Q3 2023 MEG Energy Corp Earnings Call
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Good morning, My name is <unk> and I'll be your conference operator today at this time I would like to welcome everyone to the Meg Energy's 2020, Q3 results conference call all.
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 can be British star followed by the number one on your telephone keypad. If you would like to withdraw your question. Please press the star followed by the number to you. Thank you I would now like to turn the conference over to your Speaker today, Mr. Derek Evans, President and CEO of Mag and there should be you may begin your conference.
Yeah.
Thank you Larry Good morning, everyone and thank you for joining us to review Meg Energy 2023, Q3, operating and financial results with me on this call on the call. This morning are Ryan <unk>, Our Chief Financial Officer, Garland 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 fees in our disclosure documents filed on SEDAR and on our website.
I'll keep my remarks brief today and refer listeners to yesterday's press release for more detail.
Our top priority at Mag is our focus on health safety and the environment that ensures 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.
Our focus on plant reliability steam utilization project execution and ongoing well optimization have all contributed to a strong operational quarter.
Before I turn the call over to Darlene and Ryan to share details of our results I would like to briefly touch on the business highlights.
It makes financial performance continues to benefit from strong oil prices, which reflect favorable supply and demand fundamentals for both <unk> and WCS heavy oil differentials.
<unk> prices averaged $82 a barrel U S. In the third quarter supported by increasing global oil demand and coordinated OPEC plus production cuts and supply management.
The WCS discount to <unk>, and Edmonton averaged $13 per barrel U S. During the quarter driven by effectively zero apportionment on the Enbridge system strong U S. Gulf Coast exports as a result of rising heavy crude capacity in Asia and tight global heavy crude markets as a result of OPEC.
Plus reducing supply.
That WCS differential is a key indicator of pricing for our product in Edmonton, but it's important to remember that we sold 73% of our blend volumes in the third quarter into the U S Gulf Coast.
Heavy oil and that market has been even stronger, allowing us to receive a premium over what is achievable in Atlanta.
Our market access and market optimization activities in the third quarter generated a weighted average premium of 69 cents per barrel on a realized AWP price over the Edmonton AWP benchmark.
After deducting diluent transportation cost to get our product to market. Our bitumen realization was $84 75 per barrel at our plant gate in Q3.
WCS prices have more recently widened reflecting refinery turnarounds higher western Canadian sedimentary basin production seasonal heavy oil blending requirements as well as perceived concerns about Alberta storage capacity and <unk> ex timing.
<unk> pipeline to Canada's West Coast is on track for start up late in the first quarter line fill a $4 5 million barrels should positively impact the WCS differentials in Q1 2024 with 20000 barrels per day of committed capacity on <unk> Meg will have over 80%.
<unk> its production with access to Tidewater.
Near term fundamentals remained strong as we head into 2020 for the industry will also be positioned with excess takeaway capacity for the first time in many years and that should narrow and reduce the volatility of WCS heavy oil differentials.
We anticipate the current wide WCS differentials will narrow slightly as we head into the end of the year and will remain elevated until <unk> moves into operation at the end of Q1.
Q2, and Q3 or Q2, and Q3 2020 for differentials should look similar to 2023 with Q4 2024, only marginally higher than Q2 and Q3.
Our financial results reflect strong operating performance and enable our commitment to debt reduction and share buybacks. Since April 2022, we have repurchased $853 million U S senior notes and $668 million or about 33 million shares at a weighted average price of $20.
16 cents per share.
Those share buybacks represents approximately 10% of our 2021 outstanding share count.
Free cash flow remains allocated at 50% to debt reduction and 50% to share buybacks, but that will ramp up to a 100% shareholder returns next year. When we reach our 600 million U S net debt target.
Corporation published its first or excuse me its third ESG report in September 2023, which discusses its foundational commitments of business model resilience and governance.
And the corporation's priorities ESG topics health and safety climate change and greenhouse gas emissions water management energy security energy affordability and indigenous relations.
I will now ask Darlene gates, our COO to speak to our operating results and ask Ryan <unk>, our CFO to talk through our financial results before I open the call to questions I'll provide an update on the pathways Alliance.
Efforts this quarter.
<unk> over to you.
Thank you Derek and good morning, everyone.
The third quarter as Derek mentioned, we delivered strong safety health and environmental performance with no lost time injuries and no reportable spills.
Production of about 104000 barrels per day in the third quarter with delivered at a top tier steam to oil ratio of two to eight reflecting the successful completion of our short cycle infill and redevelopment programs and a continued emphasis on steam allocation to the highest quality resource.
When compared to the same quarter last year. This represents a 2% production increase and a 5% reduction in steam to oil ratio.
These results were achieved while successfully completing our planned facility and sales infrastructure projects, which will enable us to distribute our high pressure steam to future wells.
Operating expenses net of power revenue averaged $5 11 per barrel in the third quarter, primarily reflecting higher production rate plan.
And maintenance activities and inflationary pressures on services chemicals and staff costs.
Power revenue exceeded LNG operating costs in the quarter generating <unk> per barrel net recovery, which continues to demonstrate the value of our cogeneration facilities.
As we head into the fourth quarter lower facility and maintenance activity levels and increased production rates are projected to drive our non energy operating expenses back within our full year guidance.
Outlook for second half production continues to be approximately 105000 barrels per day and have us exiting the year near our 110000 barrel per day facility capacity.
In October we also achieved first production from our newest well pad, which will continue to ramp up throughout the fourth quarter.
Thanks Sterling.
Meg generated adjusted funds flow of $492 million in the third quarter of 2023.
Bringing our year to date total to just over $1 billion Q3 cash operating netback was $58 64 per barrel, reflecting strong oil prices lower diluent costs and the first full quarter of higher postpaid crown royalties.
After funding $83 million of capital expenditures, we generated $409 million of free cash flow in the quarter, which was used for $68 million U S of debt reduction and to repurchase $58 million or $2 3 million shares at an average price of $25.
<unk> <unk> 40 per share.
In the first nine months of the year may generated $699 million of free cash flow.
That free cash flow allowed us to purchase $227 million or $10 3 million <unk> shares at an average price of $22 <unk> per share.
In addition, we reduced debt by a further U S $194 million.
At September 30, our net debt declined to $885 million U S and at current oil prices, we forecast, reaching our U S $600 million net debt target around mid next year.
As we head into the last quarter of the year, we expect to achieve the low end of our 100 to 105000 per barrel.
<unk> thousand barrel per day production guidance.
Under that production forecast non energy operating costs are trending to the top end of our $4 75 to 505 per barrel guidance range and G&A will also trend to the top end of our $1 70 to $1 90 per barrel range.
With continuing strong production and oil prices make us well positioned to execute its strategy as we head into 2020 for.
Guidance for 2024 is scheduled for release on November 27.
Thanks, and with that I'll hand, it back to Derek.
Thanks, Brian I'd now like to share a brief update on pathways Alliance Meg along with its pathway Alliance peers continue progressing pre work on the proposed foundational carbon capture and storage project will transport cotwo by a pipeline for multiple oil sands facilities to be stored safely and permanently in the cold Lake <unk>.
<unk> of Alberta.
Significant engineering force based evaluation and environmental field work is enabling more detailed discussions with indigenous groups landowners and local communities about the proposed project. Following early engagement over the last two years formal consultation with 25 indigenous groups along the proposed <unk> transportation in store.
Ridge Network corridor is underway, we remain encouraged by the work in collaboration with both the federal and Alberta governments to get the necessary agreements in place to advance this ambitious and important project.
I'd be remiss, if I did not remember an acknowledged with great sadness, Ian Bruce makes chair, who passed away tragically at as Cartage in Ontario in October <unk>.
<unk> passionate about our industry and brought a wealth of experience and wisdom to make it was a tremendous smarter of Meg and our management team and will be greatly missed by all of us at Mag and all who knew him on behalf of our board of directors management team and employees at <unk>.
And our deepest sympathies to Ian's wife, Darlene his family and many friends.
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 with.
What we have 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 teams that want to thank you for your continued support with that I'll turn the call back over to <unk> to begin the Q&A.
Thank you and ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press <unk>.
<unk> followed by the number one on your telephone keypad, you will hear from acknowledging your request and Youre questions will be pulled any order. They are received should you wish to declines in your calling process. You May press the star followed by the number to you.
If youre using a speakerphone please pick up the handset before pressing any keys one moment. Please for your first question.
Your first question comes from the line of Dennis Fong from CIBC World markets. Your line is open.
Hi, good morning, and thanks for taking my questions.
The first one is just around capital structure, you've obviously been very focused around repurchasing. The 2027 notes just wondering.
And.
Especially focusing also on the $600 million U S. Net debt floor here. How are you thinking about your exposure to term notes and kind of longer term debt.
I know.
The next kind of tranche after the 2027.
Great.
Yes, Dennis Thanks, I'm going to ask Ryan to.
Talk to that.
Hey, Dan.
You should think that we're just going to continue buying back those 2027 notes take that to zero at that point in time, we do have the 2020 Nine's outstanding U S $600 million Thats our debt target.
Those are at an attractive rate relative to where we could finance today. So we're going to keep those outstanding and.
That will provide us significant liquidity, obviously going forward without any near term maturities.
Great. Thanks, and then my follow up here is just around.
I guess inventory and sales levels.
You guys built up inventory through the quarter.
It's to some degree around.
Or what would potentially in anticipation around line fill for.
May or may not be needed at.
Yes, I mean, we did the inventory will move around Dennis and we did have a couple of hundred million build in working capital at the end of September I guess versus the end of June that was due to a couple of things. We did see oil prices rally so receivables rallied into the end of the quarter on the inventory side you can see.
<unk> movements around various factors, whether we're building our cargo for example that might ship off the coast, which was the case at the end of September whether we're buying non proprietary volumes to manage our pipeline space and.
Add some optimization activities through our.
Marketing activities et cetera, So you will see.
Movements up and down in that inventory level with respect to <unk>, we're expecting we'll be holding about 160000 barrels a day or 160000 barrels of line fill that will be long term it'll be classified as long term assets I guess in our financial statements and won't.
Be classified as inventory for working capital.
Great. Thanks, and then if you made from it and one last question here.
I understand that you obviously have a lot of experience with respect to marketing some of your production.
Within North America, but even potentially globally, how do you view that as being a potential advantage.
<unk>.
Teammates eventually comes online in terms of finding a buyer.
Buyers for your crude and obviously.
Yes.
<unk> means of accessing that market. Thanks.
Yes, Dennis it's Derrick I'll take that one.
A big part of our marketing strategy is to ensure that we don't move all of our crude into the U S Gulf coast, and overwhelm that market and create a bigger differential just instead of moving that instead of having a differential egress related differential in Edmonton. We've now got an oversupply in the U S.
So we spend a fair amount of time working to develop Asian markets, both in India and in China.
Think we have a very good idea of people that like the quality of crude that we have and this was a big driver behind.
Our tankage and dock space in the U S Gulf Coast.
As we move to.
At to Burnaby.
At this juncture, we think <unk> got basically two two markets.
The west coast of the United States, Our California market.
And.
Fundamentally China.
We don't think transportation rates are going to our net backs are going to be sufficient to access.
India, but.
Our understanding of those markets are understanding of buyers in those markets are.
Our historic ability to have shipped them samples of our product so that they can determine whether they would.
Want to get in Q2 to buy some of that is all.
Very very important not only to finding a market but.
Helping us be less reliant on U S. Gulf coast operators, a refinery operators to give us a fair price for our product.
Great appreciate that color and context I'll turn it back thanks.
Thanks Dennis.
Your next question comes from the line of Greg Pardy from RBC capital markets. Please proceed with your question.
Yeah, Hey, thanks. Good morning, Thanks for the rundown guys Derek I wanted to I wanted to come back to.
The pathway, so, let's just say in a hypothetical world.
That the incentives are inclusive of operating cost like you've got pathways got adequate incentives in place, let's just say by the end of this year.
The trunk lines in place for 2029.
What is what's the plan then for Mag I'm, just trying to think in broad strokes what are the series of steps.
That you are going to take in terms of decarbonization.
Great question Greg.
Little more forward looking.
I guess I appreciate this because we're not going to talk about when the pipeline is going to be and let's just assume that all of that has taken place.
What that means for Meg is in 2026, 2027, 2028 and 2029 in those four years, we would probably spend somewhere in the neighborhood of a net.
$50 million to $75 million of capital building, our first carbon capture facility.
At site, so that would be.
Our facility that would capture a net capture of somewhere between six three and seven three.
Mega tons, a year of carbon so what once we've got the sort of the fiscal certainty and the regulatory uncertainty, which would be associated with having that pipe in place and up and running by 2029.
We will then start to.
Push forward past our feed ad.
Type of work to disc.
Decision.
Where tap capital being spent in that timeframe of 2026 to 2029.
Okay. Thanks, because I was going to ask you about the capital for so that's super helpful.
And then maybe kind of related because it sounds like youll be doing probably going with post combustion.
Capture where does where does <unk> fit into everything or is that something that might be several years away.
I think Ian Vaping, So just for other people on the call aimed apex is a solvent process that was developed at Meg and helps us reduce our steam oil ratio significantly it replaces theme with solvent effectively so.
Importantly, if you are trying to reduce not only your steam oil ratio, but also to keep down the amount of carbon that you have to capture.
We have spent an extensive amount of time working with <unk>, we think it's at technology.
That in a new Greenfield development is something that we would look at very seriously or if we decided to move.
A significant a ways away from our central processing facility and we were going to create a brownfield facility that was connected back to our.
The central processing facility, we would look at it there but at this point in time.
There's a number of commercial aspects that we don't have in place to contemplate that the biggest one which would be really the solvent that we would need and a long term agreement and pipeline transportation agreement both for the supply and the transportation of that product.
Just to be very clear, we thought about those with cost of those out at this point in time the.
Brownfield work that we continue to do inside of the facility is much more economic.
And <unk>.
Okay terrific, thanks very much.
Thanks, Greg.
Your next question comes from the line of Menno <unk> from TD Securities. Your line is open.
Thanks, and good morning, everyone I'll start with a question on <unk>.
Conoco is a relatively recent decision to exercise its role for onto hotels working interest on.
On its surmount project right next door can you just give us a refresh on the status of.
Your answer or monetize it in the various options or scenario is longer term.
Good morning, Minto and thanks for the question.
Sure Manav.
Yes.
I would say is as good if not better than what we are currently developing a Christina Lake. The reason it hasnt been developed is because it's <unk>.
Substantially further away at one point in time, a number of years ago, we had a.
We had worked a license for that facility through.
The upper to energy regulator, we no longer we let that license go because as we thought about it it's going to be at least 10 years before we get there with the low hanging fruit that we have at Christina Lake and really I think.
The challenge for US is not to go out there and build another.
Once through steam generator type of facility that challenge will be.
Is this an opportunity for us to put solvents to work.
Warm solvents to work and to bring a different exploitation strategy.
To this reservoir so.
Nothing in the.
The medium term is going to be developed and that's primarily because we still have massive amount of running room going from.
Say 110000, all the way up to 210000, Theres, a 100000 barrels of <unk>.
Incremental capacity that we can develop at Christina Lake.
Which has got our full and undivided attention at the current time.
Thanks for that Derek and then moving on to <unk>.
Buybacks it looks like activity in the quarter was.
It's a bit light at $58 million, roughly 14% of Q3 free cash flow.
Why was that and it doesn't imply an uptick in buyback activity in Q4 to get you closer to your 50% annual target.
Hey man on the major I guess, a couple of reasons for that we already talked about working capital. We did see a build in working capital requirements in the quarter and so that meant we didn't have the cash available to actually buy back the stock when we look at stock versus the debt buybacks the stock market is actually more.
I guess, then the debt buyback markets. So we're a little bit more opportunistic on the debt side, if we see opportunities to buy different pieces. Those may be chunkier. So we may buy back a little bit more debt and we we actually buyback stock in the period, but.
Over time, we do expect that we're going to do exactly what we said we would do 50 50 debt shares as we kind of move toward our net debt target and you can depending on where oil prices go et cetera, Youll see those working capital requirements potentially reduce and cash available for both share and debt buybacks in the fourth quarter.
Perfect. Thanks, Ryan I'll turn it back.
Thanks Mel.
Your next question comes from the line of John Royall from Jpmorgan. Your line is open.
Hi, good morning, Thanks for taking my question.
So you mentioned energy Opex net of power revenue was actually negative this quarter and.
I've noticed that net number of has trended down a bit this year from an average of maybe two to $3 per barrel over the few years before that.
Is there anything structural there with the relationship between energy Opex in power revenue or.
Or is it maybe just kind of a goldilocks scenario of the relationship between gas prices and power price.
And do you expect it to normalize.
John It's Derek I'm not sure I.
Which one of the goldilocks scenarios, we should be going and it's too hot just right or too cold but.
We do have a unique situation on the go I think we've got very high power prices in the province, and very low gas prices.
Which has driven that as.
As we look forward into next year, we see those power prices are we're forecasting that theyre going to normalize down into that $90 a megawatt so I think.
You Shouldnt believe that this is a trend that is going to continue.
We're very pleased with what we've been able to achieve our receive I guess in terms of that that combination over the last couple of quarters, but.
It will.
I think revert to historic norms as we go forward here.
Got it it makes sense and then I know youll come out with.
With a formal budget later this month.
Just thinking about next year's Capex.
Hey, Mike thinking about it correctly at least Directionally, if you think about higher than 2023 levels of the ramp in the second half. After you achieve your net debt four and start to invest in the next phase of growth is that kind of directionally, the right way to be thinking about it.
I think directionally I would tweak it a little bit and say you should be thinking about it as this year with sustaining capital and.
As we've talked to you and others about what are sort of our growth project would be taking it from 110 to 125000, we think that somewhere in the neighborhood of $300 million and you should expect that a third of that Notionally would get allocated in.
In the first year.
Got it and just to be clear that would be after you've achieved in at that four so probably more second half loaded.
No I think.
And this is all dependent upon where our board lands on this but so it's subject to their approval we haven't gotten.
This cross the line with them, yet, but I think.
We are comfortable enough that we are going to achieve that $600 million debt target. So we would be planning on.
This would be a full year capital budget, which would basically be starting the the growth plans are making allowances for and doing the long lead time work on the growth program, starting as soon as budgets fruit.
Understood. Thank you.
Thank you.
Yes.
And once again, if you'd like to ask a question simply press star followed by the number one on your telephone keypad.
Your next question comes from the line of Neil Mehta from Goldman Sachs. Your line is open.
Hi, good morning. Thanks, so much for taking the time this is Nick <unk> on for Neil Mehta.
So just the first question here would be on pricing dynamic I'm curious any thoughts in terms of what you're seeing in the Gulf Coast and then also more broadly as we think into 2024.
Outlook that you can comment on the type of Ucs differential would be helpful.
Yes, good morning and.
I think.
One thing that we would say about the WCS differential is.
For some reason people are in factoring in the $4 5 million barrels a day of line fill that <unk> is going to need. So if you think if you go and you look at the differential today and it's a part of the reason that the differential has expanded are blowing out is because of increased production or increase <unk> think thats <unk>.
We're in the neighborhood of 100000 barrels.
They are incremental.
Capacity, what we're talking about in terms of line fill is taking half of that away $4 5 million barrels over the first quarter is about 50000 barrels a day.
So.
I think my own personal opinion is the.
The Q1 2024 differential is too high it's not factoring in that <unk> line fill.
And I think there's also some.
Concerns about storage.
Which I don't understand it either I mean.
Last week storage.
And the Western Canadian sedimentary basin was about 26 million barrels or somewhere in that sort of low to medium, 30%. So we've got lots of room for storage.
So I don't think we're going to see a tight storage situation I think there is going to be effectively less transfer or less.
Product moving down the line.
I said in my previous remarks.
I provided.
My predictions.
In Q3 was under $13. This year in Q2 was in that $15 range I think that those are quite achievable.
Again next year, I think they will actually be a little bit high but if I were modeling I'd be using notes, where I think it's going to get very interesting is as you model Q4 of next year, because obviously with an incremental.
<unk> X volumes I don't think youre going to see that historic run up as you've moved into the fourth quarter of.
The differentials I think it will stay quite flat through that period, so maybe one or $2 more but.
I think we're out of.
Finally out of a period of egress.
Driven lack of egress driven WCS differentials.
And I think.
We'll have a lot less volatility on that front going forward.
That context is incredibly helpful. Thank you so much.
Then not to come back to this question again, I know a lot of analysts have asked but just on pathways Annie.
Key updates we should be looking out for towards the end of the year or anything maybe early next year, we should all be keeping an eye out for.
Yeah.
Hi.
Where to start on pathways.
And fundamentally as we drive forward.
Youre going to hopefully hear something at some point over.
The next couple of months about how the federal and the provincial government or pathways are continuing to work forward I think we owe the market an update in that regard.
And.
I think youll.
Something will be coming in that regard I hope over the next month or two I can tell you that.
We've got a few hundred people working on this project at the moment inside of the company's continuing to work on the poor space continue to work on the feed engineering, continuing to try and get the pore space approvals through so.
I worry sometimes that because.
We havent hit milestones are we're not moving as fast as people think we should be or moving that they think there is nothing going on on this project I can assure you. There is a massive amount of work that is going on in terms of indigenous consultation.
Pipeline sizing looking for appropriate mills that could.
Roll this type.
So lots and lots of work going on as well as.
The important work with both the federal and the provincial government.
Trying to arrive at the appropriate fiscal terms that will make this project economics.
That's great we'll definitely be on the lookout. Thank you so much for taking the time.
Thank you.
And there are no further questions at this time I would like to turn it back to Mr. Derek Evans for closing remarks.
Thank you <unk> and thank you to everybody that joined US. This morning for our Q3 results conference call. We're excited about what we have been able to achieve and look forward to updating you on our 2024 outlook when we release our budget at the end of November.
Have a great day and thank you.
Thank you presenters, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect good day.