Q1 2024 MEG Energy Corp Earnings Call

Good morning, My name is Colin and I'll be your conference operator today at this time I would like to welcome everyone to the Mag energies.

Energy's once you 24 Q1 results conference call all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad, if you'd like to withdraw your question. Please press star followed by two.

Speaker Change: Thank you there are some thoroughly engaged CEO you may begin your conference.

CEO: Good morning, everyone and thank you for joining us to review Meg energy first quarter 2024 financial and operating results.

Speaker Change: With me on this call are Ryan <unk>, our Chief Financial Officer Leigh L. U S D. Our senior Vice President of legal and corporate development and Eric Olson, Our senior Vice President of marketing.

Speaker Change: 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 SEDAR and our website.

Speaker Change: I'll keep my remarks brief today, if you'd like further detail on our first quarter results. Please refer to yesterday's press release.

Speaker Change: Meg energy as a leader in sustainable innovative and responsible energy development and I'm excited and grateful to lead this organization in my new capacity as President and CEO.

Speaker Change: On behalf of the entire board and management team I want to thank Eric Evans for his contributions to the organization over the past six years.

Speaker Change: Meg has a bright future ahead and will maintain its focus on safety operational excellence and shareholder return.

Speaker Change: I'm confident that will leverage the unique strengths of our assets and the talents of our people to continue delivering long term value for shareholders.

Speaker Change: This was demonstrated in our strong first quarter safety operating marketing and financial performance. Despite record cold weather and increased drilling activity in the quarter. We achieved a total recordable injury rate is there a point in Q2 and no lost time incidents.

Speaker Change: First quarter production averaged 104000 barrels per day, which was delivered at a top tier steam to oil ratio of 237.

Speaker Change: Our 2020 for redevelopment and infill program kicked off to a strong start. We also began steaming in the first of our two well pad program, which is scheduled to start up in the second quarter and will reach peak production later this year.

Speaker Change: We are performing planned maintenance in the second quarter and expect production to average around 100000 barrels per day, but are significantly reduce turnaround scope spread more evenly throughout the year will help achieve our 2024 production guidance of 100 to 208000 barrels per day.

Speaker Change: Operating expenses net of power revenue in the first quarter averaged an industry, leading $6.37 per barrel, which included non energy operating costs of $5 18 per barrel.

Speaker Change: Low natural gas and favorable power prices continue to benefit our business with power revenues offsetting 68% of energy operating costs.

Speaker Change: Capital investments for the quarter totaled $112 million directed towards drilling activity on safety pads in our short cycle redevelopment and infill program.

Speaker Change: Engineering and design work on our growth plans is also progressing well with a final investment decision and associated ramp up in expenditures expected in the second half of the year.

Speaker Change: On the revenue side, we continue to realize strong values for our bitumen.

Speaker Change: Average first quarter bitumen realization after net transportation and storage expense was $60 per barrel, which represents a 38% increase over the same period in 2023, despite higher mainline apportionment.

Speaker Change: In the second quarter, our marketing strategy with access to the U S. Gulf Coast increased our image and realized a blended sales price after net transportation and storage expense by U S. Dollar 54 per barrel relative to Edmonton AWP index.

Speaker Change: These price improvements along with strong operational performance generated 329 million of adjusted funds flow for the quarter.

Speaker Change: After $112 million in capital expenditures make generated $217 million of free cash flow.

Speaker Change: That free cash flow facilitated the repayment of the U S 105 billion in senior notes and the repurchase of our Canadian 127 million or $4 7 million Bancshares.

Speaker Change: Our net debt at the end of the quarter with U S $687 million and we're on track to reach our U S $600 million net debt target in the third quarter.

Speaker Change: At that point, we'll transition to returning 100% of free cash flow to shareholders.

Speaker Change: In March we renewed our normal course issuer bid for another year, which facilitates that continued return of capital to our shareholders.

Speaker Change: Announced last week, the Trans Mountain pipeline expansion is approved for operation.

Speaker Change: This marks a significant milestone not just for Mac, but also for Alberta.

Speaker Change: This pipeline provides excess transportation capacity out of Canada for the first time in many years, which should narrow and reduce the volatility of our heavy oil differential.

Speaker Change: The pathways Alliance continues to advance its proposed foundational carbon capture and storage project.

Speaker Change: The alliances and discussions with the federal in Alberta provincial governments on different fiscal and policy tools for large scale projects such as our.

Speaker Change: This support will help us to derisk the investments needed to build a competitive clean economy and help me, Kansas climate goals.

Speaker Change: Regulatory applications to the Alberta energy regulator began in mid March seeking approvals for the pathways C O two transportation network and storage hub.

Speaker Change: Formal consultation and engagement with indigenous groups, along the proposed Cotr transportation corridors and storage network began in the fall of 2023, those discussions alongside meetings with communities landowners continues to take place there.

Speaker Change: The recent federal budget also signaled several important measures that could potentially help get the pathways project.

Speaker Change: Final investment decision, but more work is necessary.

Speaker Change: Lastly, I am excited to share that Bob Rooney is standing for election to <unk> Board of directors at the Corporation's annual shareholders meeting later today Mrs.

Speaker Change: Mr. Rooney is currently an executive advisor with Enbridge and has over 40 years of energy sector experience.

Speaker Change: Strategic planning capital allocation corporate finance and governance.

Speaker Change: The board and I are looking forward to officially welcoming another remarkably qualified Canadian oil and gas industry bedroom onto our team.

Speaker Change: Yeah.

Speaker Change: As I bring my remarks to a close I want to emphasize my commitment to the vision and strategic direction to our team that our team has established in recent years.

Speaker Change: With favorable price fundamentals and unprecedented egress capacity Mag is well positioned to continue delivering long term value to our shareholders.

Speaker Change: I am excited to move make forward into its next chapter I'm confident in our ability to execute the 2024 plans with her team.

Speaker Change: On behalf of Mag Board of directors and our management team.

Speaker Change: With that I'll turn the call back over to Colin to begin the Q&A.

Speaker Change: Yeah.

Colin: Thank you ladies and gentlemen, we will now begin the question and answer session. If you'd like Russia. Please press star one by one if you'd like to withdraw your question Press Star followed by two if they're using a handset. Please lift the handset before pressing any Keith.

Speaker Change: Your first question comes from Greg Pardy from RBC capital markets. Please go ahead, yes.

Greg Pardy: Yeah. Thanks, Thanks, good morning, and thanks for the thanks for the rundown.

Greg Pardy: Another solid quarter.

Speaker Change: Darlene and Ryan the questions are really around.

Greg Pardy: Return of capital. So the first one would be is it.

Greg Pardy: Possible that you could hit that 600 million dollar.

Speaker Change: Four by the end of June like could you do you think is it possible for you to achieve it in the second quarter and are you just being conservative in terms of thinking through Q.

Ryan: Greg It's Ryan.

Ryan: I guess it is possible depending on what oil price you assume FX rate et cetera. So the possibilities there to hit the net debt target of $600 million, but once again, we're going to continue to buy back. Our 2027 bonds that are outstanding that will take us a little bit further into the quarter and with that we will have U S $600 million of total debt.

Ryan: Outstanding the 2029 boxes. So we will hit it we're going to continue to buy back the bonds after that and.

Ryan: Make sure we gave ourselves some runway out to 2029.

Speaker Change: Okay no. Thanks for that and then the second question really comes back to.

Speaker Change: To dividends, but from from two perspectives I guess, one is whats the appetite amongst the management team and the board.

Speaker Change: For implementing just.

Speaker Change: Our base dividend that would be question, one and then just sort of a subset related to the buyback to the extent you don't have room under the N CIB to fulfill the 100% would you just do variables to supplement things as need be.

Speaker Change: Yeah, I mean, the base dividend that is under consideration by the board at this point in time, yet to be determined whether that that decision is made that's a board decision obviously.

Speaker Change: But it is under consideration we will continue to emphasize the NCI be to your point. So we will.

Speaker Change: Be emphasizing share buybacks and under certain scenarios you can hit the maximum 10% buyback under that program.

Speaker Change: I would say that we would at that point, probably look towards in assai be.

Speaker Change: Rather than variable dividends, we do hear from our shareholders loud and clear that.

Speaker Change: They don't believe that variable dividends are appropriately priced into the share price. So.

Speaker Change: Less likely to put a variable dividend in place more likely to look at an S. B.

Speaker Change: Understood Thanks very much.

Speaker Change: Your next question comes from Neil Mehta from Goldman.

Neil Mehta: Goldman Sachs. Neil Please go ahead.

Neil Mehta: Yeah. Good morning team would just love your perspective on where we are in terms of the egress dynamics and <unk>.

Neil Mehta: Quick update on <unk> ex timing, what you think happens to the market when <unk> comes online and I guess the follow up question is just.

Neil Mehta: Do you think Canadian oil producers grow into the incremental incremental capacity.

Neil Mehta: How do you think that plays out on the backend so any big picture thoughts there would be terrific.

Neil Mehta: Thanks, Neil as you might have picked up we've got our senior Vice President marketing here just to answer these questions today, because it's a special time, so I'm going to pass it off to Eric.

Eric: Thanks, Neil it's Eric.

Eric: Looking forward to the imminent startup of the <unk> pipeline. It is great for industry in Canada to have that tremendous asset available.

Eric: With this critical infrastructure now complete we anticipate that light heavy differentials remain narrow for years, well Canadian egress remains unconstrained.

Eric: Your question about egress, I mean, as an industry. There is a history of filling the available egress and I think that will happen again over time.

Eric: There are various estimates out there of when that could occur seems things as recent as two years, others within five or six.

Eric: Our thinking is closer to the outer end of that timeframe.

Eric: The <unk> I think you'll see additional egress from an enbridge mainline expansion and while I don't see another pipeline being built I believe there is debottlenecking of other existing pipelines that will occur.

Speaker Change: Okay. That's really helpful color and it's great to see this asset almost coming online.

Speaker Change: Follow up is just on 2025 is going to be heavier year as you have already signaled for for turnarounds and so just love your perspective as you think about some of these.

Speaker Change: Maintenance projects and growth projects over the next year or two what do you think the market should be aware of what do you think is important what do you want to accomplish.

Speaker Change: And particularly in 2025, which is the biggest biggest now.

Speaker Change: Well I'll start there has sterling.

Sterling: I would say for 2025 as you mentioned, we've got our turnaround that we've kind of a lower activity level for 2024, that's allowing us to plan better for the 2025 turnaround.

Sterling: We're really looking at optimizing the scope of that turnaround to minimize its impact.

Sterling: Team is doing a lot of really good work right now.

Sterling: Kris the scope that allows us to do a lot more better planning and scheduling and looking at the Resourcing that we need. So we're in really good shape. There are lot of good activity by the team to prepare for that so we feel we're in good shape at the same time, you would've seen us introduce in the capital program.

Sterling: Furniture's for tie in about a fifth for additional steam that is preparing for the possibility of 2025 of weather will put additional steam into place that allows us to have that Optionality and then really our focus in 2025 will be that third processing train, where we ramp up most of that.

Sterling: Checked by the end of this year. The team will have the final investment decision proposals for the board that will have a lot more certainty on that capital profile and scope and schedule and we should have that in place and be in good shape.

Speaker Change: Thanks, Tim.

Sterling: Okay.

Sterling: Okay.

Sterling: Your next question comes from Dennis <unk> from CIBC World markets. Denis. Please go ahead.

Dennis: Hi, good morning, and thanks for taking my my questions. The first one maybe just comes off the back of.

Dennis: Some of your prepared remarks, there darlene.

Dennis: You noted that there was a little bit of isolated impact.

Dennis: From facility maintenance in cold weather.

Dennis: Should we be thinking about the cadence of driving the SLR back towards the lower level is that just like well startups are or are there other kind of considerations, we should be thinking about.

Speaker Change: Yeah. Thanks, Dennis absolutely you've got that right the impact on the steam to oil ratio is really just the timing for Mag. This year, we usually have been starting up one pad a year. This year, we've got to have two rigs going and as a result of that we're just pulling on that steam and as you know when we're putting the steam in the reservoir, while we are heating up there.

Speaker Change: Reservoir, we don't get that production back initially and that drives up the scene to oil ratio a little higher for this year no other messaging in that.

Dennis: Great.

Speaker Change: And then secondarily.

Speaker Change: I know you guys don't hedge for.

Speaker Change: Realization or kind of the topline commodity price risk management.

Speaker Change: Do you look at layering in some kind of commodity risk management related to cost structure. I was just wondering how do you think about managing those costs through 'twenty four and 'twenty five just given some potential additional egress that could come out from a natural gas perspective, I'd walk, how youre thinking about condensate and <unk>.

Speaker Change: The Gulf War in environment.

Speaker Change: Yeah, I mean I'll start there Dennis it's Ryan.

Ryan: We do look to hedge some of the input costs I guess the natural gas.

Speaker Change: Input costs, the condensate to your point, we do have some positions on in 2024, but.

Speaker Change: Natural gas prices are relatively low this year.

Speaker Change: Start to tick up in the forward curve I guess into 2025 as LNG, Canada comes on I would say, we still think that there is sufficient supply out there when we look at the supply demand dynamics.

Speaker Change: We don't necessarily feel like we need to rush to get any positions on to hedge those input costs. We will obviously look at it as the market dynamic kind of moves forward, but we're comfortable staying unhedged on that position at this point in time as we move forward.

Speaker Change: On the condensate front I would say a similar thing we are buying a significant portion of our condensate out of the U S Gulf Coast.

Speaker Change: Prices, there continue to be soft relative to where they've been historically speaking and we.

Speaker Change: We don't feel we feel that with differentials the way they are et cetera, we don't need to rush and hedge those input costs.

Speaker Change: Yes.

Eric: Yeah. This is Eric.

Eric: Another thing I would add other than we will typically look at.

Eric: Nat gas condensate on a regular basis and if we do see asymmetric risk we would consider hedging, but it's not not something that we're actively working on at this point.

Speaker Change: Great. Thanks, and if you permit me one quick follow up to Neil's question just on <unk> I know you guys have a fair amount of experience marketing barrels.

Speaker Change: Down in the U S Gulf Coast, how should we be thinking about the relative size of your committed capacity on Tms versus your ability to we'll call it market either off the dock.

Speaker Change: Or how are you going to manage that exposure.

Eric: Yeah.

Eric: Thanks, Dennis it's Erik again.

Erik: You did mentioned the marketing capabilities that we do have out of the Gulf Coast, We will leverage those and how we're marketing for T. M X I'll say, we're augmenting the capabilities that we have by a partnership.

Eric: With a global operator that has extensive shipping capabilities.

Eric: That partnership into the details of our kind of first sales are commercially sensitive so I won't get into specifics on that so.

Eric: So what I would say is the partnership is working as intended.

Speaker Change: Great I appreciate the color I'll turn it back.

Speaker Change: Your next question comes from John Royall from Jpmorgan. Please go ahead.

John Royall: Hi, good morning, Thanks for taking my question.

John Royall: Can you talk about the production cadence for the rest of the year, particularly in the impact of turnarounds, albeit I know there are minor and spread out this year, but will we see a slightly lower <unk>, albeit maybe not as late as is typical.

John Royall: And how should we think about second half production given we'll have the pad addition, phasing in.

John Royall: Thanks, John at Sterling.

Speaker Change: You know as I mentioned in the discussion the second quarter will be around 100000 barrels a day. That's the result, Q2 and Q3 will have more of our maintenance activities. So those will be impacted more through that but not a major turnaround.

John Royall: Another way I would say it is if you look at the first half of 'twenty four compared to the first half of 2023.

Speaker Change: We've got a much higher production between the first half so when you average it out between 23 and 'twenty four looking stronger as you look ahead to the second half of 2024, you'll start to see the impact of that new pad being brought online and we'll be starting up the second pad in late <unk>.

Speaker Change: Patent, bringing that late so we'll get it finished strong campaign.

Speaker Change: And come out to exit rate should be quite high I expect the second half for sure about 105000 barrels per day.

Speaker Change: Okay. Thank you that's helpful and then.

Speaker Change: My next question is just on your tax status. So do you have any updated views sitting today in a somewhat improved price environment. When he makes it flipped to a full taxpayer.

Speaker Change: Hey, John.

Speaker Change: Our best guess still is right around mid 2027 time frame, we still got $4 billion of tax pools.

Speaker Change: A lot of those immediately deductible. So when we look forward kind of mid 2027 timeframe still seems reasonable to us.

Speaker Change: Thank you.

Speaker Change: There are no further questions at this time I'll turn it back to <unk> for closing remarks.

Speaker Change: Thank you Colin and thank you to everybody that joined US. This morning for our Q1 results conference call. We look forward to updating you again when we release our Q2 results in July I hope everybody has a safe and great day.

Speaker Change: Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.

Speaker Change: Okay.