Q1 2025 MEG Energy Corp Earnings Call

Vincent: Good morning. My name is Vincent and I'll be your conference operator today. At this time, I would like to welcome everyone to the Meg Energy's 2025 Q1 Results Conference call.

Vincent: All lines have been placed on me to prevent any background noise.

Vincent: After this pickers remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw a question, please press the star, followed by two.

Darlene Gates: Thank you, Mrs. Darlene Gates, CEO , you may begin your conference.

Thank you, Vincent.

Speaker Change: Good morning everyone, and thank you for joining us to review Meg Energy's first quarter 2025 financial and operating results.

Speaker Change: I'm joined this morning by members of our senior management team.

Speaker Change: Ryan Kubik, our Chief Financial Officer, Tom Gear, our Senior Vice President of Oilsands, Eric Alson, our Senior Vice President of Marketing, and Lyle Yuzdepski, our Senior Vice President of Corporate Development and Legal.

Speaker Change: I'll begin the call with opening remarks and an update on our first quarter business performance, and then I'll hand it over to Ryan for a discussion of our financial results. I'll conclude with comments on the business environment and our outlook for the remainder of 2025 before taking your questions.

Speaker Change: Make had a strong start to 2025. Our strategy of sustainably growing capital returns has led to a 24% increase in funds from operations per share in the first quarter.

Speaker Change: After funding capital expenditures, strong vitamin production and pricing, we generated 223 million of free cash flow during the quarter, allowing us to deliver 185 million of capital to our shareholders.

Speaker Change: The work we've done over the past few years establishes a strong financial foundation and lays the groundwork for the next phase of production growth.

Speaker Change: Meg remains in an enviable position to deliver substantial growth in free cashflow for share, even through uncertain commodity price environments.

Speaker Change: With oil prices under pressure, we remain focused on maintaining flexibility and discipline.

Speaker Change: Our low-break even price ensures we are well positioned, and we have the ability to adjust

Speaker Change: will continue to balance capital allocation between prudent investment in our business, share buybacks and dividends to deliver long-term value to shareholders throughout the commodity price cycle.

Speaker Change: In the first quarter, Edmonton WTI to WCS Differentials tightened to $12.67 per barrel from $19.31 in the first quarter of 2024.

This represents a 34% improvement.

Speaker Change: Our Realized Bitchman Prize benefited from our strategy of diverse market access and tight differentials in all of Meg's market areas, which reflect continued strength in global heavy crude demand.

Speaker Change: Production was 103,224 barrels per day, consistent with our guidance and delivered out of steam

Speaker Change: Production increased 3% versus the prior quarter driven by the successful ramp up of our newest Welp House.

Speaker Change: Strong performance from this new pad contributed to a 5% reduction in scene-to-oil ratio compared to the prior quarter, again validating both our high-quality resource and enhanced well-designed.

Work on our Facility Expansion Project also continued in the first quarter.

Speaker Change: Engineering and procurement work are well underway and early construction activities have been kicked off in the field.

Speaker Change: The project delivers attractive internal rates of return across a range of commodity price scenarios, underscoring its robustness, even in today's volatile market conditions.

Speaker Change: It also provides us with the necessary flexibility and optionality to manage our operating and spending plans in a dynamic market environment.

Speaker Change: Looking ahead, our 2025 production, capital and operating guidance remains unchanged.

Speaker Change: We are currently focused on our second quarter turnaround, which commenced April 24th and I'm pleased to share the team have communicated is going well and remains in line with our expectations.

Speaker Change: Prior to ramp down, April must-a-day production averaged over 107,000 barrels per day, which highlights the continued performance of our latest well-pads and positions us to deliver on a strong second half of 2025.

Speaker Change: I am very proud of our team and the work they do every day to deliver our operations and project activities safely and officially.

Speaker Change: With that, I'll turn the call over to Ryan to provide more details on our financial results.

Thanks, Darlene.

Ryan: May's first quarter operating expenses, net of power revenue continue to be strong at $7.90 per barrel including non-energy operating costs of $5.84 per barrel.

Ryan: Coss, process trading costs increased as expected with the start-up of our most recent well-pad and non-energy operating costs will decline into our guidance range as production rises following our Q2 turnaround.

Ryan: Capital expenditures in the first quarter increased to $157 million from $112 million in Q1 of last year, primarily reflecting facility infrastructure costs and investments in our facility expansion project.

Ryan: In Q1, we generated $380 million of funds from operations, an increase of 15% from the first quarter of 2024.

Ryan: Discastflow provides the ability to sustain our business, while maintaining a strong balance sheet and paying a sustainable dividend and buying back shares.

Ryan: Thanks to those disciplined share buybacks, we delivered a 24% increase in funds from operations per share, as we reduce the weighted average number of shares outstanding.

Ryan: This approach shows the benefits of leveraging our operating results by returning cash to

and this quarter we continued with that strategy.

Ryan: Free fast flow after all sustaining and growth investments was $223 million and during the quarter we returned $185 million to shareholders with $159 million in buybacks and $26 million in dividends.

Ryan: Those share references equate to approximately 3% of our outstanding balance at the start of the year.

Ryan: Our commitment to shareholder returns continues, and Meg's Board of Directors has declared our next quarterly dividend of $0.10 per share for payment on July 15, 2025.

Darlene Gates: Thanks and with that I'm going to turn the call back over to Darlene for closing comments.

Thank you, Ryan.

I'll leave my remarks with some final comments.

Speaker Change: OPEC Plus production management decisions and geopolitical tensions are driving market volatility.

Charles. We've successfully navigated these cycles before.

Speaker Change: Possess the expertise to manage them effectively, and we'll maintain our discipline to focus on the variables within our control.

Importantly, global demand for reliable, affordable energy remains strong.

Speaker Change: and the long-term fundamentals for Canadian heavy oil continue to demonstrate resilience.

Speaker Change: Before we open it up for questions, I want to thank the entire team again for their hard

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

Speaker Change: Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speaker phone, please lift up, lift the hands up before pressing any

Your first question comes from Greg Pardy with RBC Capital.

Please go ahead.

Yeah, no thanks. Good morning.

Speaker Change: Darlene, I was hoping maybe we could just dig into that a little bit more. I mean, I was going to ask you, you know, how do you think about agility and prudence? And then maybe just specifically related to that. I mean, I think you have plenty of off ramps.

Speaker Change: with respect to the multi-year facility expansion, but I'm just wondering any color there and thoughts would be appreciated.

Speaker Change: Good morning, Greg. Thanks for the questions. Catch me if I miss anything that in your questions here. Let's start with your first one about agility and prudence at Mac. Very important question for us, and we're spending a lot of time, you know, ensuring people understand the plans.

Speaker Change: Take us back to the strategy when we roll the strategy out from Meg back at the business update. We communicated at that time it's designed to be flexible in a dynamic market environment. Today you don't roll out projects without stress touching them under various price environment.

Speaker Change: That is strategically positioned up to know how to handle the project in various environments.

Speaker Change: We built optionality into the capital program, and that's enabled agility in the lower price of environments and to protect our balance sheet strength.

Speaker Change: The prudent part is about we can pace the Facility Expansion Project as needed. That's prioritizing long-term value, bringing it back to that focus and that fundamental. We also will not borrow we continue to reinforce, we will not borrow to fund the Facility Expansion Project.

Speaker Change: Putting all this back right back to the analysis that we did back in November , we can fully fund this project and our dividend over the next three years at US $53 per barrel WTI and $13 bad debt.

Speaker Change: that gives us a lot of resiliency and clearly allows us to manage and navigate. Our balance, you know, how do we get here? Again, it's just the fundamentals of all the hard work over the last several years.

strong balance sheet.

Speaker Change: Steve Rift, The Current Differentials and the Forex, as you look at the Business Fundamentals, even in a $50 per barrel WTI environment, we can maintain the 2025 dividends, maintain our capital program, and execute meaningful additional share-by-back.

Thank you.

Speaker Change: So when you put that all together we feel very confident.

in our communication right now to continue forward. Now.

Speaker Change: Having said that, if we need to, I've communicated if we have to, we can adjust and I think that's where you're going with the off ramps. What are those available to us?

Speaker Change: and that's that optionality that's built into this expansion project. So if you focus on 2025, we're really in a stage of detailed engineers and

Speaker Change: and Execution right now. Mostly you're focused on a little bit of field construction with the steam generator and that starts to happen in August or 3rd quarter of this year.

Speaker Change: Okay, so your construction component really doesn't happen to the third quarter and fabrication does not really begin until the fourth quarter with the modules and on the third processing.

Speaker Change: Give us off ramps and not and pace the program based on what we're experiencing in the external market.

Speaker Change: With that, we have that ability to make those choices of whether to, you know, continue with a bird, with a steam generator first. I try to get that executed with a pacing on the third process in dreams, or pace both of them. And again, we'll manage that as we see the environment.

Speaker Change: No, that's a very thorough answer. Hopefully I only asked one question. The follow-up here was just on the opposite. The only thing that stood out in your numbers was maybe just a little higher non-energy object. I'm curious as to how much of that is.

Speaker Change: Temporary and really related to the additional well pads that are coming on. And then the unplanned maintenance you flagged in the report was that just simply a functional cold weather and that's it for me. Thanks very much.

Yes, thanks, Greg, we'll let you have this one [inaudible]

Non-energy operating costs in the first quarter as you mentioned.

Speaker Change: with really expected increase because of the new pounds. So yes, no different message than that. That will equalize those through the years we increase our production with our fixed cost structures. So we expect that to be equalized. And as I mentioned, we'll be within guidance on the objects.

Speaker Change: Cold weather was not an impact for us. It was a one-time event in February with a loader that failed.

Speaker Change: So no impact from the cold weather, the team has been again.

Speaker Change: put an intense focus on that management in the January and February period.

Speaker Change: from Learnings of Past Years, and they executed exceptionally through the cold weather period. It's a very

Speaker Change: I'll hand it over to Tom if he has anything additionally want to add in there from what I should.

Tom: Yeah, no, for sure. Thank you, Darlene. Really with the off-ex, as Darlene mentioned, it's very much expected as we bring on new pads and new wells and those fluctuate through each year.

Tom: and really exceptional response of the operation, the people through cold weather period.

Tom: that we experience. But as mentioned, the teams have been doing a lot of work around ensuring we do appropriate winterization and definitely response to knowing it will get cold stops through that period.

Thank God it. Thanks very much. Thanks.

Speaker Change: Your next question comes from John Royall with Meg Energy. Please go ahead.

Sorry, um...

Next question with Neil Mehta.

with Goldman Sachs, please go ahead.

Neil Mehta: Yeah, good morning, Darlene and team. And thanks for the summary here. They just want to follow up on

Speaker Change: from some of Greg's questions around capital allocation. And maybe we could talk about the buyback and how that feels.

Speaker Change: In the November summary, you talked about maybe 40% of your cash flow being available for buybacks, but

Speaker Change: Given the $53 WTI breaking, then obviously there's a little bit less flexibility there. So how do you think about whether you're willing to take on a little bit of debt, fund the buy back, and how that fits in terms of the priority stack,

Speaker Change: Good morning and thanks Neil for the question. I'll start with just a couple comments there and then pass it over to Ryan.

Speaker Change: You know, I'll just start with the foundation. We will not borrow, you know, our intent and our strategy does not include borrowing to buy share-by-backs during this environment. It's a good question. It's something that, again, we continue to evaluate, but again, not our strategy is not to increase our debt.

Speaker Change: I'll head it over to Ryan to go into a bit more of the detail on our strategy to give him some sound time.

Speaker Change: Yeah, I mean, fundamentally, we certainly want to, it's taken us a long time to get the balance sheet to where it is today, and we certainly want to preserve that balance sheet, keep our strong, resilient business going here, especially in this.

Speaker Change: and challenging commodity price environment. So, Darlene Hiddett, we don't intend to borrow to fund any share buybacks. We will continue to return 100% of that free cash flow.

two shareholders.

Foundation of that is a small dividend we're paying with a real emphasis on buying backstock and we do.

Speaker Change: Continue and expect even though you're seeing lower free cashflow today.

Speaker Change: You are seeing lower share prices, so we do expect to buy back a significant portion of the shares outstanding this year, even under today's lower commodity prices.

Speaker Change: and, you know, offsetting that commodity price, obviously, we're seeing a little bit weaker Canadian dollar, and we are seeing some strength in the WCS differential, which offsets the WTI impact, Neil, that maybe you're thinking about.

Again, maybe just turn.

Speaker Change: Neil, before we jump to the next question, I think just to finish that one off, even at a $50 barrel WTO environment, we still have a strong meaningful addition of share buybacks in the second half of the year 2025, even at that price firm.

Speaker Change: Okay, thanks, thanks, Darlene and Ryan and that actually the follow-up is on WCS Differentials in the last quarter we were all asking you.

Speaker Change: How are you going to navigate a blowout in the diffs? And today we're looking here at, you know, differentials that have been averaging 9 or 10 under and pad 2's just

Speaker Change: Curious on your thoughts on the paths from here on WCS and your marketing strategy to ensure that you're capturing that relative strength at least if WCS.

Speaker Change: Thanks Neil, it's Eric. With unconstrained egress we continue to see WCS differentials in the nine to fourteen dollar range.

Speaker Change: As you mentioned, we're seeing tight differentials now currently sitting in that $9 range for the May and June timeframe with the second half of the year looking very supportive at roughly $12

Speaker Change: Every sour accrued supply remains tight and global demand remains strong.

You know, with that.

Speaker Change: as we think about our markets that we serve will continue to be agile in terms of how we place barrels in the markets with the best netbacks. But really as we look across our marketing areas right now, I'd say all the differentials in those areas remain tight and very constructive.

Thanks. Thanks, too.

Thanks, Neil.

Speaker Change: Next question comes from Dennis Fong with CIBC. Please go ahead.

Dennis Fung: Hi, good morning, thanks for taking my questions. My first one is really just related to up the production operations here. Within the press release, you discussed a little bit about the the derivation of lower S-O-R reflecting kind of improved reservoir quality as well as optimized well designed. Can you talk towards kind of the evolution of. [inaudible]

Dennis Fung: I'm excusing of the well-design and how you think you're able to capture barrels more efficiently and lower SORs.

Dennis Fung: Good morning, Dennis. You know, we've talked about this, you know, consistently about the completion design of our paths and and ensuring that our steam is getting out effectively and out to the resources.

Dennis Fung: As the team has continued to optimize that design, the effectiveness of the steam has continued to improve. And so it's heating the reservoir if you put it into simple language, heating the reservoir more effectively and efficiently, and allowing increased turnaround on the storta.

Dennis Fung: of our paths so they're able to start the paths up because they've heated up the reservoir more efficiently and effectively. That allows us to get a higher peak rate when we start up the path. And then, of course, then that performance of the lower steam to oil ratio comes as a result of that.

Dennis Fung: The second component is around the resource and the development plans that the team has focused on. They're targeting...

Dennis Fung: through their delineation program using technology, using their insights and intel from their delineation programs.

to help prioritize the placement of welds.

Dennis Fung: The prioritization of paths awarded to both the resource next, and you're seeing that transition from both the southeast of the reservoir to also the northwest.

Dennis Fung: We spent time in our business update, you know, helping people understand what we're so excited about as we look forward to the next development of our paths.

Dennis Fung: The first time that we just mentioned that started up, you know, this was delayed from last year from the wildfires but started up this year. Again, just exemplifying the work that the team has been doing.

Dennis Fung: by hitting it from very different angles from the resource development through the technology, the completion and drilling design to then the production into the asset.

Dennis Fung: and when you put that all together you're seeing industry leading performance on this latest pad and we're excited again the delineation program from this year looks really promising and the future looks good.

Speaker Change: Your team discussed the potential of extending time between turnaround, especially as you implement the Christina Lake growth plan as well. Can you talk towards some of the smaller things that you're doing to optimize turnaround duration become a little bit more efficient in terms of

Speaker Change: down time as well as pace of work and maybe turn around scope as well and just how that relates back to costs and kind of again managing up time from Christine O'Lake.

Speaker Change: Thanks, Dennis, for the question. This is Tom Gear. Yeah, there's been a lot of work being done by the teams to both be more planful in these turnarounds, more preparation.

David Morgan

David Morgan: Not the best to do it in a turnaround window and how you can optimize that outside of turnaround. So I'd say there's been a key focus on

David Morgan: being able to write size these turnarounds and at the same time the work being done in this turnarounds specifically is towards that strategy we talked about in the business update which is being able to assure being extending the turnaround every four years.

David Morgan: and so those are a lot of the key pieces and then on top of all that when you talk about

What are they doing to?

David Morgan: Deal with the scope and improve within. There's use of technology and technology is everyone's getting an angle on what can we do to increase the speed and efficiency of executing those turn around through a number of technologies on inspection and any repairs that come up. So those are the three key buckets.

Thank you.

Hey!

David Morgan: Thank you, Vincent, and thank you to everybody that joined us this morning for our first quarter results conference call. We are excited about the strong start to 2025 and look forward to updating you on our operational performance and return of capital program when we release our second quarter results in July .

Take care, everyone, and have a good day.

Thank you.

David Morgan: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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