is structural. This is largely been driven by increased loads across the dock to in...
at least in this year's the biggest driver has been incremental loads going into China as they've come out of their COVID shutdowns. We don't see that dropping off so we would say that that is a structural piece and you should expect to see that continue. I would be remiss if I didn't say there is some seasonality associated.
and barrels, TMX coming on in the fourth quarter or early in the first quarter. Next year, all of a sudden, you're pulling another million barrels away from that US golf coast market. I would expect that you could see further structural tightening in that market.
as we drive forward. So I think the outlook on WCS is quite positive and should be very supportive of our business going forward. But you will continue to see variations in that differential, which is.
I was well understood from a seasonal perspective.
On TMX, you know, I've got to, we are a shipper, we have a ship of about 20,000 barrels a day, or we will be shipping 20,000 barrels a day of a deal bit. It's still too early for us to be able to talk to with any degree of certainty what the impact of those cost overruns will be.
is an important piece of infrastructure for the Western Canadian sedimentary V.I. basin that provides another 600,000 barrels a day of egress. And especially when you think that our major market is the U.S. Gulf Coast and it's pulling that 600,000 barrels a day away from there and is going to.
impact the WCS differential, we believe positively on our whole business. You know, talking about a toll on a specific part of that line probably wouldn't do it justice in terms of the economic value that is going to bring to the table for us. And there's the followup on the turn of you can.
can comment on it, but our understanding of TMX as well, there was a cost overrun. It's still tracking on schedule from a timing perspective. Is that fair?
Yes, that's our understanding as well.
That's our understanding as well. Thank you, sir.
Thanks, Neil. Your next question comes from Jesus Sanchez. At Castanar, please go ahead.
Hi, thank you for taking my question. A couple of questions for Ryan in the reconciliation from Funds Form of Ration to the Justice Fund flow. We have 87 million in Realized Security Prize Management gain.
which is a double from last quarter. Maybe you can give some explanation about this account. Thank you. And the second question will be about the return of shareholders. We have spent 170 million in debt repayment, but our net debt is.
flat, 1389 million of Canadians, flat from last quarter, and also the reportuses. We have spent 100 million reportuses, but only the share account has only decreased by half of the 5 million.
Remind me if I don't get to all the questions, but the first one was on the $87 million of equity price risk management That was the equity risk management hedge that was put in place
to manage the risk around the LTI that was issued back in 2020 at a relatively low price in the dollar 57 range. And so we did a good piece of business there brought in about $120 million to the company by hedging that LTI position.
It did settle in the period, the 2020 LTI settled during the period and so the 87 million that you're seeing there is the realized gain from that position. We had recognized for our accounting purposes about 78 million of that at the end of the years. So it went from unrealized 70.
Why didn't fall maybe as much as you would have anticipated? The reason for that is the earlier question on working capital build. The working, we did generate $160 million of free cash flow during the period. We had a couple of $100 million of cash available to repay debt and buy back shares. But with that $160 million of free cash flow.
A portion of that is sitting in accounts receivable and wasn't actually collected as cash. So cash fell to buyback stock and the debt during the period. A portion of the free cash flow that we generated is sitting in accounts receivable yet to be collected. So that's the impact you're seeing there. Net debt did fall.
It just didn't fall as much as you might have expected because the cash balance fell to help us buy back that $103 million of stock and about $117 million of debt.
So that was your second question, a working capital build. And then the last question was on the number of shares. We bought back 4.9 million shares during the period, but the actual share balance didn't fall that much. The reason for that is we actually issued some LTI during the period. So we did have an offsetting issue.
Not all the LTI is cash-based. Some of it is share-based and was issued in shares during the period.
Thank you for displaying time. Thank you very much to Ryan. You're welcome. Ladies and gentlemen, once again, if you would like to ask a question, please press star one now. There are no further questions on the phone lines, so I will turn it.
We release our Q2 results in July . Hope everybody has a great day and thank you again for joining us.