MEGEF Q1 2018 Earnings Call
Operator: Good morning, my name is Stephanie and I will be your conference operator today. At this I would like to welcome everyone to the MEG Energy First Quarter Conference Call. [Operator Instructions] Thank you. Mr. John Rogers, you may begin your conference.
John Rogers: Great. Thanks, Stephanie and good morning, everyone and welcome to our first quarter conference call. I have in the room with me today Bill McCaffrey, our President and CEO; Jeff McCaig, Chairman of the Board of MEG Energy; Eric Toews, CFO; and Helen Kelly and myself. We're going to start out with the usual format. I'm going to give you a few of the highlights which we think are notable from the quarter. Bill is going have to few comments and then we're going to open the call for any Q&A you may have. So I think some of the areas which are notable in the quarter for us, is we did see record production volumes of 93,207 barrels. Clearly this is illustrating just how well the implementation of eMSAGP is progressing and we feel very confident. It will meet [technical difficulty]. Our annual guidance of 85,000 to 88,000 barrels per day is clearly achievable after taking into account the maintenance turnaround which we're going to have in the second quarter. We do expect and continue to expect that we will exit the year with production in 95,000 to 100,000 barrels a day range. Second point is non-energy operating cost of $4.55 and net operating cost of $5.98 per barrel continued their downward trajectory. Obviously cost management continues to be a key focus of the company and we do continue to spread more barrels over what is well our well and fixed [ph] cost of the operation. The sale of the Access pipeline and Stonefell Terminal [ph] is closed in the quarter and $1.225 billion was allocated to paying down our debt. The long-term debt decreased to $3.54 billion about 25% lower than it was, it started the year which was in the range of 4.678. Capital spending of $148 million most of which was spent on eMSAGP is progressing on-time and on budget. And we feel very comfortable with the $700 million which we've allocated for our capital spending for this year taking into account the amount of money we will actually spend in the turnaround in the second quarter. Now one area I'm going to be take a little bit of time on, but I think it's incredibly important, is to highlight the price realizations we're getting for those barrels which were selling into the Gulf Coast. Now today we're selling in the neighborhood of about one-third of our barrels there and did in the first quarter received well over US$10 per barrel versus selling into PADD II. Now that takes into account that US$10 is after taking into account the pipeline charges which are necessary to get those barrels to the Gulf Coast. So clearly this is point of our Company and you witness that in our cash flow and earnings this quarter and we're pleased with the one-third that we have today of our sales and quite excited in 2020, we will begin to move above two thirds of our barrels to the Gulf Coast. So again clearly a marketing strategy it's paying off handsomely for us. The strong cash position of $675 million and $1.4 billion undrawn line of credit. Leases with sufficient liquidity to fund both 2018 and 2019 capital programs as we sit here today in [technical difficulty]. And we're very pleased with the ability to fully fund both of those capital programs again, as we see it today and we're looking forward to the completion of that journey 213,000 barrels a day. So that's all the comments I had in terms of highlights that I wanted to pass onto you, I will turn it over to Bill to make a few comments. So Bill, if you'll take it away.
Bill McCaffrey: Thanks John. At present MEG is focused on the implementation of its Vision 20/20. To achieve our production target of 113,000 barrels a day, the company must first build finish its build out of its eMSAGP program on its Phase 2b producing assets. And just to give an update on where we are at on that, we've anticipate finishing the drilling and the tie-in of the wells in the third quarter of this year and that will be followed by a ramp up, the remaining part of the ramp up of the eMSAGP program to 100,000 barrels a day by early 2019. And then, at the same time, we're in early phase of implementing a small Brownfield expansion that will add a further 13,000 barrels a day. As John indicated, they're fully funded and they'll add to the production to get us to the completion of our 113,000 by 2020 which is part of the Vision, which I'll talk about in a minute. A real color on where we're at with the Brownfield expansion is we anticipate completing the expansion work in Q3, 2019 with ramp up to follow and the incremental production coming on in 2020. Now, you might ask why these two growth projects are so important to us. While to fund the completion of these projects we will have dropped our overall cash cost by approximately $3 a barrel. Our balance sheet metrics will have continued to improve and if recent prices hold, we'll be generating meaningful free cash flow and management and the board will be discussing the best way to deploy it. Given the low decline nature of our production base, it is a model that doesn't pay at once, but numerous times over the life of the assets. As evidenced by the first quarter results, I'm very pleased of how well we're progressing with the implementation of our vision. Simply stated MEG is firing on all cylinders at the present time. As mentioned earlier, the implementation of our eMSAGP technology continues on Phase 2b and is on schedule and well under the original budget. The Brownfield expansion is started and given the nature of the project I'm also very confident in bringing it in on time and on budget. The advancement of eMVAPEX to a full well pad is moving forward and we continue to be cautiously optimistic about the potential of this technology and how it may shape our future growth and our operations. A little extra on that area, on the Q3 of this year we anticipate completing the recycle facilities at the pad and that will allow us for the conversion of up to another seven well pairs that will pair over [ph] about nine to 12-month period as we bring it on in phases there. Still lot of goals over the - with the corporation over my tenure as CEO and from an operational point of view I must say I'm very, very proud of the team for having never missed the quarter. My final goal now is to ensure an orderly transition takes place and that the culture of operational excellence continues and with that, I'm going to turn it back to John.
John Rogers: Great, thanks Bill. And with that - wrap up our prepared comments for the conference call. Stephanie we'll turn it over to questions from the audience. I do remind you that Helen and I will be available after the call to answer any detailed questions you may have as you complete your models. So with that Stephanie, if we can open the line for questions.
Operator: [Operator Instructions] your first question comes from Phil Skolnick with Eight Capital. Please go ahead.
Phil Skolnick: Did you rail any of your volumes really all piped to the Gulf Coast?
Bill McCaffrey: We do move some barrels by rail, it's just to add flexibility to the system but we do move the majority bit by pipe. We do have an ability to more by rail, if we need to as well.
Phil Skolnick: Okay and in terms of pricing relative to - any color that you could give us on what you're experiencing there?
Bill McCaffrey: On the Gulf Coast it's extremely strong right now. There's a number of factors that are contributing to that, with Venezuela's production declining in Mexico and the Saudi's reducing their heavy components. It is extremely strong market as - don't want to give an exact price on it right now, but we're seeing very low discounts to WTI right now.
Phil Skolnick: Okay, great. That's all for me and all the best for you Bill in your retirement.
Bill McCaffrey: Thanks very much, Phil. Thanks for the support over time. Much appreciate.
Phil Skolnick: You're welcome.
Operator: Your next question comes from Greg Pardy with RBC Capital Markets. Please go ahead.
Greg Pardy: Just to carry on with Phil was mentioned Bill all the very best. And I'm sure you're going to be spending a lot more time in Sedona going forward.
Bill McCaffrey: Thank you.
Greg Pardy: Just a couple of questions from me. I guess the first one is there, you provided some great color in terms of some of the timing of the expansions. What can you say just to book the progress of eMVAPEX right now?
Bill McCaffrey: Yes, well the key right now for us is that, we have the three well pairs that have been converted. The time factor on it is that we're completing the recycle facilities right now and the [indiscernible] will be done third quarter of this year. then what we'll do is, we'll start recycling propane that comes back and as we built on that, we'll just add more wells along the way to ultimately get to as much as the full pad being converted. As I say, it's probably a nine to 12-month conversion.
Greg Pardy: Okay, great. And then secondly I guess is just in terms of shifting gears and as you touched on pricing and so on, so as the company does move into a free cash flow and just the balance sheet continue to get the lion share of free cash flow in terms of debt reduction or how should we think about that.
Bill McCaffrey: Yes I think the way I look at it, is there's really three general buckets. We could pay down more debt or grow further or return cash to shareholders and really it will be a decision, the board at the time depending on the conditions. But it is very exciting to see that there is a clear path for MEG right now to be free cash flow and to be able to fund its goal from that and does provide the option for greater debt reduction from cash flow or other alternatives and it could be handle or other alternatives, which side of the board wants to at the time.
John Rogers: If I can just add, one other piece. We do expect once we're ahead of 113,000 barrels a day prices are similar to where they're today our debt-to-EBITDA will be in the two to three range, so have to take that into context in terms of where the market is from a leverage point of view and that will be part of the decision making.
Greg Pardy: Okay, great. Yes, thanks very much.
Operator: Your next question comes from Paul Chambers with Barclays. Please go ahead.
Paul Chambers: And first Bill, the tip of the hat to you, sir for the type of company you built with your team there and best of luck in your next phase of life.
Bill McCaffrey: Thank you.
Paul Chambers: The question is on, the unit cost. You guys reported it, it looks like it was about $83.90 a barrel that's about 105% say of WTI. The last three quarters that have been running closer to 110%. I'm just kind of curios is there anything going on the condensate market or anything you can relate, say about your cost per barrel in the first quarter that might have been different say from the second half of 2017.
Bill McCaffrey: We do have some good hit a lot of forward purchases of condensate for the year in 2017, we did that for 2018. We do have good access from the Gulf Coast and that has helped us a lot, its pipeline Access in [technical difficulty] be able to acquire condensate on favorable pricing.
Paul Chambers: Okay. So going forward it would probably look more like the first quarter then say the where it was maybe in the second through fourth quarter of last year, given your comments, on a percentage of WTI amount.
Bill McCaffrey: Yes.
Paul Chambers: Okay, great. the follow-up question had to do with transport you said that I think for the, you've incurred something around - just $8 million in transport cost incremental to the new TSA agreement that you signed, that was for the 10-day period. I'm just trying to say, I know Christina Lake will be down for maintenance in the second quarter, but if we adjust that does that give us kind of quantified look at what the second half of 2018 transport would be on a per barrel basis.
Bill McCaffrey: Well we think it's probably about $80 million for the full year on that one and so you can adjust that variance.
Paul Chambers: And that's $80 million annualized from.
Bill McCaffrey: Sorry that's correct, yes. That would be an annual average per.
Paul Chambers: Okay, great. Thanks for that. That's it from me.
Operator: Your next question comes from Joe Gemino with Morningstar. Please go ahead.
Joe Gemino: How do you think about your growth projects with the potential delays in the pipeline expansion projects?
Bill McCaffrey: Well these projects are extremely economic at the present time and so we do have access to markets as we look at the - as it is mentioned we've got the capacity, take 50,000 or roughly a third for barrels down there now and by 2020 so have additional thirds or two-thirds of barrels rough capacity for two-thirds of our barrels in the Gulf Coast. So when you think of these extremely economic projects the eMSAGP and the Brownfield, they fit well.
Joe Gemino: Great and when you say you're going to have double your expansion down to the Gulf Coast, is that dependent? And like Line 3 [ph] coming through.
Bill McCaffrey: No it's a contractual thing that we had agreed to [technical difficulty] our access to the Gulf Coast so that we could align it better with our developed funds overtime, so it's been part of the planning from the beginning.
Joe Gemino: Great. Sounds good. Thank you very much.
Operator: Your next question comes from Tarek Hamid with JP Morgan. Please go ahead.
Unidentified Analyst: This is John in for Tarek. Just on the 2Q turnaround, could you provide a little on the timing and how you guys came to that 5,000 to 6,000 barrel per day impact?
Bill McCaffrey: Sure the turnaround is, the largest the company has done to-date, it's about 30 to 35-day at turnaround. It starts in next week or so here and then obviously that will running into June on that part of it. So the turnaround is focused on our Phase 2b plant which is designed past these 35,000 barrels a day, but we put upwards of 55,000, 60,000 through that plant. So when that plant is down for that time and is not down the whole time it's down in portion, so we bring, we go through and we check to see everything is good and bring the components on along the way, but that's the net effect of that 5,000 to 6,000 barrels a day on an annualized basis.
Unidentified Analyst: Okay, great that's really helpful. And also on your guys transportation expense, I noticed it was down quarter-over-quarter could you guys just give us a little better picture kind of what to expect going forward pro forma for your sale of the Access interest.
Bill McCaffrey: Can you repeat that question? And I couldn't quite hear you there.
Unidentified Analyst: No worries. I noticed your transportation expense was down sequentially quarter-over-quarter and can you just give us a little better idea of what to expect going forward pro forma for the sale of Access on transportation expense kind of per BOE?
Bill McCaffrey: In terms of Access, it's going to be an additional $80 million annualized for this year. So if you take our forecast in production on that you can back out the transportation component associated with the Access pipeline.
Unidentified Analyst: Okay, great and then last one, you mentioned earlier that you can move more via rail, if you wanted to, could you kind of - what kind of incremental capacity would you guys be able to expand up to you think?
Bill McCaffrey: Well we can certainly I don't think we've actually released the number on it, so I won't be able to be –sensitive that we do have to be careful on that, on the lines here. But I can say that, we're not limited we can move more barrels, if we so chose and it can add another, well it can add meaningful volumes more than we are requiring right now.
John Rogers: So we do feel we have special capacity by rail to make up for any potential [indiscernible] issues that may come our way through the year.
Unidentified Analyst: Okay, great. Really helpful guys. Thanks again.
Operator: [Operator Instructions] your next question comes from [indiscernible] with [indiscernible]. Please go ahead.
Unidentified Analyst: I'm just wanting to understand this very quickly little better. So John you said that right now you're selling one-third of your barrels to the US Gulf Coast and that's going primarily on the Seaway and the Flanagan South.
John Rogers: That's correct.
Unidentified Analyst: And you have capacity of 50,000 on that?
John Rogers: That's correct.
Unidentified Analyst: With an option to go up to 20,000. Okay. What about the remaining.
John Rogers: Well actually [technical difficulty]. Okay we have the capacity secured to go to 100 in 2020.
Unidentified Analyst: Okay, so one-third is going to the Gulf Coast, what about the remaining two-thirds, if I may ask?
John Rogers: We have options on rail to take more to the Gulf Coast as well. Once it's on rail, it can go anywhere and then we have PADD II as well and then we do have other markets that we focused on, that can better international as well on that.
Unidentified Analyst: When you say international, you mean you're exporting barrels out of Canada?
John Rogers: Out of the continent.
Unidentified Analyst: Okay, all right. Okay, thanks.
Operator: There are no further questions at this time.
John Rogers: Great. Thanks Stephanie and thanks everyone for your interest and listening into our first quarter conference call. Of course Helen and I will be available after the call to answer any further questions that may come to mind. Thanks again for your interest in listening in and hopefully everybody have a good day. Bye now.
Operator: Thank you. This concludes today's conference call. You may now disconnect.