MEG Energy Q2 2024 Earnings Report

MEG Energy EPS Results

• Actual EPS: C$0.86
• Consensus EPS: C$0.69
• Beat/Miss: Beat by +C$0.17
• One Year Ago EPS: N/A

MEG Energy Revenue Results

• Actual Revenue: $2.74 billion
• Expected Revenue: $1.28 billion
• Beat/Miss: Beat by +$1.45 billion
• YoY Revenue Growth: N/A

MEG Energy Announcement Details

• Quarter: Q2 2024
• Date: 7/25/2024
• Time: N/A
• Conference Call Date: Friday, July 26, 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 Q2 2024 Earnings Call Transcript

Key Takeaways

• MEG proactively evacuated non-essential staff due to nearby wildfires but has resumed returning workers to site, reporting steady production with no direct facility impact.
• The company generated US$231 million of free cash flow in Q2, repaid US$158 million of debt year-to-date, and repurchased 7 million shares, reducing net debt to US$634 million and on track to hit its US$600 million target in Q3.
• MEG’s board approved an inaugural quarterly dividend of US$0.10 per share (~1.5% annual yield) and committed to returning 100% of free cash flow to shareholders via dividends and share buybacks.
• With the Trans Mountain expansion now shipping 20,000 bbl/d of contracted capacity, Canadian heavy differentials tightened by US$0.70/bbl Q-on-Q, driving Q2 bitumen realizations to CAD 74/bbl, up 28% year-over-year.
• Q2 bitumen production rose 17% y/y to 100,500 bbl/d due to strong deep-pad performance and a steam-to-oil ratio of 2.44; operating expenses averaged CAD 6.62/bbl with capital guidance unchanged and a facility expansion FID expected later this year.

Presentation

[Operator]

Good morning. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the MEG Energy's 2024 Q2 Results conference call. All lines have been placed on mute to prevent any background noise. 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 1 on your telephone keypad. If you would like to withdraw your question, please press star followed by 2. Thank you. Ms. Darlene Gates, CEO, you may begin your conference.

[Darlene Gates, CEO at MEG Energy]

Thank you, Joelle. Good morning, everyone, and thank you for joining us to review MEG Energy's second 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. I'll keep my remarks brief today. For further detail on our second quarter results, please refer to yesterday's press release. I'd like to begin today by providing an update on our wildfire situation. Last week, we proactively evacuated non-essential personnel from the site and continued to operate our Christina Lake facility with a reduced and essential workforce.

[Darlene Gates, CEO at MEG Energy]

To date, the wildfire has not directly impacted our facility, and production remains steady. I'm pleased to share that we have started to return evacuated workers to site as of today. I want to express my appreciation for our dedicated team, for their ongoing efforts in ensuring safe and continuous operation of Christina Lake. They also exemplified collaboration with our industry partners and communities. I want to recognize Alberta Forestry and Parks for their selfless support in ensuring the safety of our people and communities. Thank you for everything that they are doing to help keep us all safe and their ongoing efforts. Moving on to business results. I'm proud of MEG's strong safety, operating, and financial performance in the second quarter of 2024, which demonstrates the team's continuous focus on operational excellence.

[Darlene Gates, CEO at MEG Energy]

These business results mean that MEG expects to reach its $600 million net debt target in the third quarter, and I'm pleased to announce that MEG's board of directors has approved an inaugural quarterly cash dividend of CAD 0.10 per share. This announcement is a culmination of a robust multi-year debt repayment and capital allocation strategy and highlights MEG's maturation as a senior Canadian oil producer. Further to our long-standing commitment, shareholder returns will rise to 100% of free cash flow, with an emphasis on continued share buybacks and a quarterly-based dividend. This dividend equates to an approximate 1.5% annual yield at MEG's current share price, a level that is positioned to grow through disciplined capital allocation. The dividend will be payable on October 15, 2024, to shareholders of record at the close of business on September 17, 2024.

[Darlene Gates, CEO at MEG Energy]

MEG recorded CAD 354 million of adjusted funds flow in the second quarter, and after funding CAD 123 million in capital expenditures, we generated CAD 231 million of free cash flow. That free cash flow facilitated the repayment of $53 million in senior notes and allowed for the repurchase of $68 million, or 2.2 million MEG shares. Year to date, we have repaid $158 million of debt and repurchased 7 million shares, totaling CAD 195 million of share repurchases. Net debt as of June 30th was $634 million. Another milestone in the second quarter was the startup of the Trans Mountain Expansion pipeline.

[Darlene Gates, CEO at MEG Energy]

MEG began shipping to our 20,000 barrel per day contracted capacity to Canada's West Coast, and our first cargo left the dock in June. This was an important milestone, which removed long-standing Western Canadian transportation constraints, which we believe will lead to narrower and less volatile Canadian heavy oil differentials, improving MEG's netbacks and profitability. This was evident in the tightening of the WCS-to-WTI differential of $5.70 per barrel in Q2 relative to the first quarter of 2024. Our second quarter average bitumen realization, after net transportation and storage expense of $74 per barrel, represents a 28% increase over the same period in 2023.

[Darlene Gates, CEO at MEG Energy]

On our operating front, bitumen production for the quarter averaged approximately 100,500 barrels per day, representing a 17% increase over the second quarter of 2023. This improved performance was driven by continued strong results from our recent SAGD pads and reduced turnaround scope. We converted the first group of wells from our newest pad to production late in the quarter, and they are ramping up in line with expectations. Our second quarter steam-to-oil ratio of 2.44 reflects planned circulation of steam to these new wells. As we move into the second half of 2024, we anticipate higher production volumes with the addition of these new wells coming online. This, coupled with the startup of a second pad late in the year, positions us for a strong exit to 2024.

[Darlene Gates, CEO at MEG Energy]

Operating expenses net of power revenue in the second quarter averaged an industry-leading CAD 6.62 per barrel. We continue to benefit from low natural gas prices and power revenue, offsetting 54% of energy operating costs during the quarter. This results in CAD 0.99 per barrel of energy operating costs, net of power revenues. Capital investments in the quarter totaled CAD 123 million, primarily directed towards drilling activity on SAGD pads and our short-cycle redevelopment and infill programs. Engineering and design work on our facility expansion plan continues to progress, with a final investment decision expected later in the year. On our 2024 capital and operating guidance, it remains unchanged. Now to a brief update on the Oil Sands Pathways Alliance.

[Darlene Gates, CEO at MEG Energy]

Regulatory applications to the Alberta Energy Regulator, seeking approvals for Pathways CO2 Transportation Network and Storage Hub, are continuing, and the front-end engineering and design on the proposed 400-kilometer CO2 transportation line is now more than 75% complete. Formal consultation and engagement with Indigenous groups, along with the proposed CO2 transportation corridor and storage network, continues. The Pathways Alliance continues to work actively with both the federal and Alberta governments on the necessary policy and co-financing frameworks required to move the project forward. Lastly, I'd like to welcome Mike McAllister to MEG's board of directors, effective July 1. Mr. McAllister brings over 40 years of energy industry experience, having held several executive and technical roles, overseeing operations, development, marketing, and corporate services. His experience and expertise will be of significant benefit to our board as we execute our strategic initiatives.

[Darlene Gates, CEO at MEG Energy]

2024 has been a milestone year for MEG as we reach the culmination of our balance sheet improvement strategy, and the TMX startup diversifies market access and offers the potential for improved netbacks on all our production. With our commitment to returning 100% of free cash flow to shareholders, introduction of a base dividend, and our transition to self-funded, moderate organic growth production, MEG has solidified its position as a leading pure-play oil investment. 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 Joelle to begin the Q&As.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press star followed by the 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 Greg Pardy with RBC. Your line is now open.

[Greg Pardy, Research Analyst at RBC Capital Markets]

Thanks. Thanks. Good morning. Thanks for the rundown, Darlene, and good move on the dividend. Couple of questions, but maybe the biggest one is I realize it's still early, but how are you thinking about just the cadence of your capital investment? You know, obviously not so much this year, but more as we get into 2025 and 2026.

[Darlene Gates, CEO at MEG Energy]

Thanks, Greg. Good morning. When we look at the 2025 and 2026, as you know, with a strong operating performance, a strong financial performance, as we look ahead now, it's gonna be focusing ourselves on moderate growth, 3%-5% per year. Our team is evaluating those opportunities that we have right now. I would call them modest debottleneck and growth. They're very capital efficient. Most of those projects are projects that we have experience with, and the team is really refining those projects of how to integrate them and deliver the most capital efficient program.

[Darlene Gates, CEO at MEG Energy]

As I look ahead at the numbers, of course, we haven't finalized any of these numbers, but I don't see any year exceeding, you know, they should range between CAD 550-CAD 650, would be sort of that capital cadence over the next several years to deliver that moderate growth program that the team is proposing.

[Greg Pardy, Research Analyst at RBC Capital Markets]

Okay. Okay, thanks for that. And I'm gonna shift gears entirely. If we roll back the clock, like, this time last year, WCS spreads were, I don't know, you know, $10 or so, $10, $11, and some of that obviously impacted by outages on wildfires earlier in the season, in 2023. Have the spreads surprised you guys a little bit as to how wide they are? And then, but more importantly, I'm interested in what you think the path might be around spreads, particularly as we get into the autumn timeframe.

[Erik Alson, SVP at MEG Energy]

Thanks, Greg. It's Erik. Looking at the differentials, I'd say Q3 differentials have widened slightly on available inventory and a number of unplanned outages. In PADD 2, PADD 3, and Mexico, we'll still see the typical widening, the seasonal widening in the winter, but our view remains unchanged, that Edmonton differentials will largely range in that -CAD 10 to -CAD 15 range.

[Greg Pardy, Research Analyst at RBC Capital Markets]

Okay, terrific. Thanks very much.

[Ryan Kubik, CFO at MEG Energy]

Welcome.

[Operator]

Your next question comes from Menno Hulshof with TD Cowen. Your line is now open.

[Menno Hulshof, Managing Director at TD Cowen]

Good morning, everyone, and thanks for taking my questions. Maybe I'll just start with one on the game plan for the base dividend, which has been set fairly conservatively. I understand this is a really volatile business, but is the plan or the hope maybe to iteratively grow the dividend? How important is that to the board?

[Ryan Kubik, CFO at MEG Energy]

Hey, Menno, it's Ryan. You are right. We did intentionally set that base dividend at the low end of the spectrum. We don't feel we're here to compete on dividend yield against, and peers or other industries, quite frankly. So the plan is to add value through a base dividend, and we know that that accrues over time as you pay that base dividend, keep it stable, and grow it over time. And so that is the plan. We are still emphasizing our commitment to deliver 100% free cash flow returns to shareholders, and that's gonna be largely concentrated on share buybacks at the moment.

[Ryan Kubik, CFO at MEG Energy]

But with the base dividend at a relatively low level, we do expect that we can grow that dividend over time as we grow production through the projects that Darlene was just mentioning, and as we buyback our shares over time. So the plan would be to, you know, grow it over time, and we have set a level that we think we can sustain through the cycle. The oil price cycle, that is.

[Menno Hulshof, Managing Director at TD Cowen]

Terrific. Thanks for that, Ryan. And then my second question is on turnarounds. My understanding is that 2024 is a light turnaround year with activity relatively evenly spread across the year. As we look into 2025 and 2026, should we assume turnarounds are going to look more like they have historically, or do you see the potential to do those more efficiently as well?

[Darlene Gates, CEO at MEG Energy]

Yeah, Neil, thanks, thanks for that question. I know a lot of people are asking about the turnaround. Technically, this should have been a major turnaround year, and the team did some exceptional work looking at our performance of our assets and, and testing and, and challenging some of those capital efficiency opportunities. With our team, they had identified that we could minimize the, the turnaround scope this year, and that's part of what, I mentioned is helping us with our production performance. Because it's not only just cost, but it also impacts production, as you know.

[Darlene Gates, CEO at MEG Energy]

As we look ahead, the continued work that the team has done to optimize the turnarounds is currently the schedule would be every three years. We do a major turnaround, and then in the for two of our facilities or two of our plants, and then on the third year, it's a lighter scope. That's kind of the sequence today. What I'm seeing the team evaluating right now is moving that frequency to every four years. That decision hasn't been taken at this time, but I suspect, based on the work that they're doing, that looks promising. So more to come by year-end. We'll roll that out by Q4, give you more insights on the work that the team has progressed, but expecting them to, either way, deliver some improvements on turnaround efficiency.

[Menno Hulshof, Managing Director at TD Cowen]

Thanks, Darlene. I'll turn it back.

[Operator]

Your next question comes from Neil Mehta with Goldman Sachs. Your line is now-

[Neil Mehta, Head of America Natural Resources Equity Research at Goldman Sachs]

Yeah, good, good morning, Darlene and team, and hope everybody stays safe from your team up there. My first question is just really on these economic growth projects. And you're in flight here on that third processing train, the skim tank, and then the steam optionality tie-in. Just can you talk about how those are developing? And as the biggest part of it, of course, is the third processing train, so if you could spend a little more time on that piece would be great.

[Darlene Gates, CEO at MEG Energy]

Sure can. This is, you know, as we look at our strategy and hitting these major milestones and introducing ourselves, moving towards 100% free cash flow, our focus continues on shareholder value and returns. As we evaluated our strategy, looking at our resource, it really starts with the delineation program over the last two years, has been identifying our resource to the southeast, but also now to the northwest, looks extremely promising. Our focus will be on capital efficient programming and self-funded. Okay, so that has been the challenge that was given to the team. As they looked at that, you know, over the last year, the team has brought production up to the full capacity of the facility, both on processing and on steam.

[Darlene Gates, CEO at MEG Energy]

As they look ahead to grow the production, moderate growth, how can we most efficiently do that? We've got a program in place that delivers programs around 20-25 thousand per flowing barrel, and that includes an integration of both installing additional processing capacity. That's our ability to increase our fluid handling. And the front-end engineering design is in progress right now and should be complete in the second half of this year. That will allow us to make a decision integrated with upgrading our steam system to allow access to both the northwest and the southeast. We bring those two programs together. Directionally, they look like they're sitting between that 20 and 25 thousand per flowing barrel.

[Darlene Gates, CEO at MEG Energy]

As they brought those two projects forward, there was also an identification for some efficient project execution strategy to optimize costs and labors as we brought those projects together, and that's why you're hearing us integrate those two. The third one you mentioned and asked about was the skim tank, and that's really about pacing your equipment delivery and how to create value over your investment period. With the turnaround, we can bring that tank in to optimize our turnaround and help with some of the scheduling and efficiency of the startup of the plant. And so the skim tank was something that the team identified, that while it's needed as part of the third processing train, we could optimize turnarounds with the addition of accelerating that into the program. And that's why that came into the 2024 capital.

[Neil Mehta, Head of America Natural Resources Equity Research at Goldman Sachs]

Okay. Thanks, Darlene. And then the follow-up is just on to Greg's question on the differential. I think some investors we speak to have been surprised. It has traded wider, despite we are in a seasonally tighter period for the demand for WCS, given refiners are running hard, and then you get into Q4, and you tend to get maintenance, and you get the blend ratios and all that stuff. So, is there something that we could be missing here? The fact that TMX went so over budget, you know, that it is bleeding into the differential, and maybe the new mid-cycle isn't 10-15, it's a little bit wider. Just wanted to push back and get your perspective on that.

[Erik Alson, SVP at MEG Energy]

Thanks for the question. This is Erik again. The near-term issues that you're seeing, again, refineries are running hard. They're not necessarily the refineries that are running heavy crudes. So I had mentioned some of the unplanned outages we've seen in PADD 2 and PADD 3, that's impacted heavy crude demand, so you're seeing that impact in the differentials. With some of the reliability issues with refineries in Mexico, what that has meant is more availability of Mexican crude in the US Gulf Coast. That's put additional pressure on availability and differentials as well. So that's what you're seeing in the near term. The longer-term dynamic, as inventories are drawn, there's a fair bit of inventory built around the startup of TMX, as well as one of the big PADD 2 refiners earlier in the year that was down for an extended period of time.

[Erik Alson, SVP at MEG Energy]

There was a lot of heavy crude inventory that was built at that time. Those inventories are drawing and have been drawing pretty heavily for the past couple of months. We'll be reaching operational minimums inventory-wise here in Q3. And again, my expectation is you'll see a little bit of the seasonal widening as you get into the winter. The nice thing is, with TMX online, the volatility that you've seen in the past are now protected with that from an unconstrained egress perspective. So as you roll into, you know, the coming year, the benefit of TMX, lower inventories, you'll see the differentials in that $10-$15 range that we've been talking about.

[Neil Mehta, Head of America Natural Resources Equity Research at Goldman Sachs]

Thanks, team. Appreciate more color.

[Darlene Gates, CEO at MEG Energy]

You're welcome.

[Operator]

Your next question comes from John Royall with JP Morgan. Your line is now-

[John Royall, Executive Director at JP Morgan]

Hi, good morning. Thanks for taking my question. So, you mentioned some modest growth through debottlenecks, obviously, in addition to the third processing train. And you gave some good color on Neil's question, but, can you talk about what the ultimate capability is of the asset and how large you think it can get to over the long term, relative to the 125 post the third train?

[Darlene Gates, CEO at MEG Energy]

Thanks, John. A great question. What comes along with this is the ability of capacity, right? The plant right now is at full capacity, and so without introducing these opportunities, it's we're not able to grow the production. So that's the first place, is very efficient. How do we create the capacity? The processing side with the steam allows us to take it from about, I would say, somewhere between 125,000-135,000 in production. That allows the team now, when you're thinking about capital efficiency, we'll pace the pads that come in to fill that capacity of the plant, and that's how we'll manage, again, if we're in a volatile environment, how we pace the growth and why we give the range 3%-5%.

[Darlene Gates, CEO at MEG Energy]

We'll manage that based on the macro environment that we're in to return the best returns to our shareholders. So about 125-135. To go beyond that, we still have the ability to continue to optimize the facility. The resource looks outstanding. The delineation program through the last two years continues to demonstrate that the northwest of our resource looks even better than some of the southeast that we've been pursuing. And so we have a long runway ahead for opportunities, and now it's really just paced growth as we move that forward. To go beyond 135, then some additional optimization will be required in the facility, and I think we can optimize our way back up to about 145-150.

[John Royall, Executive Director at JP Morgan]

Great. Thank you. And then, just to follow up on the wildfires, I think you mentioned bringing people back, following the wildfires. So, is it safe to say the near-term risk has completely come and gone? And then, has enough of the surrounding area been burned off such that, there's lower risk around the next wildfire, should there be one?

[Darlene Gates, CEO at MEG Energy]

So, you know, this is, you know, what you count on MEG is, is our operations team out at the site, you know, and the collaboration that they have done with Alberta Forestry and Parks. We have installed over the years, through a lot of work, is fire breaks, is what I call them. To be frank, the fire was all around one of our disposal wells. The breaks worked extremely effective. The team managed it, very well, and so they're able to demonstrate that the mitigations that they put in place are effective. I will never tell you that we're out of the woods. I think we're gonna see the fires here for a while.... but I'm confident, as you can see, I wouldn't bring the team back if we weren't confident in the safety of our, of our people.

[Darlene Gates, CEO at MEG Energy]

Several of the communities, a couple of the communities have also been mobilized back to the communities. We are seeing the progress that Alberta Forestry and Parks is making. I expect that we will continue to monitor these throughout the summer because of lightning strikes and those kind of things that are just present in our world that we're in today.

[John Royall, Executive Director at JP Morgan]

Thank you.

[Operator]

Your next question comes from Dennis Fong with CIBC. Your line-

[Dennis Fong, Equity Research Analyst at CIBC]

Hi, good morning, and thanks for taking my questions. The first one is a bit of a follow on to John Royall's question. As you march through these debottlenecking operations, it sounds like oil processing capacity after this third processing train isn't as much going to be the limitation of the facility and rather steam gen. So as you step into what you just highlighted as maybe a higher quality reservoir towards the northwest, driving down that SOR should then potentially be able to increase production given your existing steam capacity or the expanded steam capacity.

[Dennis Fong, Equity Research Analyst at CIBC]

Is that a way to potentially optimize the field and kind of pull the most out of your CPF without actually having to install additional steam capacity after kind of these sets of projects have been completed to, we'll call it, outperform that 135 number that you just stated?

[Darlene Gates, CEO at MEG Energy]

Yeah. Sorry, Dennis, it was a little broken up, but I'll, if I don't get your answer correct, just shoot me back another question. So I think what you're asking is, can we optimize further? So, yeah, absolutely. Your steam is what you're using to deploy out your best resource. If you have higher saturation, better resource, then your steam is more effective. And so if we have the ability in the northwest, looks like it's better resource, the steam will have lower steam-to-oil ratios, and therefore, you don't need to bring on as additional steam to increase your production.

[Dennis Fong, Equity Research Analyst at CIBC]

Great. And then I guess the pseudo follow-up to that would be just around oil processing capacity. Once this third processing train is complete, what do you think the facility itself could potentially do? Obviously, understanding that there's a steam constraint that may limit the actual total production level, through from the field.

[Darlene Gates, CEO at MEG Energy]

Yeah, Dennis, that's the work that the team is doing right now. As we do the engineering work and, and the optimization of these projects, the team is looking at, those optimizations of what the processing capability, can do. We expect that, with the existing design, as they've laid it out, gets us to that 125-135, and we'll require some optimization work to go above the 135 as it sits today. But again, the team is doing that work, as we speak, and we'll probably continue to provide updates as we get that refined in.

[Dennis Fong, Equity Research Analyst at CIBC]

Great. Great. And then my second question, just on the marketing side of things, and really appreciate all the color and context that you've provided already. Just as TMX throughput stabilizes, towards kind of the normal operating levels, how has maybe the ability to gain access to certain markets, both through the West Coast and the US Gulf Coast for your marketing operations, maybe changed or evolved as you've been able to kind of test the markets and gain realizations in either of those two sales points? And how might that shift going into the future, especially given the current dynamics on heavy oil?

[Erik Alson, SVP at MEG Energy]

Well, thanks for the question. The, this is Erik. The access to tidewater is, has been great. With TMX coming into service, we're, we're pleased to see how well that new infrastructure has been operating. There were questions about that initially, but, Trans Mountain has performed extremely well. Between the assets that we have with TMX, the access to the Gulf Coast and the assets that we have there, the international reach is, has been great. We continue to access new international customers and continue to grow the sales portfolio. My expectation is we'll continue to see significant value from the international market.

[Dennis Fong, Equity Research Analyst at CIBC]

Great. Thanks. Appreciate the color. I'll turn it back.

[Ryan Kubik, CFO at MEG Energy]

Thank you.

[Operator]

Your next question comes from Mike Werner with Stifel. Your line is now open.

[Mike Werner, Analyst at Stifel]

Hi, just wanted to say congrats, congratulations to the team on a standout first quarter. My question is, as you transition to 100% free cash flow to shareholders in Q3, do you foresee down the line, Q4 2024, Q1 2025, the necessity to do a significant issuer bid to take up some share buybacks, or do you, do you see that just continuing on through an NCIB? Thanks very much.

[Ryan Kubik, CFO at MEG Energy]

Thanks for the question. You know, I guess we will continue to use the NCIB. That's the most effective way to buy back shares. And, but there is a limit on the NCIB program, so your question really revolves mostly around what oil price we're gonna see and how much revenue we generate as a result of that. So we will continue to pay the base dividend, you know, subject to board approval, obviously, but depending on conditions at the time. That will use up some of the free cash flow that we're generating. We'll emphasize the NCIB program. That is capped at 10% of our shares. So in a good world, we buy back 10% of our shares, and we have excess cash left over.

[Ryan Kubik, CFO at MEG Energy]

At that point in time, you would have to consider to return 100% of free cash flow, you would have to consider an SIB program, which is a little bit more opportunistic. You largely would. Those are larger bids, and you would build cash in advance of those SIB kind of programs. But we have seen peers use those programs, and it would be something we would consider, if necessary. But first, you use up your NCIB.

[Mike Werner, Analyst at Stifel]

Great. Thank you.

[Operator]

Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Your next question comes from Patrick O'Rourke with ATB Capital Markets. Your line is now open.

[Patrick O'Rourke, Managing Director at ATB Capital Markets]

Oh, hey, guys. Thanks for the update, and congratulations on the inaugural dividend there. I just maybe wanted to ask sort of a bit of a follow-up on Dennis's question, maybe a little bit of nuance here.

[Patrick O'Rourke, Managing Director at ATB Capital Markets]

But given you have some pretty significant experience, marketing in the Gulf, and now you're marketing, you know, on the West Coast, I'm kind of curious what the, from a pricing dynamics perspective, the demand for those barrels, once you get them to the end of TMX, looks like from a discounting to WTI perspective, and how you've seen sort of the refinery complex, particularly in PADD 5, be able to sort of absorb what's a bit of a different and maybe slightly more nuanced crude slate coming down to them than they may have seen before, and you know, how they're reacting to that.

[Erik Alson, SVP at MEG Energy]

Thanks for the question. This is Erik. As we look at the sales from Trans Mountain, some of the early netbacks, as we think about where the barrels are landing, we've got, of the committed capacity that's moving, probably half of the barrels are moving into the US West Coast, the other half moving into Eastern Asia, largely China. What we've seen from a dynamics perspective is the heavy high TANs are largely going to Asia at this point, with light crudes and low TAN mostly pointed to the US West Coast. One of the opportunities that's out there in front of us is for the PADD 5, the West Coast refiners, to build more familiarity with processing heavy high TAN.

[Erik Alson, SVP at MEG Energy]

We know those kind of early runs are taking place with the West Coast refiners, and my expectation is we'll see more of a demand pull for heavy high TANs into the West Coast as well. So we're very encouraged by what we see to date and continue to see the opportunity for upside as our product moves into the West Coast.

[Patrick O'Rourke, Managing Director at ATB Capital Markets]

Okay. And then, just, with respect to the buyback here, you know, when I look at the way you've done it, sort of on a monthly or on a quarterly basis, there is some lumpiness to it that, you know, sort of, you know, call it is, is in line with some of the free cash flow profiles. Just wondering that, you know, as you hit the CAD 600 million, you got a ton of flexibility on the balance sheet. Is there any desire to move to something that's sort of ratable on an annualized basis and remove some of the lumpiness to the way that you guys buy back shares in the market here?

[Ryan Kubik, CFO at MEG Energy]

You know, on the buy back, we are very programmatic about how we do it. I think you'll continue to see us do that. The movement and the amount that gets bought back is really driven by the free cash flow that we're generating, oil prices, volumes, et cetera, and our needs for cash, you know, to pay bills, et cetera. And so it is very programmatic. We'll continue to just look at what cash is sitting in the bank account at the end of the month. We'll hold back what we need to run the business, and then the rest goes to buying back stock and paying our dividend. And so that's the approach. We do just try to hit the volume weighted average price as we buy back and be programmatic rather than opportunistic in those buybacks.

[Ryan Kubik, CFO at MEG Energy]

You'll continue to see that approach going forward.

[Patrick O'Rourke, Managing Director at ATB Capital Markets]

Okay, thanks.

[Operator]

Your next question comes from John Royall with JP Morgan. Your line is now open.

[John Royall, Executive Director at JP Morgan]

Hi, thanks for coming back to me. I just had a very quick housekeeping follow-up for Ryan. I think you have about CAD 100 million remaining on the 2027 bonds. Is the intention to get this down to zero before you flip to 100% returns of capital?

[Ryan Kubik, CFO at MEG Energy]

Hey, John. Yeah, good question. That is exactly the intent. We'll, we'll hit our net debt target in Q3, probably mid-Q3, and then further to that, we'll continue to buy back those 2027 bonds and give ourselves a nice liquidity runway out to 2029. That would be our next bond maturity. So take out that full CAD 100 million of 2027s. We expect that's gonna occur in Q3 as well, and then we'll dial up to the 100% free cash flow returns.

[John Royall, Executive Director at JP Morgan]

Thank you very much.

[Operator]

There are no further questions at this time. I will now turn the call over to Darlene Gates for closing remarks.

[Darlene Gates, CEO at MEG Energy]

Thank you, Joelle, and thank you to everybody that joined us this morning for our Q2 results conference call. We look forward to updating you again when we release our Q2 results in November. I hope everyone has a great day.

[Operator]

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

Participants

Executives

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

Analysts

• Dennis Fong, Equity Research Analyst at CIBC
• Greg Pardy, Research Analyst at RBC Capital Markets
• John Royall, Executive Director at JP Morgan
• Menno Hulshof, Managing Director at TD Cowen
• Mike Werner, Analyst at Stifel
• Neil Mehta, Head of America Natural Resources Equity Research at Goldman Sachs
• Patrick O'Rourke, Managing Director at ATB Capital Markets