Q3 2024 MEG Energy Corp Earnings Call
Kelvin: 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 MEG Energies 2024 Q3 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Kelvin: If you would like to ask a question during this time, simply press the star button followed by the number 1 on your telephone keypad. If you would like to withdraw your question, please press the star button followed by the number 2. Thank you.
Kelvin: Mrs. Darlene Gates, CEO, you may now begin your conference.
Darlene Gates: Thank you, Kelvin. Good morning, everyone, and thank you for joining us to review MEG Energy's third quarter 2024 financial and operating results.
Kelvin: with me on this call this morning are Ryan Kubik, our Chief Financial Officer, Lyle Udebski, our Senior Vice President of Legal and Corporate Development, and Eric Olson, our Senior Vice President of Marketing.
Kelvin: I'd like to remind our listeners that this call contains forward-looking information.
Kelvin: Please refer to the advisories in our disclosure document filed on CDAR and our website for more on these disclaimers.
Kelvin: I'll keep my remarks brief today. If you'd like further detail on our third quarter results, please refer to yesterday's press release.
Kelvin: Our team's unwavering focus on safety, operational excellence, and disciplined capital allocation has delivered another quarter of solid results.
Kelvin: 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.
Kelvin: We achieved two important milestones this quarter, reaching our net debt target and announcing our inaugural quarterly dividend.
Kelvin: Combined with our commitment to return 100% of free cash flow to shareholders, these actions demonstrate our focus on delivering enhanced shareholder returns.
Kelvin: 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.
Kelvin: 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.
Kelvin: We began steaming the second of our 2024 SEGD Weld Pads and the pad is scheduled for start-up in December.
Kelvin: 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.
Kelvin: It also is reflective of the exceptional efforts and collaboration of our drilling, projects, commissioning, and operations teams.
Kelvin: Thank you.
Kelvin: 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.
Kelvin: Low natural grass pricing and our cogeneration units continue to benefit our business, with power sales revenue offsetting 62% of the energy operating costs.
Kelvin: Capital investments for the quarter totaled $141 million, directed towards field development activity, as well as increasing investment in moderate capacity growth projects.
Kelvin: 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: For more information visit www.FEMA.gov
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. $9 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 US 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: After $141 million in capital expenditures,
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.
Speaker Change: 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, 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 MEG team.
Speaker Change: for their continued commitment to safe, reliable, and predictable operations.
Speaker Change: 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 star button followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star button followed by the number two.
Speaker Change: 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, you know, roughly stable, and then adjust the unit levels, or are those decisions going to kind of be taken in due course?
Greg Pardee: Thank you.
Ryan Kubik: Hey Greg, it's Ryan.
Greg Pardee: 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: a long-term moderate growth strategy here. We're going to, you know, 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
Speaker Change: 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 anomalous 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: Bye.
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. That partnership is working well and it's enabling sales flexibility for us and net back enhancement.
Ryan Kubik: 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
Ryan Kubik: 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.
Ryan Kubik: With that move and the startup of TMX, you see the pricing related to additional polls for TMX coming in line.
Speaker Change: All right. Thanks very much, Eric.
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 on commodity prices. And does that change the way that you approach the next couple of years of capital allocation? And as you balance between growth and return of capital, does the magnitude of non-OPEC supply growth or OPEC spare capacity make you want to focus a little bit more on cash generation versus growth? So just your perspective on that.
Emil Mehta: 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
Emil Mehta: spent a lot of years reducing leverage in the business and we're at the point where our leverage
Emil Mehta: has us very confident in executing the plan. So, as we look forward, yes, we're going to see volatility.
Emil Mehta: We still do believe that the strategy of building this moderate capacity growth as we move forward makes sense.
Emil Mehta: Those projects are very economic at prices down well below where we are today, so we know 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: Danielle, I would just add on to what Ryan has said is this 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. And then 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.
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 $20,000 to $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: That will be released November 25th with a business update on the 26th.
Speaker Change: Thanks, Darlene. Appreciate it.
Speaker Change: Thanks for watching.
Speaker Change: Thanks, Neil.
Speaker Change: Your next question comes from the line of Meno Hoshop of TD Securities. Please go ahead.
Meno Hoshop: Thanks and good morning everyone. I'll start with a question on solvent SAG-D since it's been a
Meno Hoshop: Pretty newsy quarter with with C&Q and Imperial talking up Kirby North in the Grand Rapids
Meno Hoshop: Where do things currently stand for MAG on solvent-assisted? I did a quick search of the transcripts and I think...
Speaker Change: Derek talked about this last year and I believe he suggested that EMVAPEX wasn't effectively competing for capital. Is that still the case and what would you need to see to to get EMVAPEX back into the queue?
Speaker Change: Thanks Meno. 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 Meg's journey but to provide the update where we sit on this thinking is helpful I think with all the discussions around solvents.
Speaker Change: You'll recall that Meg piloted EMVAPEX between 2016 and 2021, so a lot of excellent work was done over that period to identify the strategic value of solvents for Meg's development plans 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 of it, 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: While the pilot was very successful, I think on the technical aspects, it delivered what we needed to understand from that area. The economics of the process were not superior to our existing depletion plan.
Speaker Change: And so that's really where, as we continue in our strategy and continue to evaluate it, it's not that it's not successful, and it's not that it may never be part of MEG's development plan, but today it doesn't compete with the opportunities that we have.
Speaker Change: Okay and maybe just to follow up on that, so it's unlikely to show up in the multi-year plan that you're probably putting out to the market at the end of November? That's correct.
Speaker Change: Okay, perfect. And then I guess the follow-up is on
Speaker Change: 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's any apportionment. So I guess the question is, are you surprised? What is driving it? And is there anything that you're seeing that points to a potential further uptick in the in the coming months?
Speaker Change: Thanks, Mano. It's Eric. No, we weren't surprised to see the apportionment. We do expect to see low levels of apportionment from time to time.
Speaker Change: It's really an outcome of a number of factors including nominating behavior and pipeline maintenance.
Speaker Change: and 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.
Mano: Perfect. Thank you. I'll turn it back.
Speaker Change: Thank you. Your next question comes from the line of Dennis Wong of CIBC Gold Markets. Please go ahead.
Dennis Wong: Hi, good morning and thanks for taking my question. I just have one as my other question was asked by another analyst.
Dennis Wong: And it's a little bit of a follow-on from what Menno was asking there.
Speaker Change: As I think about your deployment of, we'll call it, non-condensable gas injection across your aggregate development,
Speaker Change: and secondarily with kind of your push into what you view as higher quality or high quality resource towards the North and Northwest.
Speaker Change: Can you talk towards a little bit about how you're managing SOR potentially lower as you continue this development and what that potentially means with respect to the expanded capacity or seam capacity with these upcoming projects that you're talking about or that you will talk about on November 25th and 26th?
Speaker Change: Sure, Menno. I'm sure the question you wanted to ask was solvent, so we'll jump to your other question now.
Speaker Change: since we got that one covered. As you look ahead for Meg...
Speaker Change: Meg's differentiator is its 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 de-risks the resource as we move to the southeast and northwest.
Speaker Change: That informs 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 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 the production is both a steam to oil ratio improvement as well as the facility expansion projects that we're evaluating.
Speaker Change: Great, I really appreciate the color and I'll turn it back. Thanks.
Speaker Change: Thank you. Once again, ladies and gentlemen, should you have a question, please press the star button followed by the number one on your touchtone phone. You will hear a prompt that your hand has 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, Kelvin, and thank you to everybody that joined us this morning for our Q3 results conference call.
Darlene Gates: I'd like to remind you that we will release our budget on November 25th and will present a business update on November 26th. An 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: Thank you.
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: [music]