MEG Energy Corp

TSX:MEG

Earnings Call Transcript 2021-Q4

[Operator]

Good morning. My name

is Pam, and

I'll

be

your

conference

operator

today.

At

this

time,

I'd

like

to

welcome

everyone

to

the

MEG

Energy's

2021

Year-End

Results

Conference

Call.

All

lines

have been

placed

on

mute

to

prevent

any

background

noise.

After

the

speakers'

remarks,

there'll be

a

question-and-answer

session.

[Operator Instructions]



Thank

you.

I

would

now

like

to

turn

the

conference

over

to

Mr.

Derek

Evans,

CEO.

Please

go

ahead.

[Derek Watson Evans]

Thank

you,

Pam.

Good

morning

and

thank

you

for

joining

us to

review

MEG

Energy's

year-end

2021

operating

and

financial

results.

In

the

room

with

me

this

morning are

Eric

Toews, our

Chief

Financial

Officer;

Lyle

Yuzdepski,

our

General

Counsel

and

Corporate

Secretary;

and Darlene

Gates,

our

Chief

Operating

Officer.

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

on

our

website.

I'll

keep

my

remarks

brief

today

and

refer

listeners

to

yesterday's

press

releases

for

more

detail.

MEG

continues

its

priority

of

maintaining

safe

and

reliable

operations

as

we

work

within

the

ongoing

COVID-19

environment.

Our

teams

continue

to

respond

to

the

impacts

of

the

pandemic,

prioritizing

the

health

and

safety

of

our

workforce

and

reliable

operations

at

our

Christina

Lake

facility.

I'm

proud

to

say

that

we

had

no

lost

time

incidents

for

our

employees

or

contractors

in

2021,

a

testament

to

the

dedication

and

diligence

of

our

team.

We

exited

the

year

with

strong

financial

and

operational

results.

Our

team's

focus

on

safety,

plant

reliability,

steam

utilization,

and

ongoing

well optimization

have

contributed

to

MEG's

strong

2021

results.

Highlights

from

our

year-end

results

include:

adjusted

funds

flow

of CAD

799

million

or

CAD

2.57

per

share

for

the

year;

record

free

cash

flow

of

CAD

468

million

in

2021;

we

completed

or

announced

the

repayment

of

$325

million

of

outstanding

indebtedness;

record

bitumen

production

volumes

for

the

fourth

quarter

of

100,698

barrels

per

day

as

well

as

for

the

full

year

of

93,733

barrels

per

day.

Total

capital

expenditures

of

CAD 331

million,

approximately

2%

lower

than

the

July

2021

increased

budget,

were

primarily

directed

towards

sustaining

and

maintenance

activities

and

additional

drilling

to

return

bitumen

production

to

100,000

barrels

a

day.

Net

operating

costs

averaged

CAD

6.60

per

barrel,

including

record

low

non-energy

operating

costs

of

CAD

4.24

per

barrel.

Power

revenue

offset

energy

operating

costs

by

approximately

52%.

We

released

our

second

ESG

report

with

a

new

2030

greenhouse

gas

intensity

target

to

complement

our

2050

net

zero

greenhouse

gas

target

and

improved

alignment

on

disclosure

of

climate-related

risks

with

SASB

and

TCFD

guidance.

MEG

realized

an average

AWB

blend

sales

price

of

$57.59

per

barrel

during

2021

compared

to

$28.07

per

barrel

in

2020.

The

increase

in

the

average

AWB

blend

sales

price

year-over-year

was

primarily

a

result

of

the

average

WTI

price

increase

of

$28.51

per

barrel.

MEG

sold

42%

of

its

sales

volumes

in

the

premium

priced

US

Gulf

Coast

market

in

2021

compared

to

40%

in

2020.

MEG

invested CAD

331

million

of

capital

in

2021

compared

to

CAD

149

million

in

2020.

Majority

of the

capital

was

focused

on

sustaining

and

maintenance

activities

as

well

as

incremental

well

capital

to

fully

utilize

the

Christina

Lake's

oil

processing

capacity

of

100,000

barrels

per

day.

As

we

disclosed

last

year,

the

total

investment

for

this

initiative

is

approximately

CAD 125

million,

of

which CAD

50

million

is

being

invested

in

the

first

half

of

2022.

MEG

expects

full

facility

utilization

in

the

second

half

of

2022

post

our

planned

turnaround

in

Q2

of

this

year.

I'm

proud

of the

efforts

and

the

advancements

in

our

ESG

activities

from

our

teams

across

the

organization.

In

June

2021,

MEG

along

with

four

other

oil

sands

operators,

created

the

Oil

Sands

Pathways

to

Net

Zero

Alliance

with

the

objective

to

achieve

net zero

emissions

from

our

operations

by

2050.

In

the

fall,

a

sixth

company

joined

the

alliance,

which

now

represents

approximately

95%

of

operated

Canadian

oil

sands

production.

Our

collective

purpose

is

to

position

Canada

as

the

preferred

global

supplier

of

net zero

crude.

Pathways'

vision

is

anchored

by

a

major

carbon

capture

and

storage

system

with

a

CO2

pipeline

connecting

oil

sands

facilities

from

Fort

McMurray

and

the

surrounding

region

to

a

carbon

sequestration

hub

near

Cold

Lake.

We

continue

to

work

with

the

federal

and

Alberta

governments

in

support

of

this

emissions-reduction

project

and

infrastructure

as

well

as

advancing

development

of

new

and

emerging

technologies.

2021

also

saw

the

release

of

our

second

ESG

report,

which

outlines

the

meaningful

progress

we've

made

in

our

priority

topics:

climate

change and

greenhouse

gas

emissions,

water

and

wastewater

management,

health

and

safety,

and

indigenous

relations.

In

addition,

the

report

contains

our

new

2030

greenhouse

gas

intensity

target

that

complements

our

2050

net

zero

target

and

improved

alignment

on

climate-related

risks

with

SASB

and

TCFD

guidance. The

report

is

available

on

our

website

at

www.megenergy.com,

and

I

really

encourage

listeners

to

take

the

opportunity

to

read

it

in

some

detail.

It's

a

fabulous

report.

As

we

exit

2021,

MEG

is

well-positioned

to

continue

to

deliver

on

its

deleveraging

and

shareholder

return

strategy.

Yesterday,

MEG

issued

a

notice

to

redeem

the

remaining

$171

million

of

MEG's

outstanding

6.5%

senior

secured

second

lien

notes

due

January

2025.

This

brings

MEG's

total

debt

repayment

to

approximately

$2 billion

since

the

beginning

of

2018.

Continued

debt

reduction

remains

a

core

focus

of

the

company.

As

MEG

expects

to

soon

reach

its

previously

announced

near-term

debt

target

of

$1.7

billion,

yesterday,

MEG's

board

of

directors

approved

the

filing

of

an

application

to

allow

MEG

to

initiate

a

share

buyback

program,

whereby

10%

of

the

corporation's

public

float

may

be

brought

back

– bought

back

up

to

a

maximum

of

approximately

27.2

million

common

shares

of

MEG.

MEG

intends

to

allocate

25%

of

free

cash

flow

generated

to

share

buybacks,

with

the

remainder

being

allocated

to

debt

reduction.

Once

MEG

reaches

its

$1.2

billion

net

debt

target,

the

corporation

intends

to

increase

the

percentage

of

free

cash

flow

allocated

to

share

buybacks

to

approximately

50%,

with

the

remainder

being

applied

to

further

debt

reduction.

In

closing,

we

continue

to

enhance

our

competitive

position

with

our

work

on

several

priorities,

including

our

debt

repayment

and

shareholder

return

strategy,

plant

optimization

and

reliability,

cost

management,

and

advancement

of

our

ESG-related

activities.

I'm

pleased

with

the

more

favorable

outlook

for

commodity

prices

as

well

as

the

ongoing

global

recovery

from

the

impact

of

the

COVID-19

pandemic.

I

want

to

extend

my

thanks

to

our

team

for

their

performance

and

contributions

to

our

success

in

2021.

I'm

proud

of

what

we've

been

able

to

accomplish

and

confident

in

our

future

and

our

commitment

to

sustainable,

innovative,

and

responsible

energy

development.

With

that,

I'll

now

turn

the

call

to

our

operator

to

begin

the

Q&A.

[Operator]

Thank

you.

Ladies

and

gentlemen,

we

will

now

begin

the

question-and-answer

session.

[Operator Instructions]



Your

first

question

comes

from

Phil

Gresh

with

JPMorgan.

Please

go

ahead.

[Phil Gresh, Analyst, JPMorgan Securities LLC]

Yeah.

Hey.

Good

morning,

Derek.

And

thanks

for

taking

the

questions.

First

one

just

on

the

takeaway

situation

for

2022.

Can

you

give

us

any

updated

thoughts

on

your

ability

to

use

the

full

contracted

amount

as

the

year

progresses?

[Derek Watson Evans]

Absolutely.

Phil,

I

think

you're

referring

to

our

Flanagan

South

Seaway

capacity.

I

think

we

fully

expect

to

be

able

to

use

the

majority

of

that

95%

of

that

throughout

the

year,

primarily

driven

by

the

fact

that

the

Enbridge

apportionment

we

expect

to

see

in

that

sort

of

0%

range

through

the

summer

and

maybe

a

little

bit

of

maybe

5%

apportionment

in

some

of

the

shoulder

seasons.

But

effectively,

we're

going

to

have

a full

access

to

that

capacity

now.

[Phil Gresh, Analyst, JPMorgan Securities LLC]

Got

it.

So

even

here

in

the

first

quarter,

you

feel

comfortable

with

that?

[Derek Watson Evans]

Well,

I

mean,

apportionment

was

higher

in

January

and

February.

But

I

mean,

March's

apportionment,

I

believe,

is

zero.

And

we

fully

expect

that

to

continue

as

we

drive

forward

now.

[Phil Gresh, Analyst, JPMorgan Securities LLC]

Got

it.

Okay.

Good

to

hear.

And

then

any

updated

thoughts

around

the

timing

of

moving

to

post payout

in

this

type

of

macro

environment?

Obviously,

it's

extremely

volatile

right

now,

but

just

curious

how

you

would

frame

the

way

we

should

think

about

that?

[Eric L. Toews, Chief Financial Officer, MEG Energy Corp.]

Yeah.

Phil, it's

Eric.

Probably

the

best

way to

think

about

that

is

to

think

about

the

effect

of

royalty

rates

for

2022

and

2023,

so at

the

prices

we're

seeing

today,

the

oil

prices

we're

seeing

today.

And

as

you

know,

like,

there's

a

bunch

of

factors

that

go

into

calculating

the

payout,

oil

prices, diluent

costs,

foreign

exchange,

capital,

all

that

needs

to

be put

in to

determine

payout

timing.

But

the

effect

of royalty

rates

we're

seeing

for

2022

is

probably

in the

10%

to

15%

range.

And

then

we'd

see

that –

at

current

pricing, we'd

see

that

going

to

20%

to

25%

for

2023.

So

that's

probably

the

best

way

for

us

to

frame

that

for

you.

[Phil Gresh, Analyst, JPMorgan Securities LLC]

Okay.

Perfect.

Thank

you.

I'll

turn

it

over.

[Derek Watson Evans]

Thanks,

Phil.

[Operator]

Your

next

question

comes

from

Neil

Mehta

with

Goldman

Sachs.

Please

go

ahead.

[Nicolette Slusser, Analyst, Goldman Sachs & Co. LLC]

Hey.

Good

morning.

This

is

Nicolette

Slusser

on

for

Neil

Mehta.

Thanks

for

taking

the

time.

So

the

first

would

just

be

on

costs.

Non-energy

OpEx

continues

to come

in

lower

versus

our

estimates

and

also in

recent

guidance.

How

should

we

be

thinking

about

non-energy

OpEx

going

forward?

And

is

it

safe

to

say

the

fourth

quarter's

non-energy

OpEx

per

barrel

could

be

used

as

a

sort

of

run

rate?

[Derek Watson Evans]

Great

question.

I

think,

after

six

years

of

continuing

to

reduce

our

non-energy

OpEx,

I

think

this

is

the

year

where

due

to

inflationary

pressures,

pressures

on

labor,

pressures

on

fuel,

pressures

on

services,

we

could

see

that

start

to

move

up.

Obviously,

we'll

continue

to

focus

on

that.

But

I

think

the

guidance

we've

got

out

there

includes

all

of

those

impacts.

So

I

think

our

guidance

range

is

probably

the

best

view

of

where

we

think

non-energy

OpEx

costs

are

going

to

be

on

a

go-forward

basis.

[Nicolette Slusser, Analyst, Goldman Sachs & Co. LLC]

Okay.

Great.

That's

helpful.

Thank

you.

And

then

the

follow-up,

we're

just

curious

on

your

outlook

for

WTI/WCS

this

year

as

global

demand

for

Canada

heavy

crude

may

pick

up

and

with

Line

3

on

line.

And

then

in

the

medium

term,

how

are

you

thinking

about

differentials

following

the

recent

announcement

to

bring

TMX

on

line

in

3Q

2023?

Thanks.

[Derek Watson Evans]

So

it's

interesting.

Obviously,

there's

a

lot

of

focus

on

where

WTI

today

is.

But

the

second

part

of

your

question,

I

think,

is

the

really

interesting

one

is

where

do

we

see

differentials.

I

mean,

today,

differentials

are

trading

in the

US

Gulf

Coast

for

WCS

or

AWB

in

that

CAD 2

to

CAD 3

range,

which

is

showing

the

tremendous

demand,

worldwide

demand

for

this

product.

And

obviously,

with

some

of

the

challenges

that

we're

seeing

in

terms

of

energy

supply

coming

out

of

Europe,

we

expect

to

see

very

low

WCS/AWB

differentials

on

a

go-forward

basis.

Obviously,

we

can't

predict

where

WTI

prices

are

going.

But

we

do

believe

that

if

we

look

at

sort

of

the

amount

of

underinvestment

in

the

global

oil

and

gas

business

and

the

continued

focus

of

investors

on

return

of

capital

and

no

growth

from

oil

and

gas

companies,

we

think

this

is

going

to

create

an

environment

where

you're

going

to

see

much –

you're

going

to

see

strong

WTI

prices

for

an

extended

period

of time.

[Nicolette Slusser, Analyst, Goldman Sachs & Co. LLC]

Great.

Thanks

for

the

color.

[Derek Watson Evans]

Thank

you.

[Operator Instructions]

[Operator]

Your

next

question

comes

from

Patrick

O'Rourke

with

ATB

Capital.

Please

go

ahead.

[Patrick J. O'Rourke, Analyst, ATB Capital Markets, Inc.]

Hey.

Good morning,

guys. Thanks

for

taking

my

questions.

Just

looking

at

the

net

debt

target

and

the

NCIB

that

you're

putting

in

place,

our

model

kind

of

has

it

you

getting

to

that

$1.7

billion

threshold

at

some

point

in

Q2.

But

is

it

safe

to

assume

that

as

soon

as

you

get

the

approval

here,

you

can

start

executing

on

that?

[Eric L. Toews, Chief Financial Officer, MEG Energy Corp.]

I

guess

the

way

that

we're

thinking

about

that,

Patrick,

is

we

want to

make

sure

we

have

the

cash in

the

door

before

we

start

doing

buybacks.

So

you

should

expect

to

see

us

start

that

very

soon.

But

we

want to

make

sure

that

we

have

all

the

cash

in

the

door

after

redeeming

the

second

lien

notes

we

announced

yesterday.

But

we'll

start

it

as

quickly

as

we

can

when

the

cash

is

in

the

door.

[Patrick J. O'Rourke, Analyst, ATB Capital Markets, Inc.]

Okay.

And

then

a

little

bit

of

an

improvement

on

the

SOR

in

the

quarter

relative

to

Q3

here.

Wondering

after

coming

out

of

the

turnaround

here

and

you

get

to

the

steady

state

nameplate

capacity,

how

you

guys

see

the

SOR

trending

going

forward

here.

[Derek Watson Evans]

I

think

the

– Patrick,

it's

Derek.

Obviously,

the

steam-oil

ratio

is

a

function

of

where

we

put

the

steam

to

work

and

what

stage

in

maturity

the

wells

are

at.

So

part

of the

reason

you

saw

the

steam-oil

ratio

coming

down

in the

last

part

of

the

year

is

we

were

bringing

new

well

pairs

on,

well

pairs

that

we had

been

steaming

and

warming

up,

but

not

actually

seeing

the

production

from.

So

I

think

you'll –

should

expect

to

see

that,

that

steam-oil

ratio

over

the

year

will

continue

to

come

down

gradually.

[Patrick J. O'Rourke, Analyst, ATB Capital Markets, Inc.]

Okay.

And

then

just

one

last

sort

of

final

question

for

me.

In

terms

of

time lines

for

the

Pathways

project, it's

something

that's

–

the

Pathway

is

really

intriguing

for

us,

and

I

think

a

lot

of

investors

out

there,

especially

in

terms

of

the

oil

sands

story.

Can

you

maybe

give

us

an

outlook

for

sort

of

the

timing

when

we

could

see

sort

of

more

material

news

on

this

project?

[Derek Watson Evans]

Absolutely.

Listen,

the

Pathways

project

is

exciting

on

a

bunch

of

different

fronts.

Not

only

is

it

really

Canada's

only

big

project

to

help

meet

its

2030

aspirations

to

reduce

its

greenhouse

gas

emissions,

Pathways

project

represents

obviously

10%

of

Canada's

emissions.

And

we're

excited

to

be

able

to

get

that

potentially

up

and

running

sooner

than

later.

With

respect

to

your

question,

we

are

currently

awaiting

some

news

on

the

investment

tax

credit,

which

we

hope

will

be

in

the

next

federal

budget.

And

that

will

provide

us

with

some

clarity

on

the

important

financial

support

that

we

need

to

undertake

this

project.

The

other

part

of

this,

though,

that

is

equally

and

as

important

is

the

pore

space application.

So

we

are

very

interested

in

getting

our

pore

space

application

in

with

the

province

of

Alberta

for

that

area

around

Cold

Lake

area.

I

saw

something

come

out

yesterday

that

said

there

was

an

opportunity

or

there

were

requests

for

proposals

on

that

front

that

has

sort

of

a

May

deadline

and

a

October-type

of

timeframe

with

respect

to

when

we

potentially

could

find

out, but

we'll

work

on

that.

But

those

are

sort

of

the

two

key

deadlines

we're

working

with

at

the

moment,

when

could

we

see

some

sort

of

indication

of

federal

support

and

when

could

we

achieve

some

sort

of

certainty

with

respect

to

pore

space

in

the

Cold

Lake

area.

[Patrick J. O'Rourke, Analyst, ATB Capital Markets, Inc.]

Okay.

Thank

you

very

much.

[Derek Watson Evans]

Thank

you,

Patrick.

[Operator]

Your

next

question

comes

from

Dennis

Fong

with

CIBC

World

Markets.

Please

go

ahead.

[Dennis Fong, Analyst, CIBC World Markets, Inc.]

Hi.

Good

morning.

And

thanks

for

taking

my

question.

The

first

one

that

I

have

here

is just

with

respect

to

the

term

notes.

You've

obviously

now

retired

your

– well,

soon

to

have

retired

the

entire

6.5%

senior

secured

second

lien.

How

should

we

be

thinking

about

the

next

tranche,

the

2027,

as

well

as

just

kind

of

expectations

around

capital

allocation

policies

and

maybe

ideal

capital

structure?

Thanks.

[Eric L. Toews, Chief Financial Officer, MEG Energy Corp.]

I guess, I'll

take

the

second

question

first,

which

is

the

capital

allocation

strategy.

I

don't

think –

we've

been

very

clear

on

the

allocation

of

free

cash

flow

to

buybacks

and

to

debt

reduction,

and

that

the

$1.2

billion,

we

take

that

to

50/50.

So

we

don't

see

that

changing.

We

see,

obviously,

the

trading

value

of MEG

shares

is

well

below

the

intrinsic

value.

So

until

that

fundamentally

changes,

you

won't

see

us

change

our

strategy

around

that.

With

respect

to

the

optimum

capital

structure,

we're

going

to continue

to

pay

down

debt

once

we

hit

that

$1.2

billion.

And

the

$1.2

billion

was

less

than

2

times

at

a $50

WTI

price.

We

want to

get

that

lower.

How

much

lower,

we'll

determine

that

as

we

get

to

that

$1.2

billion

level.

And

then

the

first

question

–

sorry,

can

you

repeat

the

first

question?

[Dennis Fong, Analyst, CIBC World Markets, Inc.]

Just

about

the

$1.2

billion

of

term

notes

for

2027...

[Eric L. Toews, Chief Financial Officer, MEG Energy Corp.]

Yes.

Sorry.

Yeah.

[Dennis Fong, Analyst, CIBC World Markets, Inc.]

...

[indiscernible]

(00:20:16)

generate

free

cash.

[Eric L. Toews, Chief Financial Officer, MEG Energy Corp.]

Yeah.

Sorry,

Dennis.

Thanks.

Yeah.

We're

thinking

about

that

the

same way

we

thought

about

attacking

the

second liens

a

few

years

ago,

which

is

we'll

look

at

the

tranches,

which debt

we

buy

back

based

on

things

like

liquidity,

tenor,

price,

the

economics

to

it.

So we

have

a

plan

around

that,

and

we'll

execute

that

shortly.

[Dennis Fong, Analyst, CIBC World Markets, Inc.]

Great.

Thanks.

[Derek Watson Evans]

Thanks,

Dennis.

[Operator]

Your

next

question

comes

from

Menno

Hulshof

with

TD

Securities.

Please

go

ahead.

[Menno Hulshof, Analyst, TD Securities, Inc.]

Thanks.

Good

morning,

everyone.

Just

one

question

for

me,

just

a

follow-up

on

shareholder

returns.

You're

clearly

about

to

get

really

aggressive

on

the

buyback.

But

what

are

your

current

thoughts

on

why

reinstatement

of

a

base

dividend

isn't

a

priority?

[Eric L. Toews, Chief Financial Officer, MEG Energy Corp.]

Yeah.

Well, the –

but

from

our

perspective,

the

buybacks,

that

generates

fundamental

value

for

shareholders. It's

demonstrable.

All

else

being

equal,

the

cash

flow

per

share

shrinks

as

the

– or

grows,

sorry,

as

the

outstanding

shares

shrink.

And

you've got to

remember,

we're

still

in

a

deleveraging

mode

here

at

MEG.

So

from

our

perspective,

that

strategy

is

somewhat

incompatible

with

a

fixed

charge

dividend

at

this

point

in time.

So

that's

the

reason

why

we

gravitate

towards

the

buybacks.

[Menno Hulshof, Analyst, TD Securities, Inc.]

So

potentially,

we

can

start

to

think

about

that

in

2023

or

even

further

out?

[Eric L. Toews, Chief Financial Officer, MEG Energy Corp.]

Yeah. I

wouldn't

say

that.

We'll

decide

that

at

the

time.

But

right

now,

our

approach

is

buybacks.

We

think

that's

the

best

approach

for

shareholders.

And

we'll

determine

whether

we

change

that

once

we

get

through

the

$1.2

billion

target.

[Menno Hulshof, Analyst, TD Securities, Inc.]

Perfect.

Thank

you.

[Derek Watson Evans]

And Menno, I

would

just

add.

I

mean,

we

continue

to look

at

the

intrinsic

value

of

the

shares,

and

we

still

think

the

best

strategy

given

our

high

leverage

is

to

continue

to

buy

back

those

shares.

I

mean,

I'll

be

quite

honest,

our

concern

with

dividends

is

people

see

it

as

a

fixed

part

of

your

cost

structure.

And

we've

got

to

reduce

–

we

need

to

reduce

our

debt

before

we

start

talking

about

adding

anything

else

to

our

cost

structure.

[Menno Hulshof, Analyst, TD Securities, Inc.]

Got

it.

That

all makes

a

lot

of

sense.

Thanks,

guys.

[Eric L. Toews, Chief Financial Officer, MEG Energy Corp.]

Thanks.

[Derek Watson Evans]

Thanks,

Menno.

[Operator]

There

are

no

further

questions

at

this

time.

Please

proceed.

[Derek Watson Evans]

Well,

thank

you,

everyone,

for

joining

us

for

the

call

today.

Appreciate

the

time

you've

given

us

to

let

us

update

you

on

our

story.

We

appreciate

your

questions,

and

we

appreciate

your

continued

support.

Thank

you,

and

have

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

lines.

Have

a

great

day.