MEG Energy delivers a solid third quarter but continues to bleed cash
MEG Energy posted a wider than expected operating loss in the third quarter, despite delivering solid production numbers at its Christina Lake facility.
The company reported an operating loss of $87 million versus a gain of $87 million for the same period last year. Net losses rose to $428 million on revenues of $460 million, a 35% decline year-over-year.
Excluding energy, operating costs are expected to average about $7 a barrel in 2015. MEG realized an average bitumen price of $31 a barrel in the third quarter, down over 50% from a year earlier.
Production at its Christina Lake SAGD operations grew to a record 82,768 barrels per day (bpd) in the third quarter, an 8% gain from the same period last year. Full year production guidance was revised to about 80,000 bpd. The company successfully completed a maintenance turnaround in the third quarter, which was deferred from earlier in the year due to encroaching forest fires in the Christina Lake area.
The 2015 capital spending budget was revised lower once again from $305 million to $280 million. The drop was attributed to savings being realized in operating costs. MEG had originally planned to spend well over $1 billion in 2015 before the sharp drop in energy prices.
The company still relies heavily on crude-by-rail for transporting its heavy oil to market. MEG's "Hub & Spoke" marketing strategy includes 2 rail-loading terminals near Edmonton and pipe-to-barge access to the US Gulf Coast. The company has reserved capacity of up to 100,000 bpd on the Flanagan South pipeline, which would bring its product to the US Gulf Coast.
The company has put its 50% stake in the Access Pipeline up for sale and is still looking for a buyer. The remaining 50% is owned by US based Devon Energy. The 345-kilometer pipeline includes a 400,000 bpd line carrying diluted bitumen to the Stonefell Terminal located near Edmonton and a 90,000 bpd return line taking diluent back to the Christina Lake area. Proceeds from the sale will likely go towards paying down debt. The Stonefell Terminal is 100% owned by MEG.
COST REDUCTION INITIATIVES
The company is continuing its RISER initiative to reduce operating costs at the facility, which include:
- reducing the steam-to-oil ratio of existing operations using a proprietary eMSAGP (Enhanced Modified Steam & Gas Push) technology
- redeploying the freed-up steam to other SAGD wells to further increase production
- debottlenecking the existing facility in order to accommodate further increases in throughput.
MEG's Chief Executive Bill McCaffrey also admitted the company de-staffed about 30% of its employees over the past year as part of efforts to get back to black.
Headwinds for the company continue to be:
- higher transportation costs due to its heavy reliance on crude-by-rail
- higher interest carrying costs on its debt, which is mostly denominated in US dollars
- higher depletion and depreciation expenses.
The company has a breakeven cash cost of approximately US$42 for West Texas Intermediate, down from near US$50 earlier in the year. Despite the big miss in operating revenues, investors applauded the company's efforts to reduce expenditures and return to profitability, sending share prices up over 10% upon release of third quarter results.
MEG Energy was founded in 1999 and has quickly grown into one of the fastest growing players in the Alberta oil sands. The company stock trades on the TSX (ticker: MEG) and currently does not pay a dividend.