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MEG Energy continues to bleed cash but clings to hopes of expansion

MEG Energy continues to bleed cash but clings to hopes of expansion

Following in the footsteps of other Canadian energy companies, MEG Energy swings to the black in the first quarter thanks to a paper gain booked on improved foreign-exchange rates for US denominated debt. A maintenance turnaround and small fire in Q1 coupled with lower oil prices reduced MEG's revenues by 38% in the first quarter. Despite a debt-to-capitalization ratio of 2.5x, the company remains committed to growing its presence in the Alberta oil sands.

Q1 BY THE NUMBERS

  • Revenue: $290 million versus $467 in Q1/15
  • Cash flow from operations: -$131 million versus -$30 million in Q1/15
  • Operating earnings: -$197 million versus -$124 million in Q1/15
  • Unrealized forex gains/loss: $320.3 million versus -$370.8 million in Q1/15
  • Net earnings/loss: $131 million versus -$508 million in Q1/15
  • Capital investment: $35 million versus $80.1 million in Q1/15 (-56%)

CHRISTINA LAKE PERFORMANCE

  • Production: 76,640 versus 82,398 bbl/day in Q1/15 (-7%)
  • Steam-to-oil ratio (SOR): 2.4 versus 2.6 in Q1/15
  • Average bitumen sale price: $11.43 versus $25.82/bbl in Q1/15 (-56%)
  • Net operating costs: $8.53 versus $10.49/bbl in Q1/15 (-19%)
    • Non-energy operating costs: $6.45 versus $7.57/bbl in Q1/15 (-15%)
    • Transportation costs: $6.68 versus $4.70/bbl of bitumen produced (+52%)
  • Cash operating net-back: -$3.71 versus $9.83/bbl in Q1/15
  • 2016 full year non-energy operating cost guidance: $6.75 to $7.75/bbl
  • 2016 full year average production estimate: 80,000 to 83,000 bbl/day 

The Christina Lake's Phase 2B heat recovery steam generator underwent a maintenance turnaround in the first quarter which negatively impacted production. The company also experienced a small fire at the plant's Sulphur Recovery Unit which temporarily shutdown the whole facility. Fire repair costs are estimated at $6 million, which the company expects to recover through their insurance provider.

STEAM-ASSISTED GRAVITY DRAINAGE (SAGD) SCHEMATIC

FUTURE EXPANSION

The company announced plans to file a new regulatory application for its May River Project, located 165 km south of Fort McMurray. The company is conducting core-drilling in the area with the aim of confirming the size and quality of the deposit. The May River reservoir is located 475 meters below the surface. The filing is expected to be for a greenfield SAGD facility with an ultimate capacity of 160,000 bbl/day to be built in 3 phases. Under a best-case scenario, construction could start in 2019 with steaming operations beginning in 2023.

MEG previously filed regulatory applications for the Surmont Project in September 2012 (not to be confused with the Surmont SAGD facility operated by ConocoPhillips). MEG's Surmont is similar in geology to Christina Lake, extracting bitumen in-situ from the McMurray geological formation. The plant is located 30 km north of Christina Lake and has an ultimate designed capacity of 120,000 bbl/day.

 
 

MARKETING & DISTRIBUTION

The company began shopping around for a buyer of its 50% stake in the Access Pipeline but has had no luck so far. Access is a dual bitumen/diluent pipeline connecting their Christina Lake operation to Edmonton. The system was recently expanded to accommodate future production in the Christian Lake area. The remaining 50% is owned by Devon Energy.

MEG Energy also owns the Stonefell Terminal near Edmonton with a storage capacity of 900,000 barrels. Stonefell provides connection to export markets by pipeline and a third party rail-loading terminal near Bruderheim, Alberta. In January, MEG also increased its transportation capacity on the Flanagan South and Seaway pipelines by 25,000 bbl/day. The two lines give the company access to US Gulf Coast refineries. 

The company's transport costs rose by over 50% in the first quarter as it spends more to get its oil to refineries in the US who offer a better purchase price for Canadian heavy oil.

NON-ENERGY OPERATING COSTS

DEBT AND CAPITAL SPENDING

The company reduced its capital budget to $170 million from the original plan of $328 million. Most of those funds will go towards maintenance activities to maintain current production levels.

By the end of the first quarter, MEG had $125 million in cash in the bank and US$2.5 billion in undrawn credit. The company will be hedging some of its production in order to reduce uncertainty and variance of future cash flow.

MEG Energy's total debt load by the end of the first quarter sits at $4.86 billion, improved slightly from last year due to a weaker US dollar. The company has market cap of about $1.6 billion. Moody's Investors Service downgraded MEG's credit rating from B1 to Caa2, suggesting the company is at a high risk of debt default.

Including sustaining capital costs, the company estimates it needs a WTI price of US$52.81/bbl in order to breakeven. That excludes any new spending on growth projects.

ALL FIGURES REPORTED ARE IN CANADIAN DOLLARS UNLESS OTHERWISE STATED • ALL GRAPHICS COURTESY MEG ENERGY
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