Full Year 2024 MEG Energy Corp Earnings Call
Ludi: Good morning. My name is Ludi and I will be your conference operator today.
At this time, I would like to welcome everyone to the MEG Energies 2024 Q4 and Full Year Results conference call.
Ludi: All lines have been placed on mute to prevent any background noise.
Ludi: After the speaker's remarks, there will be a question and answer session.
Ludi: If you would like to ask a question during this time, simply press start and the number one on your telephone keypad.
Ludi: If you would like to withdraw your question, please press star followed by the number 2. Thank you. I will now turn the call over to Mrs. Darlene Gates, President and CEO. You may begin.
Darlene Gates: Thank you, Ludi. Good morning, everyone, and thank you for joining us to discuss MEG Energy's year-end 2024 financial and operating results.
Darlene Gates: With me on this call this morning are Ryan Kubik, our Chief Financial Officer, Lyle Udebski, our SVP of Legal and Corporate Development, and Eric Olson, our SVP of Marketing.
Darlene Gates: I'd like to remind our listeners that this call contains forward-looking information.
Darlene Gates: Please refer to the advisories in our disclosure documents filed on CDAR Plus and on our website for more of these disclaimers.
Darlene Gates: For full details on our year-end results, please refer to yesterday's press release.
Darlene Gates: 2024 was a significant year for MEG. We proudly celebrated our 25th anniversary and our continued maturation as a leading pure-play thermal oil producer.
Darlene Gates: We are focused on delivering increasing free cash flow per share and sustainable shareholder returns.
Darlene Gates: Thanks to our team's unwavering focus on safety, operational excellence, and disciplined capital allocation.
Darlene Gates: We were able to improve our safety performance, achieve record production,
Darlene Gates: hit our net debt target, institute a quarterly dividend and sanction our facility expansion project.
Darlene Gates: I now want to touch on some key points that speak to our strong financial and operational performance.
Darlene Gates: In 2024, we generated approximately $1.4 billion in adjusted funds flow and $837 million of free cash flow. This strong cash generation enabled us to fulfill several key commitments to our shareholders, including 1. We will continue to invest in our shareholders. 2.
Balance Sheet Strength
Darlene Gates: We reached our U.S. 600 million net debt target following through on a focused multi-year deleveraging strategy that began in 2018.
Return of Capital
Darlene Gates: We instituted a sustainable quarterly-based dividend of $0.10 per share and repurchased and cancelled 17 million shares. Over the last three years, we have returned over $1.3 billion to shareholders through share repurchases and dividends.
Production growth.
Darlene Gates: We achieved our fourth straight year of record production at just over 102,000 barrels per day delivered at a steam-to-oil ratio of 2.39, reflecting strong operational efficiency from our Christina Lake asset.
Improved bitumen realizations
Darlene Gates: We benefited from our strategy of maximizing access to tidewater to reach new international customers and improve realized bitumen prices.
Darlene Gates: Heavy oil fundamentals significantly improved through 2024 as the TMX pipeline provided unconstrained egress from the basin.
Darlene Gates: WTI to AWB differentials narrowed to approximately $16 per barrel in 2024, a $5 improvement over 2023.
Darlene Gates: In the fourth quarter specifically, the WTI to WCF discount tightened to $12.56 per barrel from $21.89 in the fourth quarter of 2023. This represented a 43% improvement.
Darlene Gates: These tighter heavy oil differentials and reduced volatility demonstrate the importance of delivering Canada's energy to global markets and its fundamental benefit to Canadian heavy oil pricing.
Darlene Gates: It also highlights why continued discussion surrounding diverse market access for Canadian oil and gas remains important.
Ryan Kubik: Now I'd like to turn the call over to Ryan for a discussion of our financial performance.
Thanks Darlene
Continued focus on cost management, again, yielded excellent results.
Ryan Kubik: 2024 operating expenses net of power revenue were top quartile at $6.32 per barrel, including non-energy operating costs of $5.39 per barrel.
Ryan Kubik: Capital investment for the year was 548 million dollars, which included the start of our multi-year production growth strategy.
Ryan Kubik: After capital expenditures, MEG generated $837 million of free cash flow, enabling us to repay our remaining 2027 notes and repurchase 17 million MEG shares, or about 6% of our 2023 year-end outstanding shares.
Ryan Kubik: In total, including $27 million of dividends, we returned $481 million to shareholders in 2024, up from $446 million in 2023.
Ryan Kubik: Our share repurchase strategy has also enhanced our per share metrics.
delivering a 5% increase in adjusted funds flow per share.
In 2025, we expect to deliver strong results.
Ryan Kubik: Production guidance is between 95 to 105,000 barrels per day, including the approximate 8,000 barrel per day impact of our second quarter turnaround.
Ryan Kubik: and capital expenditures are estimated at $635 million including $130 million associated with our facility expansion project and $70 million for the turnaround.
Ryan Kubik: With low leverage and no debt maturities until 2029, we continue our commitment to shareholder returns and MAG's Board of Directors has declared our next quarterly dividend of 10 cents per share for payment on April 15, 2025.
Darlene Gates: With that, I'm going to turn the call back to Darlene for closing comments.
Thanks, Ryan.
Darlene Gates: Before I close my remarks, I want to provide perspective on our positioning amid the current market dynamics.
Darlene Gates: We continue to work collaboratively with industry and government to emphasize the importance of integrated North American energy markets and growing Canada's access to global markets.
Darlene Gates: Looking ahead, our value proposition remains compelling and differentiated for MEG.
Darlene Gates: In 2025, at a U.S. $70 WTI, we estimate generating $1.25 billion in adjusted funds flow with $615 million available for shareholder returns.
That's enough to repurchase approximately 7% of our outstanding shares.
Darlene Gates: We have positioned MEG to thrive through various market cycles with our high quality resource base, operational excellence.
low break-even and strong balance sheet.
Darlene Gates: This foundation supports our commitment to long-term shareholder returns while providing the resilience to navigate changing market conditions.
Darlene Gates: We remain confident in our strategic direction and are excited about the next future.
Darlene Gates: In closing, I want to recognize everyone on the MIG team for their hard work in delivering on our commitments in 2020.
Darlene Gates: On behalf of MEGS Board of Directors and our management team, I want to thank our shareholders for your continued support.
Speaker Change: With that, I'll turn the call back over to Ludi and we can begin the Q&A.
Thank you.
Speaker Change: Thank you. We will now begin the question and answer session.
Speaker Change: To ask a question, you may press the star followed by the number one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press the star followed by
Speaker Change: the number two. And with that, our first question comes from the line of Greg Purdy with RBC Capital Markets. Please go ahead.
Greg Purdy: Yeah, thanks. Good morning. Thanks for the rundown, Darlene and Ryan. A couple of quick ones for me.
Speaker Change: There's just on the facility expansion, we're seeing, you know, 470 million, so up, you know, 30. Is that FX or feed or what have you that's getting lumped in there to adjust that? And then can you just really remind us of timelines for the expansion, please?
Speaker Change: Sure, Greg, I'll jump in there. The total cost of the project is $470 million. What you're probably recognizing is the number in the business update that we provided at year-end with a go-forward number of $440 million. So when you combine that with the $30 million we spent in 2024, that makes the $470 million. So just simple math there.
Speaker Change: And steam in service by year end 'twenty six as you move into 2027, that's when the the expansion part of the project the processing part comes into the facility expansion.
Speaker Change: Okay. That's great. Thanks for that and then maybe just to pivot.
Speaker Change: Hum.
Speaker Change: You referenced just diversification in where the barrels are going I'm really curious as to what youre seeing.
Speaker Change: On the dock.
Speaker Change: With <unk> in terms of appetite for trade to the U S. And then also just curious whether the pricing conditions, you're seeing globally right now would actually justify taking.
Speaker Change: Taking on some small capacity, whether that would be or somebody else and just just curious whether the Max would work at this point.
Speaker Change: Okay.
Eric Olson: Thanks for that Greg its Eric.
Speaker Change: We look at.
Speaker Change: Operations on <unk>, we're pleased with how that's been operating we continue to see smooth operations with no issues during the winter.
Speaker Change: This has been a positive.
Speaker Change: In terms of the demand for AWP, we continued to see strong global demand for heavy crude.
Speaker Change: With <unk>, we've had the opportunity to get AWP into more international customers.
Speaker Change: They're early processing experience with our crude has been great.
Speaker Change: We continue to see that strong demand.
Speaker Change: In terms of the economics around the barrels moving off of <unk>. It does change monthly depending on.
Speaker Change: The local demand issues in Asia, what's happening with margins turnaround conditions et cetera.
Speaker Change: I think where youre likely to see spot shipments moving would be.
Speaker Change: More around the time when not if.
Speaker Change: If tariffs come into effect.
Speaker Change: That's when you would see the extra incentive to move a significant amount of spot capacity for now it's largely the contracted volumes that are moving.
Speaker Change: Okay terrific. Thanks, Eric Thanks.
Speaker Change: Youre welcome.
Speaker Change: Yeah.
And your next question comes from the line of January all with J P. Morgan. Please go ahead.
January: Hi, good morning, Thanks for taking my question.
January: First question is on S. O R. I know you've talked about the SLR for your new well pads coming up quite well, but.
Speaker Change: But just looking at the overall it ticked up a bit in 'twenty four relative to 'twenty three.
Speaker Change: Can you talk about the drivers there and any puts and takes we should think about for 2025 and in store.
John: Yeah I'll jump in thanks, John.
John: Two our ratio for 2024.
John: Consistent with what we've been sharing more about the timing steaming new pads and and you don't get the production back right.
John: Right away so that drives your steam to oil ratio as you move into 2025, you'll see that starting to come down and part of what are the better resource that we've been talking about and the business update as we look to the southeast into the northwest that better resource higher oil saturation will start to drive the steam to oil ratio in a downward trend as well.
John: So again, it's really resource driven that's strong resource a asset that we have will drive the improvements in the steam to oil ratio as we look ahead.
Speaker Change: Okay. That's helpful. Thank you and then my follow up is on pathways.
Speaker Change: Can you just give us the latest on where the industry is in terms of working with the government to find a framework that works for everybody.
Speaker Change: How far do you think we are off from from that kind of framework at this point.
Speaker Change: Okay.
Speaker Change: I'll jump in again on this one.
Speaker Change: Pathways.
Speaker Change: I always bring everybody back pathways is about driving cost and carbon competitiveness, that's really where the conversations are focused on.
Speaker Change: The alliance continues to advance the foundational carbon capture and storage project. So we're looking to transport cotwo on the pipeline through multiple oil sands facilities from sequestration and then we injected into the Cold Lake region.
Speaker Change: Those conversations continue.
Speaker Change: Continue with both.
Speaker Change: Both federal and provincial and those dialogues continue.
Speaker Change: It really comes down to the progress of that is around driving that cost competitiveness is getting that to the next steps and so that's where the conversations and the focus continues.
Speaker Change: There is meetings happening as we speak right now you know that that is the focus of the team and we're still pushing quite hard to be honest.
Speaker Change: You know and again it comes back to making the oil sands cost and carbon competitive.
Speaker Change: Fundamentals don't change.
Speaker Change: And politics don't change, it's really what is havent were just needing to drive those two components in order to progress that so that's really where we're still focused.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: And your next question comes from the line of Menno <unk> with TD Securities. Please go ahead.
Speaker Change: Good morning, everyone and thanks for taking my question. My first one is a follow up to greg's on.
And I'm, just going to drill down a little bit here just on U S Gulf Coast access and more specifically your thanks.
Speaker Change: Export capability, how much was export it off the Gulf coast in the quarter and if tariffs were to take effect on Tuesday is there a scenario where the exports your exports your Gulf coast exports would be would be thank you.
Eric Olson: Thanks, Matt This is Eric I appreciate the question.
Eric Olson: I'm looking back at the quarter, our exports from the Gulf Coast were in the 10% to 20% range.
Eric Olson: As we look ahead to the potential possibility for tariffs certainly our diverse market access strategy. The assets that we have in the Gulf coast position us well to be able to.
Eric Olson: Ramp up those exports very quickly so with the tankage and the dock space. We have we definitely have the ability to move more barrels and so depending on the details behind the executive order based on what we've seen today, we believe that more than half of our sales could be non tariff.
Eric Olson: Yeah.
Speaker Change: Terrific. Thanks, Eric I appreciate that and then the second question is on hedging so the the heavy differential it's tighter than a lot of people were expecting and that $13 range last I checked.
Speaker Change: Are you seeing any opportunities to hedge that out and I understand the balance sheet doesn't need. It then that that your growth is comfortably funded through free cash but is there any temptation given the tariffs overhang.
Speaker Change: Hey, Matt, It's Ryan I'll take that one.
Ryan Kubik: You hit on it we control risk today with our strong balance sheet and we have the capability to kind of weather that volatility. When you think about hedging tariffs you you hit it we would look at hedging the WCS differential.
Ryan Kubik: That market is very illiquid and Youre limited in what you can actually put in place and how long the duration of those hedges.
Ryan Kubik: It kind of limits, what you can actually hedge so theres not a lot of appetite to get out there.
Ryan Kubik: And put a position on because it's just not that meaningful and when you consider the impact of tariffs. We actually think it may be relatively muted. We do expect that you would see a widening in the differential at a 10% tariff you might see a two to $4 per barrel widening in the WCS desk, but we're also seeing a weakening in the.
Ryan Kubik: Canadian dollar at the same time, that's going to offset that so from a high level perspective, it does reduce the free cash flow, but the impacts are relatively low.
Ryan Kubik: And you're unlikely to see us get out there and hedged the WCS diff.
Speaker Change: Okay. Thanks, Brian I'll turn it back.
Speaker Change: Thank you and your next question comes from the line of Neil Mehta with Goldman Sachs. Please go ahead.
Neil Mehta: Yeah. Thank you.
<unk>, one macro and the micro as we're going into a turnaround I believe in the second quarter Darling.
Neil Mehta: Curious on what you want to accomplish during that maintenance and how do you ensure that you get through that as effectively as possible.
Neil Mehta: Hey, good morning.
Turnaround I'll start big picture team.
Neil Mehta: Is all over this a highly organised.
Neil Mehta: Energized for this turnaround there in the final preparation phase right. So the scope is fully defined and integrated enabling that detailed scheduling and resource.
Neil Mehta: Planning remains in line with the budget. So no concerns there and it really comes back to the team is doing the general maintenance for a turnaround and it's primarily focused on.
Neil Mehta: The tenure frequencies regulatory frequencies and the tie ins for the projects right there won't be there kind of a major turnaround.
Neil Mehta: Other than that it's just your your normal turnaround activity that you have at this time of year.
Neil Mehta: Yeah.
Speaker Change: Alright. Thank you and then the MACRA is it just a follow up as you guys said that about half of your barrels we could probably be exempt from the impact of tariffs.
Speaker Change: In part because of the way you market through the Gulf Coast can you just unpack that a little bit and help us understand all the ways that you can.
Speaker Change: Work around some of these impacts to the extent they go into effect next Tuesday.
Eric Olson: Thanks, Neil it's Eric.
Eric Olson: Thinking about that 50% the drivers behind that are again the.
Eric Olson: The diverse market access that we have so the ability to move barrels through <unk>.
Eric Olson: Through the Gulf Coast.
Eric Olson: Significant volumes potentially through the Gulf coast and in May.
Eric Olson: A component around the potential treatment of Pao.
Our imported.
Eric Olson: U S source condensate is handled from a tariff perspective.
Eric Olson: Yeah.
Eric Olson: Okay.
Eric Olson: Alright, Thanks, Eric.
Eric Olson: You're welcome.
Speaker Change: And once again, if you'd like to ask a question seem to fancy star followed by the number one on your telephone keypad. Your next question comes from the line of Dennis Fong with CIBC. Please go ahead.
Dennis Fong: Hi, good morning, and thanks for taking my questions. The first one is just around the U S $600 million net that floor, obviously and we've seen a lot of volatility even discussed a little bit of the potential impacts of tariffs.
Dennis Fong: Potential weakening Canadian dollar can you just remind us as to obviously the guardrail the methodology behind the U S $600 million net that floor and if that maybe I guess, adjusted if FX materially or CAD materially weakens in the near term.
Dennis Fong: Yeah.
Dennis Fong: Thanks Dennis.
Dennis Fong: The net debt floor the strategy net debt will move up and down just depending on our cash requirements in working capital you can think of.
Dennis Fong: US maintaining U S $600 million of total debt, that's our only bond outstanding at this point in time, and we're not necessarily managing at this point in time to use $600 million net debt. So we did have a little bit of cash sitting in the bank at the end of the year that was working capital requirements, we had to pay our 2007.
Dennis Fong: Million, David and right at the end of the year, we had a debt payment that was due early in the year, we had share buyback tax that was due early in the year. So we probably held back a little bit more cash than we typically would do.
Dennis Fong: In order to pay those bills. So when you think about net debt, it's just going to rise and fall.
Dennis Fong: As our cash rises and falls and the strategy is still the same when we think about share buybacks. We will look at what cash is in the bank at the end of the period hold back what we need to make payments and run the business and then use the rest to buy back shares so net debt will fluctuate naturally over.
Dennis Fong: Time.
Dennis Fong: Great I appreciate that context.
Dennis Fong: Secondarily can you talk towards a little bit around.
Dennis Fong: Procurement supply chain management.
Dennis Fong: Kind of.
Dennis Fong: Procedures are a bitch of execution that you're putting into place that help you really driver or provide confidence around the execution of.
Dennis Fong: The facility expansion project.
Dennis Fong: The actual development of it obviously understanding that you do have.
Dennis Fong: Several pieces of equipment already on site.
Dennis Fong: Thanks, Dennis good morning.
Speaker Change: Project itself I know, there's a lot of conversations around project execution with everything going around in the background, we see low project cost and execution risk right now with the tariff rate the U S tariffs we.
Speaker Change: We have minimal exposure to the U S and the procurement in this project.
Speaker Change: A large portion of that fabrication is completed in Canada here locally in Alberta, and and we're using existing working with a number of Canadian suppliers right. So that it helps us communicate why the risk is lower for us.
Speaker Change: The project the complexity of the project is also very integrated into our existing Christina Lake facility and what that means is it's utilizing similar equipment and processes and capabilities that we've already got.
Speaker Change: We mentioned we've been spending 25 years running this facility our team's got a lot of expertise and experience.
Speaker Change: The front end engineering design phase has been complete right. So you understand your scope in your parameters and you're really just moving into that detailed engineering and that's progressing very well.
Speaker Change: Project with its lower complexity and helps us bring that expertise together.
Speaker Change: And the fact that we own many of our major vessels and once through steam generator.
Speaker Change: When you put that altogether, we're on track to order.
Speaker Change: The remaining equipment in the first half of this year, so teams really bringing in the engineering the design the execution component.
Speaker Change: A lot of it's done local.
Speaker Change: A lot of it any of the long leads that are left are really the team's got line of sight to that they've got the contracts in place and really now it's just the execution.
Speaker Change: Of that over the next six months.
Speaker Change: Great really appreciate those incremental details there Darling I'll turn it back.
Speaker Change: Thank you and I'm showing no further questions at this time I would like to turn it back to Mr. Stern engaged for closing remarks.
Speaker Change: Thank you Lindsay and thank you to everybody who joined US. This morning for our year end results conference call. If you have any additional questions. Please contact investor Relations. We look forward to speaking to you again on our first quarter call.
Speaker Change: Thank you and 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: Oh.