MEG Energy Corp. Q1 2023 Earnings Call
At this time I would like to welcome everyone to the Meg Energy 2023, Q1 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 would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
I would like to withdraw your question. Please press star followed by the number too.
At this time I would like to turn the conference over to Mr. Derek Evans CEO . Please go ahead Sir.
Thank you Michelle and good morning, everyone and thank you for joining us to review Meg Energy's 2023, Q1 operating and financial results.
With me on the call. This morning are Ryan <unk>, our Chief Financial Officer, Darlene Gates, our Chief operating officer, and <unk> <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'll keep my remarks brief today I refer listeners to yesterday's press release.
Along with the MD&A and financial results that you can find on SEDAR.
Our top priority at Meg is our focus on health safety, and the environment and insurance and nobody gets hurt eliminate serious incidents and delivers operational excellence.
I'm extremely proud of the safety operating and financial performance delivered by our team.
Their focus on safety and reliability steam utilization and ongoing well optimization have all contributed to a strong operational quarter.
Our operations team have begun our scheduled turnaround at the Christina Lake facility, our priority is to make safe and reliable operations throughout the turnaround.
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.
Pitchman production rose, 6% to approximately 107000 barrels per day industry, leading steam oil ratio of two to five with an operating cost structure that was positively impacted by low natural gas and a higher power prices.
These strong operational results enabled our ongoing commitment to debt reduction.
We continued to execute on our debt repayment strategy repaying approximately $117 million Canadian with net debt declining to U S $1 billion, approximately or approximately $1 4 billion Canadian at the end of the first quarter.
Approximately 50% of 2023 free cash flow is being allocated to debt reduction with the remainder being applied to share buybacks.
Once we achieve the U S $600 million debt repayment target make we'll return 100% of free cash flow to our shareholders.
I'll now ask Arlene gate, our CLO to speak to our operating results and I 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 pathway alliance as efforts this year.
Charlie over to you.
Thanks, Derek and good morning, everyone in.
In the first quarter make maintained its position as a leader in innovative and responsible energy development. The continued strong operational performance I will highlight today is underpinned by our 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.
In the first quarter, we executed at a high level of activity, while achieving one of our lowest quarterly total recordable injury rate in the past several years at 0.24 incidents per 200000 work hours.
Our first quarter production averaged 107000 barrels per day.
<unk> percent increase over the same period.
This production was delivered from Christina Lake at a top tier steam oil ratio of 225.
Since exiting 2022 at record production rates, we've gained valuable knowledge knowledge surrounding water treatment optimization associated with the higher throughput rates at the facility.
Our team's continuous improvement mindset has been instrumental in proactively managing that.
Total operating expenses comprised of non energy and energy costs of $6 13 per barrel for the first quarter. This is up 31% reduction from the same period last year.
In the quarter, we continued to realize substantial benefits from our cogeneration facilities, which helps reduce energy operating costs net of power revenue of $1 36 per barrel.
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 $5 five per barrel.
As Derek mentioned executing a safe and effective turnaround is a top operational priority for us in our second quarter.
This turnaround will be focused on our phase one and two facilities and is expected to have a full year production impact of 6000 barrels per day. This translates into our second quarter volumes outlook of approximately 84 to 88000 barrels per day.
Our teams recently completed safe ramp down of the facilities and have begun conducting scheduled maintenance focused on maintaining regulatory compliance and delivering improved performance.
Despite continued pressure on short cycle labor availability and associated service rates.
I believe we're well positioned to deliver a productive and impactful turnarounds.
Turning to development this quarter, we executed a robust winter drilling program preliminary results continue to validate quality of our long term resource base.
We also kicked off our 2023 infill and redevelopment drilling program, which pairs high quality resource with proven innovator subsurface technologies.
This supports our previously announced production guidance of 100 to 105000 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 shareholders with that I'll hand, it over to Brian .
Thanks Sterling.
<unk> generated $274 million of adjusted funds flow or <unk> 94 per share in the first quarter of 2023.
The 6% production increase over the first quarter of 2022 was more than offset by a 49% decrease in our bitumen realization after net after net transportation and storage expense.
As a result cash operating netback declined to $34 per barrel from $70 per barrel in the first quarter of 2022.
In 2023, we sold 56% of our AWP blend in the U S Gulf Coast generating a U S $2 25 per barrel premium relative to the Edmonton AWP index.
In addition, operating expenses net of power revenue declined to $6 13 per barrel, reflecting a 78% increase in our realized power prices and lower natural gas prices compared to the first quarter of 2022.
Crown royalties also declined to $3 18 per barrel as a result of lower bitumen revenue.
We had estimated that our Christina Lake project would reach royalty payout late in the first quarter. However, advanced expenditure timing provided additional royalty shelter during the quarter and move that timing into early Q2.
After funding $113 million of capital expenditures may generated $161 million of free cash flow for debt reduction and share buybacks in the first quarter of 2023.
We repurchased U S $86 million of senior notes and ended the quarter with U S $1 billion of net debt.
In addition, we bought $103 million or $4 9 million make shares in the quarter at a weighted average price of $20 88.
Thanks, and with that I'm going to hand, it back to Derek.
Thanks, Brian .
Apologize for the.
The noise in the background seems to be lots of fire engines rolling around.
Before we move into questions I'd like to share an update on the pathways Alliance Meg along with its pathway Alliance peers is progressing pre work on the proposed foundational carbon capture and storage project, which will transport cotwo via pipeline for multiple oil sands facilities to be stored safely permanently in the cold Lake region of Alberta.
Yeah.
Significant amount of work is underway with the pathways Alliance as we also progress environmental assessments and early engineering work for the carbon capture and storage project and also advanced 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 kilometers.
<unk> two transportation pipeline.
Conversations with the provincial and federal governments about their role in partnering with us to advance Decarbonization efforts continue to go well on March 28, 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, we continue to engage with federal and provincial governments and aligning how the pathways Alliance can support Canada and reaching its climate commitments.
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.
On behalf of <unk> 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 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.
If your question has been answered and you would like to withdraw from the queue. Please press star followed by the number two and if you are using a speaker phone. Please lift your handset before pressing any keys.
One moment. Please for your first question.
Your first question will come from Greg Pardy at RBC capital markets. Please go ahead.
Mr Party your.
Your line is open.
Okay.
Your next question will come from Menno, how soft at TD Securities. Please go ahead.
Thanks, and good morning, everyone else I will start with a question on growth on the last call. Derek I believe you talked about potentially growing.
<unk> to 120000 barrels per day over the next two to three years, but can you just elaborate on how you arrived at that target.
Is that largely being driven by the 20000 barrels per day increase the takeaway capacity that you're going to get through <unk> or do other factors come into play in that.
When we think about capital efficiencies for that growth how much of it can be delivered through lower capital efficiency opportunities like re drilling of existing pads versus.
Higher cost options like new pads.
Now I'll take a cut at that and Burley may want to step in with some details on re drills and the capital efficiencies associated with those.
Are there.
The growth that I talk about the small moderate.
2% to 3%.
Going from 110 to 120000 is really predicated on on two things it's predicated on.
Well, it's really three one that our investors do not want us spending large amounts of capital.
Is that sort of work that have very high capital.
A very low capital reinvestment cost very quick payout no matter of months, but.
The way to it's not being driven by our takeaway capacity in any way shape or form.
So.
It's nice to have that takeaway capacity, 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 up to 600000 barrels a day of product away from the U S Gulf Coast and puts it on the West coast.
I don't know if you want to talk a little bit about capital reinvestment efficiencies.
Thanks, <unk> and thanks Derek.
I think they are kept 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 will see come out in the next one to two years and that's going to help us really drive that capital efficiency for the new pads Derek.
Really reinforced our.
Program has a lot of exciting opportunity as we go and use the technology for the <unk> seismic that is helping us really optimize existing pads and that gets after those quick re drills and infill that we're pursuing at this time.
It also always want to do another shout out to the optimization team that does from the facilities and the Workovers that our team is working on again, just keep dialing in the reservoir as we learn how to get more familiar with that and then looking to the future. Our winter program as I mentioned looks pretty exciting to us we've got a lot of <unk>.
Right.
Reservoir to go pursue and then the subs the surface side of it is really going after that capital efficiency cost opportunities.
A lot of exciting work on the way and I think will really help capture those capital efficiencies.
Excellent Thanks, Sterling and Derek for that just the second question relates to the to the 500000.
Barrels per month contracted dark space on the on the Gulf Coast. I guess my question is is that the end game for dark 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.
Export capacity.
So.
Now, it's Derek I'll look 500000 barrels a day is basically the.
In the U S Gulf Coast about what you can put in an aframax. So.
We have the capability of effectively loading and Aframax a month at the current time.
That is not our ambition, we would love to be able to.
Have a better.
Or clearer site too.
Increased volumes off the U S Gulf coast or across the dock so.
You should think about it as a starting point I am not a endpoint and that if it is going to grow it should grow in sort of 500000 barrel a day type of.
Pieces.
As we think about our export strategy.
I think.
It's long been a desire of western Canadian producers to get there.
Their product their heavy oil to the U S Gulf Coast and now that everybody successfully doing that we've managed to move the pinch points in terms of pricing.
And moved the pricing power away from pad two down to pad III.
Our strategy is we should be working hard to find other buyers for that product to take that product away from the U S Gulf Coast.
And make sure that we're very much better balance between supply and refiner demand in that area. So.
I don't want to get into too much specifics, but you've heard us continue to talk about.
The big driver in the WCS differential coming in as tight as it has been.
Incremental barrels moving across the dock.
And then this last quarter to China, but.
India has also been a big buyer of this product and we expect that to continue and you should expect us to try and.
We continue to move.
Volumes in excess of what we've currently got dock space.
To those markets.
Thanks, Derek I'll turn it back.
Thanks, Matt.
Your next question will come from John Royall at Jpmorgan. Please go ahead.
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.
And your Ruiz from <unk>, just says beyond 2023 at current oil prices.
Year end next year still the right timeline to think about or is there any update there.
Hi, John its Ryan.
I would say that with the.
Narrowing differentials, we have seen over the last little while we've seen the cash flow free cash flow coming in a little bit higher than we had anticipated and thats.
Following us to repay 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 end of 2024 previously so.
It's a longer we see narrower differentials higher oil prices, it's going to shift, but still second half 2024 ish.
Okay, great. Thank you and then could you just talk a little bit about the drivers of the working capital headwind.
Headwind in <unk> I think it was about $110 million do you expect any reversal in <unk> in 2023 in general.
Florida that depends on the oil price. The biggest driver is our accounts receivable rising this quarter, we did see an increase in our round purchased.
Product sales actually we did see WTS go down relative to the first quarter of the prior period.
Relative to the end of the year I should say and.
We still saw our accounts receivable 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.
I would say the best view is that we will see it pretty stable at this point in time.
Thank you very much.
Your next question will come from Neil Mehta 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 capex.
It's tracking around $400 million.
You see that evolving over time, and what are the puts and takes right ranging from installation to volumes.
Yeah.
Neil It's Derek Thank you for that question.
It's one that we talk about often both externally and internally.
And you hit on the biggest single unknown, which is inflation.
And.
What is the impact so over the last two years, you've seen that sustaining capital.
The move up fairly aggressively to that $400 million number as a result of.
Over I would say are approximately 20% inflation.
We are in the process of and continuing to watch inflation. This year, we're still seeing inflationary pressures on two fronts on basically salaries.
Ages.
Or still a hot button moving anywhere in that 5% to 7%.
In both the field and nonunion.
Office side of the business that I would also say the other aspect on this is availability of people and that cut into your <unk>.
Sustaining capital in two ways, one it takes longer.
If you can't find people it takes longer to get the job done and if we can't find experienced people.
The effectiveness of.
And.
Cost effectiveness and the.
The safety and everything else that's associated with.
Green hands or inexperienced people.
As to your cost structure and also adds to your safety risks so.
Sure.
It's too early for us to really be able to tell you. What we think is going to happen in terms of.
Inflation on that sustaining capital number but that is the single biggest driver at this point in time.
Thanks, Derek and the follow up is on WCS, and then mix associated with that so we've seen WCS tightened up a lot year how.
How much of this do.
Do you think structural versus seasonal.
Element.
It is more structural in nature, especially given.
The OPEC cuts, but curious on your perspective on that and then as it relates to <unk> and the cost overruns.
How should we think about any financial impact that would have on on on the shippers.
Recognizing that's a moving target right now.
Yes.
So structural versus seasonal on WCS.
My thesis on that our thesis at Meg has been.
This is structural.
Is largely been.
<unk> driven.
Bai increased loads across the dock to.
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 with this but it's at the margin and I think quite small.
I think though as you move you roll the clock forward. If you think about what's going on in that more macro picture with the Mexican refinery does focus.
Coming up that somewhere in the neighborhood of 340000 barrels <unk> coming on.
Fourth quarter early in the.
The first quarter next year all of a sudden you're pulling another million barrels away from that that U S. Gulf 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.
Sure.
And.
Should be very supportive of our business going forward and but you will continue to see variations in that differentials, which are sort of well understood from a seasonal perspective.
On <unk>.
Got to we are a shipper, we ship about 20000 barrels a day or we will be shipping 20000 barrels a day.
I feel a 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.
We are.
Precluded from providing.
Information by virtue of an NDA.
NDA that we have signed so I really can't elaborate or talk about.
In great detail about this other than to say this is a important piece of infrastructure.
For the western Canadian sedimentary be yet.
And it provides another 600000 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 600000 barrels a day away.
From there and is going to.
Impact of WCS differential we believe positively on our whole.
Whole business.
Talking about a toll on a specific part of that line.
Probably wouldn't do it justice in terms of the economic value of that is going to bring to the table for us.
And Derek the follow up on that I don't know if you.
You didn't comment on it but our understanding of Panamax is while there was a cost overrun.
Tracking on schedule from a timing perspective is that fair.
Yes, that's the that's our understanding as well.
Okay.
Thank you Sir.
Neil.
Your next question comes from Jesus Sanchez at Katz Dinar. Please go ahead.
Hi, Thank you for taking my question a couple of questions for Ryan.
A reconciliation from funds from operation to adjusted non flu.
We have 87 million in realized equity price risk management gain which is a double from last quarter. Maybe you can give some explanation.
This account.
And the second question will be about the return on shareholders, we have to spend 170 million in debt repayment, but our net debt is flat.
1389.
9 million Canadians flat.
Platform last quarter.
So the repurchases we have has been 100 meeting any repurchases.
But only.
Sure.
Account has only decreased by half.
The $5 million.
We have the repurchases, which.
Accounts for $50 million so.
Dominion, there 190 million public or any debt repayments.
And maybe you can give us some color about that.
Sure.
I tried to write them down so 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 $1 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.
Settled in the period 2020, LTI settled during the period and so the $87 million that youre seeing there is the realized gain from that position.
Had recognized for our accounting purposes about $78 million of that at the end of the year. So it went from unrealized $78 million to realized $87 million and $9 million move during the quarter. So youre just seeing the impact of a shift to realized from unrealized if that makes sense.
Yes.
Yes, you had a question on net debt why it only fell why it 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 hundred million dollars of cash available.
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 as sitting in accounts receivable yet to be collected.
So thats the impact Youre 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 buyback that $103 million of stock in about $117 million of debt.
So that was your second question 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.
Ah.
Issue.
Stock not all of them not all of the LTI is cash based some of it is share based and was issued in shares during the period.
Thank you for displays Sean Thank you very much said Ryan.
Youre 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 line. So I will turn the conference back to Derek Evans for any closing remarks.
Thank you Michelle and thank you to everybody that joined US. This morning for our Q1 results conference call. We're excited about where we are able to achieve this last year and look forward to updating you on our operational performance and return of capital program. When we release, our Q2 results in July .
I hope everybody has a great day and thank you again for joining us.
Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank you all for participating and ask you to please disconnect your lines.
Okay.