MEG Energy Q3 2024 Earnings Report

MEG Energy EPS Results

• Actual EPS: C$0.62
• Consensus EPS: C$0.63
• Beat/Miss: Missed by -C$0.01
• One Year Ago EPS: N/A

MEG Energy Revenue Results

• Actual Revenue: $1.27 billion
• Expected Revenue: $1.33 billion
• Beat/Miss: Missed by -$68.89 million
• YoY Revenue Growth: N/A

MEG Energy Announcement Details

• Quarter: Q3 2024
• Date: 11/5/2024
• Time: N/A
• Conference Call Date: Wednesday, November 6, 2024
• Conference Call Time: 8:30AM ET

MEG Energy (TSE:MEG) is engaged in in situ oil sands development and production in Alberta, Canada. As of March 2021, the company reported estimated net proved and probable reserves of 2 billion barrels of oil equivalent. Net production averaged 82,000 barrels per day in 2020.

MEG Energy Q3 2024 Earnings Call Transcript

Key Takeaways

• Net debt target achieved and inaugural quarterly dividend declared, with a commitment to return 100% of free cash flow to shareholders.
• Q3 production averaged ~103,300 barrels per day at a top-tier steam-to-oil ratio of 2.36, reflecting operational reliability and cost discipline.
• Operating expenses (net of power revenues) remained industry-leading at $5.82 per barrel, aided by low natural gas prices and cogeneration power sales offsetting 62% of energy costs.
• The Trans Mountain pipeline’s first full quarter delivery drove improved market diversification, with WCS differentials narrowing to around US$12/bbl—approximately US$9 better year-over-year—and expected to stay in the US$10–15 range.
• $362 million in adjusted funds flow and $221 million free cash flow enabled repayment of 2027 notes, repurchase of 4.1 million shares, and a strengthened balance sheet for sustainable shareholder returns.

Presentation

[Operator]

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 Energy's 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. If you would like to ask a question during this time, simply press the star button followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the star button followed by the number two. Thank you. Mrs. Darlene Gates, CEO, you may now begin your conference.

[Darlene Gates, CEO at MEG Energy]

Thank you, Kelvin. Good morning, everyone, and thank you for joining us to review MEG Energy's third quarter 2024 financial and operating results. With me on this call this morning are Ryan Kubik, our Chief Financial Officer, Lyle Yuzdepski, our Senior Vice President of Legal and Corporate Development, and Erik Alson, our Senior Vice President of Marketing. I'd like to remind our listeners that this call contains forward-looking information. Please refer to the advisories in our disclosure documents filed on SEDAR+ and our website for more on these disclaimers. 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. Our team's unwavering focus on safety, operational excellence, and disciplined capital allocation has delivered another quarter of solid results.

[Darlene Gates, CEO at MEG Energy]

MEG's success comes from doing what we do best: maximizing value from our world-class Christina Lake asset while maintaining cost discipline and operational reliability. We achieved two important milestones this quarter: reaching our net debt target and announcing our inaugural quarterly dividend. Combined with our commitment to return 100% of free cash flow to shareholders, these actions demonstrate our focus on delivering enhanced shareholder returns. 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. 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. We began steaming the second of our 2024 SAGD well pads, and the pad is scheduled for startup in December.

[Darlene Gates, CEO at MEG Energy]

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. It also is reflective of the exceptional efforts and collaboration of our drilling projects, commissioning, and operations teams. 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. Low natural gas pricing and our cogeneration units continue to benefit our business, with power sales revenue offsetting 62% of the energy operating costs. Capital investments for the quarter totaled $141 million, directed towards field development activity as well as increasing investment in moderate capacity growth projects.

[Darlene Gates, CEO at MEG Energy]

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. 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. The increased egress capacity provided by TMX has contributed to a meaningful reduction in WCS volatility, with November differentials settling near $12 per barrel, representing roughly $9 per barrel improvement over the same period last year. With relatively low inventories of heavy crude in North America and reliable egress pipeline operation, we expect differentials to remain narrow, in line with our expected $10-$15 per barrel range. To date, we are pleased with TMX's performance and its fundamental improvement to Canadian heavy oil pricing.

[Darlene Gates, CEO at MEG Energy]

The project demonstrates Canada's commitment to responsible energy development, helping meet global demand while driving economic growth. Our strong operational performance generated CAD 362 million of adjusted funds flow in the quarter. After CAD 141 million in capital expenditures, MEG generated CAD 221 million of free cash flow, facilitating the repayment of our remaining 2027 notes and the repurchase of 4.1 million MEG shares, returning CAD 108 million to shareholders. Year-to-date share repurchases totaled over 11 million MEG shares, or CAD 303 million. With our remaining notes now maturing in 2029, 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 shareholders. As part of this framework, MEG's board of directors has declared our next quarterly dividend of CAD 0.10 per share for payment on January 15, 2025.

[Darlene Gates, CEO at MEG Energy]

Moving to Pathways Alliance, this project continues to advance its proposed foundational carbon capture storage project. 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. This support is needed to de-risk the investments required to build a competitive, clean economy and help meet Canada's climate goals. As I bring my remarks to a close, I want to recognize everyone on the MEG team for their continued commitment to safe, reliable, and predictable operations. 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. With strong operating performance and financial strength, MEG is well positioned to continue delivering long-term value to our shareholders.

[Darlene Gates, CEO at MEG Energy]

We look forward to sharing more details about our multi-year plan when we release our budget. On behalf of MEG's board of directors and our management team, I want to thank you for your continued support. With that, I'll turn it back over to Kelvin to begin the Q&A.

[Operator]

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 touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the following process, please press the star button followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Greg Pardy of RBC Capital Markets. Please go ahead.

[Greg Pardy, Analyst at RBC Capital Markets]

Yeah, thanks. Good morning. Thanks for the rundown, Darlene. A couple of quick ones for you today. I mean, I know you just inaugurated the dividend, but as you think about that dividend on a go-forward basis, is the idea to keep the absolute outlay roughly stable and then adjust the unit levels, or are those decisions going to kind of be taken in due course?

[Ryan Kubik, CFO at MEG Energy]

Hey, Greg, it's Ryan. 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 long-term moderate growth strategy here, we're going to 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 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.

[Greg Pardy, Analyst at RBC Capital Markets]

Okay. Okay. I think I got that one. And then secondly, Darlene, you touched 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.

[Darlene Gates, CEO at MEG Energy]

Thanks, Greg. Well, you know we've got our expert on the phone, so we'll have Erik jump in and share some of his thoughts.

[Erik Alson, SVP of Marketing at MEG Energy]

Thanks, Greg. It's Erik. Yeah, our marketing capabilities for TMX are enhanced by the offtake partnership that we have with a global operator. That partnership is working well, and it's enabling sales flexibility for us and netback enhancement. So we are seeing that come through. In terms of your question around the transportation costs, I think the slight raise that you would have noticed is really a function of the committed egress that we have. So MEG's egress capacity is 80% of our production, so that's the amount that we have access to tidewater and global pricing. And with that move and the startup of TMX, you see the pricing related to additional tolls for TMX coming in line.

[Greg Pardy, Analyst at RBC Capital Markets]

All right. Thanks very much, Erik.

[Operator]

Your next question comes from the line of Neil Mehta of Goldman Sachs. Please go ahead.

[Neil Mehta, Analyst at Goldman Sachs]

Yeah, thank you so much. I just want to hear 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. Does that change the way that you approach the next couple of years of capital allocation? 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? Just your perspective on that.

[Ryan Kubik, CFO at MEG Energy]

Hey, Neil. It's Ryan calling or Ryan talking. You know, I would say that we are confident in the strength of the business at this point in time. We've spent a lot of years reducing leverage in the business, and we're at the point where our leverage has us very confident in executing the plan. So as we look forward, yes, we're going to see volatility. We still do believe that the strategy of building this moderate capacity growth as we move forward makes sense. 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. So always mindful of volatile commodity prices and planning for kind of movements down in that commodity price.

[Ryan Kubik, CFO at MEG Energy]

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 will 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.

[Darlene Gates, CEO at MEG Energy]

Yeah, Neil, I would just add on to what Ryan has said is the strategy has been tested through multiple price environments, and so that is the strength of the program that the team's bringing forward. It also has several optionalities and ability to pace or to make decisions if we get into an environment where we need to pace it or reduce the capital spend. 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 what is an uncertain environment but be able to manage it as we go through it.

[Neil Mehta, Analyst at Goldman Sachs]

Thank you both. That's very helpful. And then we always appreciate your perspective on the big economic growth projects, 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 in-service as well.

[Darlene Gates, CEO at MEG Energy]

Thanks, Neil. This is one of my favorite questions right now because we are working very hard through this. So, to give you an update on where we're at today with front-end engineering and design on the facility expansion project is progressing as planned. It's 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. That project enables us to consider a 3%-5% production CAGR with expectations that it delivers a top decile capital efficiency. And what that means to us is targeting CAD 20,000-25,000 per flowing barrel. That's really what the team is working very diligently.

[Darlene Gates, CEO at MEG Energy]

As that defines and gets more and more certain, 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. 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. The team has been doing an exceptional job in that space, and we're progressing 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.

[Darlene Gates, CEO at MEG Energy]

That will be released November 25th with a business update on the 26th.

[Neil Mehta, Analyst at Goldman Sachs]

Thanks, Darlene. Appreciate it.

[Darlene Gates, CEO at MEG Energy]

Thanks, Neil.

[Operator]

Your next question comes from the line of Menno Hulshof of TD Securities. Please go ahead.

[Menno Hulshof, Analyst at TD Securities]

Thanks, and good morning, everyone. I'll start with a question on solvent SAGD since it's been a pretty newsy quarter with CNQ and Imperial talking up Kirby North and the Grand Rapids. Where do things currently stand for MEG on solvent-assisted? I did a quick search of the transcripts, and I think 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 get eMVAPEX back into the queue?

[Darlene Gates, CEO at MEG Energy]

Thanks, Menno. Let me maybe reset this one just 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. 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. 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.

[Darlene Gates, CEO at MEG Energy]

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 plans, 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.

[Menno Hulshof, Analyst at TD Securities]

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?

[Darlene Gates, CEO at MEG Energy]

That's correct.

[Menno Hulshof, Analyst at TD Securities]

Okay. Perfect. And then I guess the follow-up is on apportionment on the Enbridge Mainline for November. 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 coming months?

[Erik Alson, SVP of Marketing at MEG Energy]

Thanks, Menno. It's Erik. No, we weren't surprised to see the apportionment. We do expect to see low levels of apportionment from time to time. It's really an outcome of a number of factors, including nominating behavior and pipeline maintenance. 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.

[Menno Hulshof, Analyst at TD Securities]

Perfect. Thank you. I'll turn it back.

[Operator]

Thank you. Your next question comes from the line of Dennis Fong of CIBC World Markets. Please go ahead.

[Dennis Fong, Analyst at CIBC World Markets]

Hi, good morning, and thanks for taking my question. I just have one as my other question was kind of asked by another analyst. And it's a little bit of a follow-on from what Menno was asking there. So as I think about your deployment of, we'll call it non-condensable gas injection across your aggregate development, and secondarily with kind of your push into what you view as high-quality resource towards the north and northwest, can you talk to us 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 steam capacity with these upcoming projects that you're talking about or that you will talk about on November 25th and 26th?

[Darlene Gates, CEO at MEG Energy]

Sure, Menno. I'm sure the question you wanted to ask was solvent, so we'll jump to your other question now since we got that one covered. As you look ahead for MEG, 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-risk the resource as we move to the southeast and northwest. 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 from a steam-to-oil ratio improving as we move out to that resource, primarily driven by your oil saturation in that.

[Darlene Gates, CEO at MEG Energy]

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.

[Dennis Fong, Analyst at CIBC World Markets]

Great. I really appreciate the color, and I'll turn it back. Thanks.

[Operator]

Thank you. Once again, ladies and gentlemen, should you have a question, please press the star button followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised. 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, CEO at MEG Energy]

Thank you, Kelvin, and thank you to everybody that joined us this morning for our Q3 results conference call. 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. I hope everybody has a safe and great day today, and thank you again for calling in and joining us on this call.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Participants

Executives

• Erik Alson, SVP of Marketing
• Darlene Gates, CEO
• Ryan Kubik, CFO

Analysts

• Greg Pardy, Analyst at RBC Capital Markets
• Menno Hulshof, Analyst at TD Securities
• Neil Mehta, Analyst at Goldman Sachs
• Dennis Fong, Analyst at CIBC World Markets