Q3 2024 MEG Energy Corp Earnings Call
Good morning, my name is Kelvin and I will be your conference operator today. At this time, I would like to welcome everyone to the Mag Energy 2024 Q3 results conference goal. All lines have been placed on mute to prevent any background noise. After the speakers as remarks, there will be a question and answer session.
If you would like to ask a question during this time, simply press the star button, followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the star button followed by the number two. Thank you.
Speaker Change: Mrs. Darlene Gates, CEO, give me now begin your conference.
Darlene Gates: Thank you, Calvin. Good morning everyone and thank you for joining us to review Meg Energy, third quarter 2024 financial and operating results.
Darlene Gates: with me on this call this morning, our Ryan Kubik, our chief financial officer, Lyle Depsky, our Senior Vice President of Legal and Corporate Development, and Eric Olsen, our Senior Vice President of Marketing.
Darlene Gates: I'd like to remind our listeners that this call contains forward-looking information.
Darlene Gates: Please refer to the Advisorys and our Disclosure document, Filed On Seedar, and our website for more on these disclaimers.
Darlene Gates: I'm Mark Spreeff today. If you'd like further detail on our third quarter results, please refer to yesterday's press release.
Speaker Change: Our team's unwavering focus on safety, operational excellence and disciplined capital allocation has delivered another quarter of solid results.
Speaker Change: May's success comes from doing what we do best, maximizing value from our world-class Christina Lake asset while maintaining cross-discipline and operational reliability.
We achieved two important milestones this quarter, reaching our net debt target and announcing our inaugural quarterly dividend.
Speaker Change: Combined with our commitment to return 100% of free cash flow to shareholders, these actions demonstrate our focus on delivering enhanced shareholder returns.
Speaker Change: A continued focus on strengthening our safety culture was present throughout the third quarter as our team and contractor partners delivered safe, reliable and predictable performance.
Speaker Change: The third quarter production averaged approximately 103,300 barrels per day and was delivered at a top-tier steam-to-oil ratio of 2.36.
Speaker Change: We began steaming the second of our 2024 SEGD Weld Pads, and the pad is scheduled for start-up in December.
Speaker Change: Despite a one-month delay due to the July wildfire evacuation, we progressed from completion of drilling in June to first steam injection in September, which demonstrates the shorter cycle time of our new pad design.
Speaker Change: It also is reflective of the exceptional efforts and collaboration of our drilling, projects, commissioning, and operations teams.
Speaker Change: Thank you.
Speaker Change: Operating expenses net of power revenue in the third quarter continued to be industry-leading at $5.82 per barrel, which included non-energy operating costs of $5.18 per barrel.
Speaker Change: Low natural grass pricing and our cogeneration units continue to benefit our business with power sales revenue offsetting 62% of the energy operating costs.
Speaker Change: Capital investments for the quarter totaled $141 million, directed towards field development activity, as well as increasing investment in moderate capacity growth projects.
Speaker Change: We remain focused on delivering on our 2024 commitments, and while guidance remains unchanged, production is trending to the low end of the range due to the cold weather and wildfire impacts earlier this year.
Speaker Change: Third quarter revenue reflects the first full period of TMX operations providing reliable access to global markets and delivering on its promise of improved market diversification.
Speaker Change: The increased egress capacity provided by TMX has contributed to a meaningful reduction in WCS volatility.
Speaker Change: With November differentials settling near U.S. $12 per barrel,
Speaker Change: representing roughly U.S. nine dollars per barrel improvement over the same period last year.
Speaker Change: With relatively low inventories of heavy crude in North America and reliable egress pipeline operations, we expect differentials to remain narrow, in line with our expected U.S. 10 to 15 per barrel range.
Speaker Change: To date, we are pleased with TMX's performance and its fundamental improvement to Canadian heavy oil pricing. The project demonstrates Canada's commitment to responsible energy development, helping meet global demand while driving economic growth.
Speaker Change: Our strong operational performance generated $362 million of adjusted funds flow in the quarter.
Speaker Change: MEG generated $221 million of free cash flow facilitating the repayment of our remaining 2027 notes and the repurchase of 4.1 million MEG shares, returning $108 million to shareholders.
Speaker Change: Year-to-date share repurchases totaled over 11 million meg shares or 303 million.
Speaker Change: With our remaining notes now maturing in 2029, our Strengthened Balance Sheet supports sustainable shareholder returns through the commodity cycle. The successful execution of our Balance Sheet strategy marks the beginning of an enhanced capital return framework for our shareholders.
Speaker Change: As part of this framework, MEG's Board of Directors has declared our next quarterly dividend of $0.10 per share for payment on January 15, 2025.
Speaker Change: Moving to Pathways Alliance.
Speaker Change: This project continues to advance its proposed foundational carbon capture storage project.
Speaker Change: The Alliance is working with federal and Alberta governments to obtain sufficient levels of fiscal support and the required regulatory approvals and certainty necessary to make this project a reality.
Speaker Change: This support is needed to de-risk the investments required to build a competitive, clean economy and help meet Canada's climate goals.
Speaker Change: As I bring my remarks to a close, I want to recognize everyone on the MEC team.
Speaker Change: for their continued commitment to safe, reliable, and predictable operations. This quarter our team demonstrated clear focus on our operational priorities which ensure the safety of our people, the safety of our communities, and the performance of our business.
Speaker Change: With strong operating performance and financial strength, MEG is well positioned.
Speaker Change: to continue delivering long-term value to our shareholders. We look forward to sharing more details about our multi-year plan when we release our budget. On behalf of MEC's Board of Directors and our management team, I want to thank you for your continued support.
Speaker Change: With that, I'll turn it back over to Calvin to begin the Q&A.
Calvin: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the start button followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised.
Calvin: Should you wish to decline from the polling process, please press the star button followed by the number 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question.
Speaker Change: Your first question comes from the line of Greg Pardee, RBC Capital Markets. Please go ahead.
Greg Pardee: Thanks, good morning. Thanks for the rundown, Darlene. A couple of quick ones for you today. I mean, I know you've just inaugurated the Dividend, but
Speaker Change: As you think about that dividend on a go-forward basis, is the idea to keep the absolute outlay roughly stable and then adjust the unit levels, or are those decisions going to be taken in due course?
Ryan Kubik: Hey Greg, it's Ryan.
Ryan Kubik: You know, the strategy really is to build a track record of stable and rising dividends over time. And that's going to happen naturally in two ways. The first way is as we raise production through our
Ryan Kubik: long-term moderate growth strategy here. We're gonna raise the cash generating ability of the business and we'll grow the dividend naturally through that piece. In the meantime, while we're building out that capacity, the intent is to keep
Ryan Kubik: The per share dividend amount we pay each quarter relatively stable, which means the dollar outlay I guess each quarter is going to fall as we buy back stocks But the intent would be to raise the per share dividend amount at least once per year keep the annual dollar outlay relatively stable
Speaker Change: okay okay I think I think I got that one and then secondly Darlene you touched on
Ryan Kubik: on Trans Mountain. Just curious if there's any color you can provide us with in terms of how the marketing is going. And the other thing that just stood out a little bit, again, not a modeling question per se, but was there anything enamels in your transportation and selling costs? They just looked a touch higher than we expected.
Speaker Change: Thanks, Greg. Well, you know we've got our expert on the phone, so we'll have Eric jump in and share some of his thoughts.
Speaker Change: Thanks Greg, it's Eric. Yeah, our marketing capabilities for TMX are enhanced by the offtake partnership that we have with the global operator.
Speaker Change: That partnership is working well and it's enabling sales flexibility for us and net back enhancement.
Speaker Change: So we are seeing that come through in terms of the your question around the transportation costs I think the slight raise that you would have noticed is really a function of
Speaker Change: The committed egress that we have, so MAG's egress capacity is 80% of our production. So that's the amount that we have access to tidewater and global pricing.
Speaker Change: With that move and the startup of TMX, you see the pricing related to additional pulls for TMX coming in line.
Speaker Change: All right. Thanks very much, Eric.
Eric Olsen: Thank you.
Speaker Change: Your next question comes from the line of Emil Mehta of Goldman Sachs. Please go ahead.
Emil Mehta: Yeah, thank you so much. And so just want to love your perspective on how you're thinking about the macro. Obviously, it's been very volatile with a little bit of downward pressure.
Emil Mehta: on commodity prices, and does that change the way that you approach the next couple of years of capital allocation as you balance between growth and return of capital? Does the magnitude of non-OPEC supply growth or OPEC spare capacity
Emil Mehta: make you want to focus a little bit more on cash generation versus growth. So just your perspective on that.
Speaker Change: Hey Neil, it's Ryan calling, or Ryan talking.
Speaker Change: say that we are confident in the strength of the business at this point in time we've
Speaker Change: spent a lot of years reducing leverage in the business and we're at the point where our leverage
Speaker Change: has us very confident in executing the plan. So, as we look forward, yes, we're going to see volatility.
Speaker Change: We still do believe that the strategy of building this moderate capacity growth as we move forward makes sense.
Speaker Change: Those projects are very economic at prices down well below where we are today.
Speaker Change: We can execute that strategy, and we've got the balance sheet to execute it as we go forward.
Speaker Change: always mindful of volatile commodity prices.
Speaker Change: and planning for kind of movements down in that commodity price but where we are today we have the balance sheet strength to execute and those projects are highly economic as we move forward. I will say this that we do
Speaker Change: We'll be careful about reducing capital as we start to see commodity prices decline and the intent surely is not to leverage up as we kind of move through these growth cycles here etc. and live within our cash flow.
Speaker Change: Daniel, I would just add on to what Ryan has said is the strategy has been tested through multiple price environments and so that is the strength of the program that the team is bringing forward. It also has several optionalities and ability to pace.
Speaker Change: or to make decisions if we get into an environment where we need to pace it or reduce the capital spends.
Speaker Change: The differentiator for MEG is we can make those decisions very quickly. The project team, as they're evaluating and bringing it forward, are developing that optionality into the program. And that's part of what gives us the confidence to be able to navigate.
Speaker Change: what is an uncertain environment, but be able to manage it as we go through it.
Speaker Change: Thank you both. That's very helpful.
Speaker Change: We always appreciate your perspective on the big economic growth project, so the processing train, the skim tank, and then the steam optionality. Talk about how construction is going with these economic growth projects and how we should be thinking about the timing of service as well.
Speaker Change: Thank you. Bye.
Speaker Change: Thanks Neil. This is one of my favorite questions right now because it is, we are working very hard through this, so give you an update on where we set to speed or front-end engineering and design on the facility expansion project is progressing as planned?
Speaker Change: is looking at the third processing train and the steam expansion, as you mentioned. So we're looking at evaluating the best way that we can unlock the Christina Lake emulsion and steam capacity constraints that we have today.
Speaker Change: That project enabled us.
Speaker Change: to consider a 3-5% production CAGR with expectations that it delivers a top decile capital efficiency. What that means to us is targeting a 20-25,000 per flowing barrel. That's really what the team is working very diligently.
Speaker Change: And as that defines and gets more and more certain, you know, we expect to bring that into the plan and the budget for 2025, and then as a business update, provide more of the details around that project.
Speaker Change: The construction on the skim tank that we've talked to you in the past about, that is underway. The tank walls are being put up a few weeks ago, so that has been progressing as expected. Team has been doing an exceptional job in that space.
Speaker Change: and we're progressing.
Speaker Change: in conjunction with this project is also the turnarounds, right? They go hand in hand. It's looking at how you deliver the turnaround next year with also this project scope. So all of that's progressing extremely well. Expect that to be incorporated in with clarity in the plan and the budget.
Speaker Change: Thanks, and then ill let me maybe reset this one just you know to bring it back because it is something that has been part of a very important part of banks.
Speaker Change: <unk> journey, but to provide the update where we sit down and is thinking is helpful. I think with all the discussions around solving.
Speaker Change: Youll recall that make piloted in apex between 2016 and 2021. So a lot of excellent work was done over that period to identify the strategic value of solvents for bags development plans are back quite a few years ago.
Speaker Change: The objective of that pilot was to test steam to oil ratio reductions bitumen and solvent recoveries and then the overall economic competitiveness right. That's typically when you're looking at this you do the pilots to understand it and then get the data from that to help inform your decisions as you move it forward.
Speaker Change: Well the pilot was very successful I think on the technical aspects. It delivered what we needed to understand from that area. The economics at the process were not superior to our existing depletions.
Speaker Change: And so that's really where as we continue in our strategy and continuing to evaluate it it's not that it's not successful and it's not that it may never be part of Meg development plan, but today it doesn't compete with the opportunities that we have.
Speaker Change: Yeah.
Speaker Change: Okay, and maybe just a follow up on that so it's unlikely to show up in the multiyear plan that you're probably putting out to the market at the end of November.
Speaker Change: That's correct.
Speaker Change: Okay, Perfect and then I guess the follow up is on apportionment on the Enbridge mainline for November it's I believe it's in the 2% range. So very low, but I was a bit surprised to see that there is any portion of that.
Speaker Change: So I guess the question is are you surprised what is driving it.
Speaker Change: Is there anything that youre seeing that points to a potential further uptick in the in the coming months.
Speaker Change: Yes.
Speaker Change: Thanks, Menno, it's Eric no we weren't we weren't surprised to see the unfortunate we do expect to see low levels of unfortunate from time to time.
Speaker Change: It's really an outcome of a number of factors, including nominating behavior and pipeline maintenance.
Speaker Change: So I wouldn't confuse this with the systemic apportionment that we've seen in the past and what we're seeing now doesn't materially affect market access.
Menno: Perfect. Thank you I'll turn it back.
Speaker Change: Yeah.
Speaker Change: Thank you. Your next question comes from the line of Dennis Wong CIBC World markets. Please go ahead.
Dennis Wong: Hi, good morning, and thanks for taking my question I just have one as my other question was.
Dennis Wong: Asked by another analyst.
Dennis Wong: And it's a little bit of a follow on from from what Menno was asking there so.
Dennis Wong: As I think about your deployment of we'll call it non condensable gas injection across your aggregate development and secondarily with kind of your question to what you view as high quality or high quality resource towards the north and northwest can you talk towards a little bit about how you're managing SLR potentially lower as you continue this development and what that potentially means.
Speaker Change: With respect to the expanded capacity, we're seeing capacity.
Dennis Wong: With these upcoming projects that youre talking about or that you will talk about on November 25 and 26.
Dennis Wong: Sure Minto.
Dennis Wong: I'm sure. The question you wanted to ask was solvent so well we'll jump to your other question now.
Dennis Wong: Since we got that one covered as you look ahead for Meg Meg.
Speaker Change: Next differentiator is it resource quality the steam to oil ratio as you know for the last several years, we've been progressing a delineation program that gives us more certainty and derisked the resource as we move to the southeast and northwest.
Speaker Change: That informed your information on what the quality of the resource looks like and the oil saturation is expected to improve as we move to the southeast and northwest both parts of the resource look better if not.
Speaker Change: From a steam to oil ratio are improving as we move out to the resource primarily driven by your oil saturation in that.
Speaker Change: That's part of what gives us the confidence to move forward on a moderate growth plan and the ability to grow that production is both a steam to oil ratio improvements as well as the facility expansion projects that we're evaluating.
Speaker Change: Great really appreciate the color and I'll turn it back thanks.
Speaker Change: Yeah.
Speaker Change: Thank you once again, ladies and gentlemen, do you have a question. Please press the start button followed by the number one on your Touchtone phone.
Speaker Change: Here that you hadn't been raised.
Speaker Change: There are no further questions at this time I'd now like to turn the call back over to Darlene for final closing remarks. Please go ahead.
Darlene Gates: Thank you Kevin and thank you to everybody that joined US. This morning for our Q3 results conference call.
Darlene Gates: Like to remind you that we will release our budget on November 25th and will present, a business update on November 26, and advisory will be issued shortly with that information.
Darlene Gates: I hope everybody has a safe and great day today, and thank you again for calling in and joining us on this call.
Darlene Gates: Yeah.
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.
Darlene Gates: Yeah.
Darlene Gates: Oh.
Darlene Gates: Yeah.
Darlene Gates: Okay.
Darlene Gates: [music].