Q1 2023 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 the MEG Energy 2023 Q1 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. 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 3: 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 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'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.
Speaker 3: I will keep my remarks brief today and refer listeners to yesterday's press release along with the NDNA and financial results that you can find on CEDAR.
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. Our operations team have begun our scheduled turnaround at the Christina Lake facility.
Speaker 3: 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.
Speaker 3: 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 the first quarter.
Speaker 3: Approximately 50% of 2023 free cash flow is being allocated to debt reduction with the remainder being applied to share buybacks.
Speaker 3: Once we achieve the US 600 million debt repayment target, make well return 100% of free cash flow to our shareholders.
Speaker 3: I'll now ask Darlyn Gates, our COO, 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 his efforts this year.
Speaker 4: Darlene, over to you. Thanks, Derek, and 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. 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.
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 top tier steam oil ratio of 2.25.
Speaker 4: 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.
Speaker 4: Our team's continuous improvement mindset has been instrumental in proactively managing this.
Speaker 4: a year ago at $4.77 per barrel, and that's in line with our full-year guidance of $4.75 cents to 505 per barrel.
Speaker 4: As Eric mentioned, executing a safe and effective turnaround is a top operational priority for us in our second quarter.
Speaker 4: 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 volumes outlook of approximately 84 to 88,000 barrels per day.
Speaker 4: Our teams recently completed safe round down of the facilities and have begun conducting scheduled maintenance, focused on maintaining regulatory compliance and delivering improved performance.
Speaker 4: Despite continued pressure 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. We also kicked off our 2023 infill and redevelopment drilling 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.
Speaker 4: Looking ahead, work focus on continuing to maintain a strong safety and environmental performance record to consistently deliver sustainable value to our leadership process.
Speaker 4: With that, I'll hand it over to Ryan.
Speaker 4: With that, I'll hand it over to Ryan. Thanks, Starlie.
Speaker 3: 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 net transportation and storage expense.
Speaker 3: 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 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 an incentive.
Speaker 3: 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 the next 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: 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 Party at RBC Capital Markets. Please go ahead.
Speaker 2: Your line is open. Your next question will come from Menow Hulse Off at TD Securities.
Speaker 6: Please go ahead. 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?
Speaker 6: How you arrived at that target, is it largely being driven by the 20,000 barrels per day increased at takeaway capacity that you're going to get through TMX or do other factors coming to play? And then when we think about capital efficiencies for that growth, how much of it can be delivered through?
Speaker 6: lower capital efficiency opportunities like retrolling of existing pads versus
Speaker 6: capital efficiency opportunities like redriiling of existing pads versus higher cost options like new pads.
Speaker 3: Now I'll take a cut at that end early and maybe want to step in with some details on regirals and the capital efficiencies associated with those. You know, the growth that I talk about, the small moderate growth of 2 to 3 percent.
Speaker 3: going from 110 to 120,000 is really predicated 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 growing. These typically types of expenditures we're talking about are really deboddling making expenditures inside of our...
Speaker 3: I think the way to, it's not being driven by your 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 600,000 barrels a day of product away from it.
Speaker 4: 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. And that's going to help us really drive that capital efficiency for the new pads. Derek really reinforced, you know, our program has a lot of exciting opportunities. We go and use the technology for the 40 seismic. That's helping us really optimize the existing.
Speaker 4: 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...
Speaker 6: A lot of exciting work on the way, and I think will really help capture those capital efficiencies. Excellent. Thanks, Starling and Enderick for that. Just the second question relates to the 500,000.
Speaker 3: barrels per month of contracted dog space on the golf coast. 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 export capacity? So, Matt, I'll look, 500,000 barrels a day is basically the, in the US golf coast, but what you can put in an Afro Max. So, you know, that's, we, we have the capability of effectively loading an Afro Max a month at the current time. That is not our ambition.
Speaker 3: 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. Our strategy is we should be...
Speaker 3: working hard to find other buyers for that product to take that product away from the US Gulf Coast and make sure that we're very much better balanced between supply and refiner demand in that area. So, you know, I don't want to get into too much specifics, but you've heard us continue to talk about you know, the big driver in the WCS differential coming in as tight as it has been.
Speaker 3: we've currently got Doc's base to do.
Speaker 3: that dockspace to do to those markets.
Speaker 6: Thanks, Derek. I'll turn it back.
Speaker 6: Thanks, Derek. I'll turn it back. Thanks, now.
Speaker 2: Your next question will come from John Royale at J.P. 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 any release from one queue just says beyond 2023 at current oil prices.
Speaker 5: Is your end next year still the right timeline to think about or is there any update there? You know hi John , it's Ryan. I would say that you know with the narrowing differentials We've seen order the last set of law 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 repay debt maybe a little bit sooner. So it is into 2024
Speaker 7: Could you just talk a little bit about the drivers of the working capital? Headwind in one queue. I think it was about 110 million. Do you expect any reversal in two queue or in 2023 in general?
Speaker 5: A lot of that 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 I would say that the best of you is that we'll see it pretty stable at this point in time. Thank you.
Speaker 2: Thank you very much. Your next question will come from Neil Metta at Goldman Sachs.
Speaker 2: Thank you very much. Your next question will come from Neil Mehta at Goldman Sachs. Please go ahead.
Speaker 3: 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 at. How do you see that evolving over time and we're going to put some cakes, right? We need to get from installation to volume.
Speaker 3: Neil, it's Derek, thank you for that question. You know, it's one that we talk about often, both externally and internally, and you hit on the biggest single unknown which is inflation. And-
Speaker 3: 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
Speaker 3: over, I would say, more approximately 20% inflation. We're in the process of, and continuing to watch inflation this year. We're still seeing inflationary pressures on two fronts, on basically salaries, wages are still.
Speaker 3: a hot button moving anywhere in that 5% to 7% 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. And that cuts into your sustaining capital in two ways. One, it takes longer. It can't find the people, it takes longer to get the job done.
Speaker 3: your safety risks. So, you know, I 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.
Speaker 3: 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 do you think structural versus seasonal and other elements to us? It seems more structural, major, especially given the OPEC cut, but curious on your perspective on that. And then...
Speaker 3: 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?
Speaker 3: Yeah, so structural versus seasonal on WCS.
Speaker 3: My thesis at Mac has been that this is structural. This has largely been driven by increased loads across the dock to...
Speaker 3: 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.
Speaker 3: coming up that somewhere in the neighborhood of 340,000 barrels, TMAX 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 U.S. Gulf Coast market. I would expect that you could see further structural tightening in that market.
Speaker 3: 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 are sort of well understood from us.
Speaker 3: is no perspective. On TMX, you know, I've got to, we are a shipper, we ship 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 costs.
Speaker 3: to be able to tell about this. Other than to say, you know, this is an important piece of infrastructure for the Western Canadian sedimentary v.I. base and air 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 at 600,000 barrels a day away.
Speaker 3: economic value that is going to bring to the table for us. And Derek, the follow-up on this, I don't know if you can comment on it, but our understanding of TMX as well, there was a cost overrun. It's still tracking on schedule from the timing perspective. Is that fair? Yes, that's our understanding as well.
Speaker 3: is going to bring to the table for us. And Derek, the followup on this, I don't know if you 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. Thank you, sir.
Speaker 2: Thanks, Neil. Your next question comes from Jesus Sanchez. At Castanar, please go ahead.
Speaker 8: Hi, thank you for taking my question. A couple of questions for Ryan in the reconciliation from Funds for Immigration to the Justice Fund Flu. We have 87 million in Realized Security Prize Management gain.
Speaker 8: 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.
Speaker 8: 1,389 million of Canadians fled from last quarter and also their report is we have spent 100 million in report uses but only the share account has only decreased by half of the 5 millionjust an interview cutting into public with 113 million of the
Speaker 5: So remind me if I don't get to all the questions, but the first one was on the 87 million dollars 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
Speaker 5: 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 settle in the period, the 2020 LTI settled during the period. And so the $87 million that you're seeing there is the realized
Speaker 5: 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 78 million to realized 87 million and 9 million moved during the quarter. So you're just seeing the impact of a shift to realized from unrealized if that makes sense.
Speaker 5: We had recognized for our accounting purposes about 78 million of that at the end of the years. So it went from unrealized 78 million to realized 87 million and 9 million moved during the quarter. So you're just seeing the impact of a shift to realized from unrealized if that makes sense. That was sé het? Yes, so?? mixt???.
Speaker 5: Yep, you had a question on net debt why it only fell 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 get we did generate $160 million of free cash flow during the period we had a couple hundred million dollars of cash available to Repaid debt and buy back shares but with that 160 million of free cash flow
Speaker 5: 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.
Speaker 5: 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. The 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.
Speaker 8: Thank you for this blank time. Thank you very much to Ryan.
Speaker 2: You're welcome. Ladies and gentlemen, once again, if you would like to ask a question, please press star one now.
Speaker 3: 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're able to achieve this last year and look forward to updating you on our operational performance and return of capital programs. Thank you.