MEG Energy delivers a solid second quarter but declares another loss
Calgary-based MEG Energy reported better than expected earnings today, despite encroaching wildfires that forced the evacuation of its Christina Lake operation earlier this summer. The company has completed several major turnarounds this year, leaving it in a good position to continue to grow production through incremental optimization and debottlenecking programs.
SECOND QUARTER RESULTS
Cash flow from operations was reported at $99 million, or $0.44 per share, well above analysts’ estimates of $0.37. Second quarter cash flow is 62% lower than the same period last year due to lower energy prices. The drop in oil prices and higher transportation costs resulted in a net operating loss of $23 million for the quarter.
Net operating costs were reported at $9.43 per barrel, 35% lower than the same period last year. The reduction was attributed to lower energy prices and is the company’s second lowest on record.
The company completed some major turnaround work in 2015 at its Christina Lake operation, which was temporarily disrupted due to wildfires. Despite the setbacks, second quarter production averaged 71,376 barrels per day (bpd), 4% higher than the same period last year. The company has projected its 2015 production to average 78,000 to 82,000 bpd, with an average operating cost of $8 to $10 per barrel.
MEG realized $44.54 per barrel for its bitumen sales in the second quarter, up from $25.82 in the first quarter of 2015, but significantly lower than last year.
OIL SANDS OPERATIONS
MEG Energy has 2 commercial in-situ projects: Christina Lake and Surmont, both which use steam-assisted gravity drainage (SAGD) to extraction the bitumen in place.
The company’s first two production phases at Christina Lake (Phases 1 and 2) commenced production in 2008 and 2009. The 2 phases have a combined designed capacity of 25,000 bpd. An additional phase of expansion (Phase 2B) commenced production in late 2013 and added another 35,000 bpd of capacity to the overall site.
Although the total design capacity of Christina Lake is reported at 60,000 bpd, implementation of the RISER initiative managed to boost production to over 80,000 bpd. RISER uses proprietary reservoir technologies, steam optimization, debottlenecking and expansion to increase production from existing well-heads.
Steam to oil ratio (SOR) for Christina Lake was reported at 2.3, slightly lower than last year. Transportation costs for the second quarter averaged $4.57 per barrel, up significantly from $1.80 for the same time last year. The higher costs were attributed to the recently commissioned Flanagan-Seaway Pipeline, which transports MEG’s heavy oil blend directly to the Gulf Coast. This allows the company to net better pricing for its heavy oil product.
Another phase of debottlenecking (RISER 2B) is expected to add more production at a relatively low cost. Christina Lake already has regulatory approval in place for 210,000 bpd of production.
In late 2012, the company applied for regulatory approval of its 120,000 bpd Surmont project. Surmont is located 30 miles north of its Christina Lake operation and will be very similar in design. The company did not comment on timing of its expansion plans except to note it will wait for a recovery in oil prices before making any significant capital investments.
PIPELINES & STORAGE
MEG also holds a 50% interest in the Access Pipeline, a dual pipeline system that connects the Christina Lake Project to a transportation hub in the Edmonton area. A recently completed expansion has brought the pipeline's capacity to 400,000 bpd of diluted bitumen (200,000 bpd net to MEG), which will accommodate any production increases from Christina Lake, Surmont and any future expansions. The Access Pipeline also includes a 16 inch return line that has the capacity to carry 90,000 bpd of diluent from Edmonton back to the Christina Lake area.
MEG also owns the Stonefell Terminal, located on the southern end of the Access Pipeline near Edmonton. The terminal has a 900,000 bpd storage capacity and gives MEG access to a 3rd party rail loading terminal near Bruderheim, AB.
The company spent almost $91 million in capital expenditures in the second quarter, down significantly from the $300 million spent for the same period last year. MEG is focusing all of its capital expenditures on sustaining capital and maintenance activities and has deferred any major capital spending until energy prices improve. Total capital expenditures for 2015 is unchanged at $305 million.
Total debt for the company was reported at $4.75 billion. MEG’s debt load is denominated in US dollars and is therefore adversely affected by the falling Canadian dollar. Although none of the company’s debt is due before 2020, the company is considering selling its stake in the Access Pipeline to raise cash.
MEG Energy stock is down 64% year to date (TSX:MEG) and currently does not yield a dividend. The company has a 100% working interest in 900 square miles of leases estimated to hold 3 billion barrels of proved plus probable bitumen reserves.