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MEG Energy Corp
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Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the MEG Energy first quarter conference call. [Operator Instructions] Mr. John Rogers, you may begin your conference.
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 to have a 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. Now clearly this is illustrating just how well the implementation of the eMSAGP is progressing, and we feel very confident it will meet it's [ target we have set] for us. Our annual guidance of 85,000 to 88,000 barrels per day is clearly achievable after taking into account the maintenance turnaround, which we are going to have in the second quarter. We do expect and continue to expect that we will exit the year with production in the 95,000 to 100,000 barrels a day range. Second point is nonenergy 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 -- are well known fixed costs of the operation. The sale of the Access Pipeline and Stonefell to Wolf was closed in the quarter and $1.225 billion was allocated to paying down our debt. That long-term debt decreased to $3.54 billion, about 25% lower than it was at the start of the year, which was in the range of $4.678 billion. 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 have allocated for our capital spending for this year, taking into account the amount of money we will actually spend on 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 are getting for those barrels which we're selling into the Gulf Coast. Now today, we're selling in the neighborhood of about 1/3 of our barrels there and did in the first quarter received well over USD 10 per barrel versus selling into PADD 2. Now that takes into account, that USD 10 is after taking into account the pipeline charges, which are necessary to get those barrels to the Gulf Coast. So clearly, this is the strength of our company and we witnessed that in our cash flow and earnings this quarter. And we're pleased with the 1/3 that we have today of our sales. And quite excited in 2020, we will begin to move about 2/3 of our barrels to the Gulf Coast. So again, clearly, our marketing strategy is paying off handsomely for us. The strong cash position of $675 million and $1.4 billion undrawn line of credit leaves us with sufficient liquidity to fund both 2018 and 2019 capital programs as we sit here today in [indiscernible]. 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 to 113,000 barrels a day. So that's all the comments I had in terms of highlights that I wanted to pass on to. I'm going to turn it over to Bill to make a few comments. So Bill, if you'll take it away?
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 of where we are at on that, we've finished -- we 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 the process 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 will 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 little color on where we are at with the brownfield expansion is we anticipate completing the expansion work in Q3 of 2019, with ramp-up to follow and the incremental production coming on in 2020. Now you might ask why these 2 growth projects are so important to us. While upon 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. Now given the low decline nature of our production base, it is a model that doesn't just payout 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 has 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 out -- shape our future growth and 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 7 well pairs. That will occur over about a 9 to 12 month period as we bring it on in phases there. I set a lot of goals over the -- for 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 a 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.
Great. Thanks, Bill. And with that, that wraps up our prepared comments for the conference call. Stephanie, we'll turn it over to questions with 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 lines for questions?
[Operator Instructions] Your first question comes from Phil Skolnick with Eight Capital.
Just one quick question. Did you rail any of your volumes? Are they all piped to the Gulf Coast?
We do move some barrels by rail just to add flexibility to the system. But we do move the majority of it by pipe. We do have an ability to move more by rail if we need to as well?
Okay. And in terms of pricing relative to Maya, any color that you could give us on what you're experiencing there?
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 and Mexico and the Saudi's reducing their heavy components, it is extremely strong market. I don't want to give an exact price on it right now. But we are seeing very low discounts to WTI right now.
Your next question comes from Greg Pardy with RBC Capital Markets.
Just to carry on what Phil has mentioned. Bill, all the very best and I'm sure you will be spending a lot more time in [ Sedona ] going forward.
Thank you.
Just a couple of questions for me. I guess the first one is there -- you provided some color -- great color in terms of some of the timing of the expansions. What can you say just about the progress of eMVAPEX right now?
Yes. Well, the key right now for us is that we have the 3 well pairs that have been converted. The time factor on it is that we're completing the recycle facilities right now. And as I say, those 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 build on that, we'll just add more wells along the way to ultimately get to as much as the full pad being converted. And as I say, it's probably a 9 to 12 month conversion.
Okay, great. Okay. And then secondly, I guess, 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 position and would the -- does the balance sheet continue to get the lion's share of the free cash flow in terms of debt reduction or how should we think about that?
Yes, I think the way we look at it is there's really 3 general buckets. We could pay down debt, more debt or grow further or return the shares -- return cash to shareholders. And really, it will be a decision of the board at the time depending on the conditions. But it is very exciting to see that there's a clear path for MEG right now to be free cash flow and to be able to fund its growth from that. And that does provide the option for greater debt reduction from cash flow or other alternatives. And it could be and/or other alternatives, whichever the board wants to do at the time.
Greg, if I can just add one other piece. We do expect once we're at 113,000 barrels a day, if prices are similar to where they are today, our debt-to-EBITDA will be in the 2 to 3 range. So we'll 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.
Your next question comes from Paul Chambers with Barclays.
And first, Bill, the tip of the hat to you, sir, for the type of company you've built with your team there and best of luck in your next phase of life.
Thank you.
The question's on diluent cost. You guys reported, it looked like it's about 83 90 a barrel, that's about 105%, say, of WTI. The last 3 quarters that had been running closer to 110%. I'm just curious, 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?
We do have some good -- we did 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 as far as access and allowed us to be able to buy our condensate on favorable pricing.
Okay. And -- okay, so going forward, it would probably look more like the first quarter than, say, the -- where it was maybe in the second through fourth quarter of last year given your comments on a percentage of WTI, I mean?
Yes.
Okay, great. A follow-up question has to do with transport. You said that -- I think for the -- you've incurred somewhere around 3 million or $2.8 million in transport costs incremental to the new TSA agreement that you've 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 a quantified look at what the second half of 2018 transport would be on a per barrel basis?
Well, we think it's probably about 80 million for the full year on that one. And so we adjusted that [indiscernible].
And that's 80 million annualized from...
Annualized. Sorry, that's correct. Yes, that will be an annual average per [indiscernible].
Your next question comes from Joe Gemino with Morningstar.
How do you think about your growth projects with the potential delays in the pipeline expansion projects?
Well, these projects are extremely economic at the present time. And so -- and we do have access to markets as we look at the -- as mentioned, we've got the capacity to take 50,000 or roughly 1/3 of our barrels down there now. And by 2020, we'll have additional 1/3. So 2/3 of our barrels -- a lot of capacity for 2/3 of our barrels will move to Gulf Coast. So when you think of these extremely economic projects, the eMSAGP and the brownfield, they fit well.
Great. And when you say you're going to have double your expansion down to the Gulf Coast, is that dependent on like line 3 coming through?
No. It's a contractual thing that we had agreed to at the start. We want to stage in our access to the Gulf Coast so that we would have -- we could align it better with our development plans over time. So it's been part of the planning from the beginning.
Your next question comes from Tarek Hamid with JPMorgan.
This is [ John ] in for Tarek. Just on the 2Q turnaround. Could you provide a little bit of color on the timing and how you guys came to that 5,000 to 6,000-barrel per day impact?
Sure. Well, the turnaround is the largest that the company has done to date. It's about a 30 to 35 day turnaround. It starts in the next week or so here. And then, obviously, running into June on that part of it. So the turnaround is focused on our Phase 2B plant, which is designed capacity is 35,000 barrels a day. But we do put upwards of 55,000, 60,000 through that plant. So when that plant is down for that time, and it's not down the whole time, it's down in portions. So we bring on -- we go through and we check to see everything is good and bring components on all along the way. But that's the net effect of that 5,000 to 6,000 barrels a day on an annualized basis.
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 or kind of what to expect going forward pro forma for your sale of the Access interest?
Can you repeat that question? I didn't quite hear you there.
In other words, we noticed your transportation expense was down sequentially quarter-over-quarter. If you could 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.
Well, in terms of Access, it's going to be an additional $80 million annualized for this year. So if you take our forecasted production on that, you can back out the transportation component associated with the Access Pipeline.
Okay, great. And then last one, you mentioned earlier that you can move more via rail if you wanted to. What kind of incremental capacity would you guys be able to expand up to, do you think?
Well, we can certainly -- I don't think we've actually released the number on it. So I want to be a little sensitive because we do have to be careful on that on the lines here. But I can say that we are not limited. We can move more barrels if we so choose and that it can add another -- well, we can add meaningful amounts more than we are requiring right now.
So we do feel we have sufficient capacity by rail to make up for any potential apportionment issues that may come our way through the year.
Yes.
[Operator Instructions] Your next question comes from [indiscernible] with [ Black ].
I'm just wanting to understand this rate quickly a little better. So John, you said that right now you're selling 1/3 of your barrels to the U.S. Gulf Coast and that's going primarily on the Seaway and the Flanagan South?
That's correct.
And you have capacity of 50,000 on that?
That's correct.
With an option to go up to 20,000, okay. What about the remaining...
No, actually, we actually have carryover capacity secured to go to 100,000 in 2020.
Okay. So 1/3 is going to the Gulf Coast. What about the remaining 2/3, if I may ask?
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 2 as well and then we do have other markets that we focus on that can't -- that are international as well on it.
When you say international, you mean you are exporting barrels out of Canada?
Out of the continent.
There are no further questions at this time.
Great. Thanks, Stephanie, and thanks, everyone, for your interest and listening into the 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 and listening in and hopefully everybody has a good day. Bye now.
Thank you. This concludes today's conference call. You may now disconnect.