Q1 2025 MEG Energy Corp Earnings Call

Smile Guide

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

Vincent: After the speaker's 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. This is Darlene Gates, CEO . You may begin your conference.

Thank you Vincent.

Darlene Gates: Good morning everyone, and thank you for joining us to review MEG Energy's first quarter 2025 financial and operating results.

Darlene Gates: I'm joined this morning by members of our senior management team, Ryan Kubik, our chief financial officer, Tom Gear, our senior vice president of Oilsands, Erik Alson, our senior vice president of marketing, and Lyle Yuzdepski, our senior vice president of corporate development and

Darlene Gates: 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.

Darlene Gates: I'll conclude with comments on the business environment and our outlook for the remainder of 2025 before taking your questions.

Darlene Gates: Make how to 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.

Darlene Gates: After funding capital expenditures, strong-bitchment 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.

Darlene Gates: 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.

Darlene Gates: MEG remains in an enviable position to deliver substantial growth in free cashflow per share, even through uncertain commodity price environments.

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

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

Darlene Gates: 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.

Darlene Gates: 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.

Darlene Gates: Our Realized Bitchman Price 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.

Darlene Gates: Production was 103,224 barrels per day, consistent with our guidance and delivered out of steam to oil ratio at 2.28.

Darlene Gates: Production increased 3% versus the prior quarter driven by the successful ramp up of our newest

Darlene Gates: 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.

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

Darlene Gates: 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.

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

Darlene Gates: Looking ahead, our 2025 production, capital, and operating guidance remains unchanged.

Darlene Gates: 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 their expectations.

Darlene Gates: 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.

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

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

Thanks, Darlene.

Speaker Change: Make'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.

Speaker Change: Processed 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.

Speaker Change: 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.

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

Speaker Change: Discast flow provides the ability to sustain our business while maintaining a strong balance energy and paying a sustainable dividend and buying back shares.

Speaker Change: 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.

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

and this quarter we continued with that strategy.

Speaker Change: Free pass 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.

Speaker Change: Those share repurchases equate to approximately 3% of our outstanding balance at the start of the year.

Speaker Change: 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.

Darlene Gates: OPEC Plus production management decisions and geoflitical tensions are driving market volatility, creating uncertainty and exerting downward pressure on oil prices.

We've successfully navigated these cycles before.

Darlene Gates: Possess the expertise to manage them effectively and will maintain our discipline to focus on the variables within our control.

Darlene Gates: Our premium asset quality, naturally low decline rates, industry leading operational efficiency, deliver a competitive breakeven price. It also strategically positions us to withstand commodity price fluctuations.

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

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

Darlene Gates: Should market conditions necessitate, we will adjust spending as needed, prioritizing long-term value while ensuring operational and financial resilience.

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

Darlene Gates: I also want to express my gratitude to our shareholders for your continued support and confidence in our ability to navigate the current present environment and create long-term value.

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

Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question? Please press the star followed by the one on your touch on 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 followed by the two.

Darlene Gates: If you are using a speaker phone, please lift up, lift the hands up before pressing any keys.

I'm sorry. I'm sorry. I'm sorry. I'm sorry.

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 MEG. Very important question for us, and we're spending a lot of time 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 testing them under various price

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 the environment 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 the 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

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 Balanced Sheets, Steve Rift

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

Thank you.

Speaker Change: So when you put that all together, we feel very confident and 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 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: So that allows us a flexibility to continue to monitor the markets, 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 some pacing on the third-course of the tree, or pace both of them. And again, we'll manage that as we see the environment.

Okay, now that's a very thorough answer.

Speaker Change: And hopefully I only asked one question. The follow-up here was just on the opposite. So, I mean, the only thing that stood out in your numbers was maybe just a little higher non-energy up. 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.

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

Thanks so much for joining us

Speaker Change: Cold weather was not an impact for us. It was a one-time event in February with a voter that failed, 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 from learning to past years, and they executed exceptionally through the cold weather period, so very proud of them.

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

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

Tom Geer: 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, cold snaps through that period.

Thank God it. Thanks very much. Thanks.

Thank you. Thank you.

Thank you.

Your next question comes from John Royall with MEG Energy. Please go ahead.

Sorry.

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. Just wanted to follow up on some of Greg's questions around capital allocation and maybe we could talk about the by-back and how that feels.

in the prioritization. [inaudible]

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

Neil Mehta: 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 and how that fits in terms of the priority stack?

especially given the discounted valuation that your stock trades have.

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

Neil Mehta: 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 buybacks 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. It's a good question. It's a good question. It's a good question.

Neil Mehta: 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.

Darlene Gates, Ryan Kubik

Two shareholders Rolder's.

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 cash flow 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.

and maybe just a

Speaker Change: Neil, before we jump to the next question, I think just to finish that one off, even out of $50 per barrel WTM environment, we still have a strong, meaningful addition of share by-backs in the second half of 2025, even at that price bar.

Thank you.

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

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 at WCS.

Speaker Change: Thanks Neil, it's Eric. With unconstrained egress, we continue to see WCS differentials in the 9-14 dollar range.

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

Eric Olson: Every sour accrued supply remains tight and global demand remains strong.

You know, with that.

Eric Olson: 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.

Eric Olson: 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, team.

Thanks, Neil.

Thank you for watching. Bye.

Speaker Change: Next question comes from Dennis Fong with CIPC, please go ahead.

Dennis Fong: Hi, good morning and thanks for taking my questions. My first one is really just related to up production operations here. Within the press release, you've discussed a little bit about 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

Speaker Change: including of the well-design and how you think you're able to capture barrels more efficiently in lower S.O.R.S.

Dennis Fong: Here, good morning, Dennis. You know, we've talked about this, you know, consistently about the completion design of our pads.

Dennis Fong: and ensuring that our steam is getting out effectively and out to the resources.

as the team has continued to optimize that design.

The effectiveness of the steam has continued to improve.

Dennis Fong: and so peating the reservoir, if you put it into simple language, heating the reservoir more effectively and efficiently and allowing increased, you know, turnaround on the storta.

Dennis Fong: of our path 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 Fong: The second component is around the resource and the development plans that the team has focused on. They're targeting through their delineation program, using technology, using their insights and intel from their delineation programs.

Dennis Fong: to help prioritize the placement of wells, the prioritization of paths awarded to both the resource next, and you're seeing that transition from both the southeast of the reservoir to the north west.

Dennis Fong: 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 Fong: 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.

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

Dennis Fong: 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.

Great. Thanks. Appreciate that color.

Speaker Change: Turning my focus towards turnarounds. I know in the business update, you...

Dennis Fong: Your team discussed the potential of extending time between the turnarounds, especially as you implement the Kristina Lake growth plan as well. Can you talk towards some of the smaller things that you're doing to optimize turnar generation become a little bit more efficient in terms of. [inaudible]

Dennis Fong: by downtime 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.

Thanks, Dennis, for the question. This is Tom Gear.

Dennis Fong: Yeah, there's been a lot of work being done by the teams to both be more planful in these turnarons, more preparation.

Dennis Fong: is key in these things to be able to then optimize the scope to risk manage what gets done each turn around. I think that's been the single largest focus on the asset right now is

Dennis Fong: 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...

Dennis Fong: 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.

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

What are, what are they doing to?

Dennis Fong: 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!

Dennis Fong: 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.

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

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