Q4 2022 MEG Energy Corp Earnings Call

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 make Energy's 2022, Q4, and full year 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 that time simply press Star then the number one on your telephone keypad.

I would like to withdraw from the queue. Please press star followed by the number too.

I would now like to turn the conference over to Mr. Derek Evans CEO . Please go ahead Sir.

Thank you Michele good morning, everyone and thank you for joining us to review Meg Energy's 2022 year end operating and financial results.

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

I'd like to remind our listeners that this 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 detail beyond the comments we've prepared this morning.

I'm extremely proud of the safety operating and financial performance delivered by Meg in 2022 Megs.

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

<unk> achieved record production levels of approximately 111000 barrels per day.

So our up to two in the fourth quarter and record annual bitumen production of approximately 95300 barrels per day at an SLR of 236.

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 using 2022 free cash flow of $1 $5 6 billion.

At year end make head outstanding net debt of $1 billion U S.

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.

This allocation will remain in place until.

U S $600 million net until the U S 100 U S $600 million net debt target is achieved.

These results were delivered through the dedication hard work and innovation of our entire make 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 Arlene gates, our CEO or COO to speak to our operating results and ask Ryan our CFO to talk to our financial results before I open the call to questions I'll provide an update on our pathway alliance efforts.

Darlene over to you thanks Derek.

As I mentioned last quarter make us a leader in innovative and responsible energy development. Our team remains focused on safe reliable 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.

As Eric mentioned, we reached a new quarterly production record of 110000 barrels a day and this was achieved with a 9% increase quarter over quarter, a 10% increase above the fourth quarter of 2021 and it was also done with an improved steam oil ratio of two two.

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.

Strong quarterly performance allowed us to deliver full year production of 95338 barrels per day, another record annual record and drove non energy unit operating costs of $4 73 per barrel, despite unprecedented levels of inflationary pressure on labor chemicals and material costs.

As we move into 2023, our Q1 production outlook is approximately 107000 barrels per day, which reflects reduced facility throughput that will be optimized during our second quarter turnaround full.

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

This turnaround carries a full year impact of 6000 barrels per day.

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'm excited and confident that our focus on safety culture, and operational excellence will continue to deliver long term value for our shareholders.

With that I'll hand, it over to Ryan to discuss our financial performance.

Thanks Sterling.

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 funds flow or $6 26 per share in 2022.

Our cash operating netback 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 in the U S Gulf Coast Rose to 66% of blended sales in 2022 generating a U S $1 17 per barrel uplift in our blended sales price relative to the Edmonton AWP index.

Higher crude oil prices in the year, however were partially offset by increased operating expenses and royalties.

Operating expenses net of power revenue rose to $7 91 per barrel, mainly due to increased natural gas prices.

Around royalty is also rose to $6 43 per barrel.

Reflecting our higher <unk> higher WCW Ti price and revenues as well as a pre payout royalty formula we.

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 royalties at that time.

After funding $376 million of capital expenditures in 2022 free cash flow rose to $1 6 billion from $5 billion in 2021.

That free cash flow allowed us to reduce our net debt to U S $1 billion and significantly improved <unk> balance sheet strength.

We remain focused on our next net debt target at U S. A U S $600 million and we will continue to return capital to shareholders through our share buyback program.

That program reduced makes outstanding share count of approximately 7% in 2022, as we bought back $382 million or $20 7 million <unk> shares.

Today, our board of directors approved the filing of an application to renew our NCI program and that will allow us to buyback up to 10% of makes public slow over the next year.

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.

Now going to hand, it over to Derek for some closing comments.

Thanks, Brian .

<unk> 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 from 2013 levels by 2030.

With the midterm target of reducing its absolute scope, one and two greenhouse gas emissions by 0.63 Mega tons per annum by year end 2030, representing a reduction of approximately 30% absolute emissions from 2019 levels.

On the pathway front I am pleased to share that Megan our pathways 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 projected to support Canada in meeting its climate commitments position, Canada as a preferred.

Global supplier of crude oil and to achieve net zero greenhouse gas emissions from oil sands operations by 2050.

In the fourth quarter, Meg and its 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.

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 carbon capture for this quarter, our carbon capture and storage program and also advanced other technologies.

Conversations with our provincial and federal governments about their role in partnering with us to advance decarbonization efforts continue to go well.

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 I want to thank you for your.

<unk> support.

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

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.

Your question has been answered and you would like to withdraw from the queue. Please press star followed by the number too.

And if you are using a speaker phone please lift the handset before entering any case please.

Please standby for your first question.

Your first question will come from Patrick O'rourke at ATB capital markets. Please go ahead.

Hey, guys. Thanks for taking my question. This morning, I guess, just wanted to kind of take a look at operations here.

You had 111000 barrels a day of production in the quarter you are talking about 107 in Q1, a year ago, we would have been thinking about this as an asset with a 100000 barrels a day of nameplate capacity sort of what your view in terms of the REIT.

Steady state run rate run rate production out of this asset is and then I know you've talked in the past about some potential.

Here is return of capital and the dip pardon me the balance sheet, but you've talked about some sort of debottlenecking, our incremental capital that you could spend like <unk>.

Steam generating units that might be very capital efficient.

Sort of what that might look like and also with that.

Have any impact positive or.

On the royalty structure here.

Yes.

Hey, Patrick it's Derek I'm going to let Darlene talk to sort of where do you see steady state production at I'll take the future capital and I'm going to ask Ryan to deal with the wood.

Would any future capital be incremental on the.

The royalty so darlene over to you okay. Thanks, Eric.

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 are moving into a new operating environment and as you move into that new operating environment, you see some new constraints.

Our treating facility we've been quickly incorporating those learnings suggestion and we will have that optimize if theres anything that we can't get done before the turnaround we will have that fully.

Optimized during the turnaround.

When I look at steady state I think youre seeing that type of production.

Our development plan as I mentioned in the notes has been doing outstanding job for US our operating strategy has been to screen. The results and we're confident to continue that progress in and moderate growth in this asset.

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 once through steam generators that are sitting in inventory in various levels of completion.

Completion that we could bring to the project I think the easiest way to think about this is.

There is a runway to 120000 barrels a day over the next two to three years, we've got capital in our budget for 2% to 3% sort of incremental.

Incremental growth and clearly at some point in time, we will definitely wanted to put those once through steam generators.

And potentially that co gen to work as part of that as you think about the capital.

Our dollar per flowing BOE, we would need to bring to the table I think there is.

Two 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 $25000 per flowing Boe.

But what are the really interesting things that we've been able to develop it Meg in the last little while is what I call short cycle re completion opportunities and those are wells that were re drilling rehabilitating on existing pads.

That are typically have.

200 to $3000.

Per flowing Boe.

Of course so.

Very incremental.

And those are have been a big part of our success to date.

So I hope that covers off sort of where we could go well, we're going to do and Ryan is going to tell us.

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 in the future will be deductible off of revenue.

In calculating net revenues for that.

Royalty formula going forward.

Any capital, we spend and the Christina Lake area is ring fenced by that project. So you will see that.

Lay into the royalty economics.

The other point to note is that we are unlikely to transition back to a minimum or a gross revenue royalty.

These capital expenditures won't be large enough to kind of move us to that point, we will continue to pay likely net revenue royalties.

Thank you very much.

And factor.

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

Hi, Good morning, this is Nicholas plus around for Neil Mehta, Thanks for taking the question.

Just first one pathways and understand there is an incremental update hearings <unk> 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 as it relates to progress around the project.

Sure Nicole and thank you for the question the evaluation that we agreement that we entered into pathways entered into in October of 2023.

Provides us with the opportunity to go out and evaluate the suitability of the reservoir.

As you go back through and you look at some of the projects that have failed in.

Carbon capture and sequestration area.

They tend to fail in two areas one in terms of the capture component in the storage and the second would be the storage component. What we're dealing with here is the evaluation of that storage component.

And its suitability and we need to prove to the Alberta government debt.

It's got activity, it's got the permeability and the ability to store the <unk> that we are proposing to store it in.

The unique thing.

This particular reservoir, it's one in which we're already storing cotwo in the province.

And its one in which there has been a great deal.

Disposal activity sort of produced water so.

As we work through this and we provide that government of Alberta with that data. We don't think we're going to have any surprises and.

Once we've got that work done we will move to the next phase, which is the granting of a license.

Two from from the Alberta government.

Alright, that's very helpful. And then the follow up here would just be on WCS and the differentials has tightened up a bit here more recently, but wanted to get your thoughts around where you see the spread tracking in near term and then any insight you can provide as well around next expected Gulf coast exposure in 2023.

So it's tightened up quite a bit.

From our last conference call, where the differential was blowing out.

But we've seen that differential almost fallen half. This morning, we're looking at WP.

<unk> prices on the Gulf coast out of that $8 U S barrels.

Those would have been as high as $22 a barrel earlier.

Earlier on so we have seen.

Big decrease in fundamentally.

The reason, we believe that is happening.

And based on our intelligence on the U S Gulf Coast is.

Chinese demand has picked up substantially and we can see it.

Increased loads across the dock heading off.

To Asia and that is tighten the market up and we expect that will continue to tighten the market up as we move into turnaround season, and lower supply being available to be shipped.

Alright very helpful. Thank you.

Thank you.

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

Okay.

Mr. Evans, we have no further questions I will 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 and return on capital program. When we release, our Q1 results on May one.

Thank you and have a great day.

Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank everyone for participating and ask you to please disconnect your lines.

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