MEG Energy reports strong first quarter 2018 results
Solid operational and financial results, along with substantial liquidity, position MEG well for its next stage of growth
All financial figures in Canadian dollars ($ or C$) unless otherwise noted
CALGARY, May 10, 2018 /CNW/ - MEG Energy Corp. (TSX:MEG) today reported first quarter 2018 operating and financial results. Highlights include:
- Record first quarter production volumes of 93,207 barrels per day (bpd), reflecting the continued ramp-up of MEG's eMSAGP growth initiative at Christina Lake Phase 2B;
- First quarter non-energy operating costs of $4.55 per barrel and net operating costs of $5.98 per barrel;
- The repayment of approximately $1.225 billion of MEG's senior secured term loan from the majority of the $1.5 billion net cash proceeds received from the sale of the company's interest in the Access Pipeline and Stonefell Terminal. The remaining $275 million is allocated towards fully funding MEG's previously announced 13,000 bpd brownfield expansion at Christina Lake Phase 2B;
- Total cash capital investment of $148 million, mainly directed towards advancing the company's objective to reach 113,000 bpd in 2020; and
- Cash and cash equivalents of $675 million. MEG's four-year covenant-lite US$1.4 billion credit facility remains undrawn.
MEG's growth is proceeding on schedule and on budget, with the eMSAGP implementation expected to be completed later this year bringing production to 100,000 bpd by early 2019. The company anticipates the Phase 2B brownfield expansion to increase production capacity to approximately 113,000 bpd in 2020. MEG continues to target 2018 average production of 85,000 to 88,000 bpd and 2018 exit production of 95,000 to 100,000 bpd. The 2018 average production guidance takes into account a planned maintenance turnaround at Christina Lake Phase 2B scheduled for the second quarter.
"Taking into consideration the market dynamics in the first quarter of 2018, MEG delivered solid operating and financial results," said Bill McCaffrey, President and Chief Executive Officer. "We were able to effectively mitigate pipeline apportionment issues by utilizing the network of storage and rail facilities we have available to us, and we continue to have good access to the Gulf Coast via the Flanagan South and Seaway pipeline systems, which enables us to sell a significant percentage of our barrels at world prices."
MEG's current contract of 50,000 bpd of transportation capacity on Flanagan South and Seaway will double to 100,000 bpd in mid-2020, moving approximately two-thirds of the company's forecast blend sales volume to the Gulf Coast and world pricing. This combination of growing pipeline access and continued optionality around rail advances MEG's strategy of reliable and diversified access to the broadest possible markets.
Net operating costs per barrel for the first quarter of 2018 were 29% lower than in the first quarter of 2017, while non-energy operating costs per barrel decreased 13% over the same time period. The ongoing reduction in net operating costs and non-energy operating costs in the first quarter of 2018 is primarily a result of efficiency gains and continued cost management.
Vision 20/20
"The implementation of eMSAGP and the brownfield expansion on Phase 2B are key components for achievement of MEG's Vision 20/20," said Bill McCaffrey. "Following the implementation of these two phases of growth, we will have decreased our overall cash costs by approximately $3 per barrel from current levels, improved our balance sheet metrics, and positioned the company to grow thereafter while generating free cash flow."
Capital investment during the first quarter of 2018 totalled $148 million. The majority of the capital was dedicated towards the drilling of new infills and well pairs as the implementation of eMSAGP continued on Phase 2B. The brownfield expansion on Phase 2B commenced during the quarter and is proceeding on schedule. Construction of the eMVAPEX pilot was also advanced.
"Vision 20/20, once completed, will enable MEG to enter a new chapter. From a stronger operating and financial foundation, we will be in an improved position to respond to changing market conditions," said McCaffrey. "It is with this clear vision in mind that this is the right time for me to retire. With Management and the Board fully aligned on this vision, I am confident that MEG has the internal bench strength and the technical and financial capabilities to successfully carry out this transition."
Adjusted Funds Flow and Earnings
MEG realized adjusted funds flow from operations of $83 million for the first quarter of 2018 compared to adjusted funds flow from operations of $43 million in the same quarter of 2017. This 93% increase primarily reflects increased bitumen sales volumes and a reduction in net interest expense primarily due to realized gains on the company's interest rate swap contract.
The company recorded a first quarter 2018 operating loss of $18 million compared to an operating loss of $79 million for the same period in 2017. The decrease in the operating loss was primarily the result of higher bitumen sales volumes. Bitumen sales averaged 91,608 bpd for the first quarter of 2018 compared to 74,703 bpd for the same time period in 2017.
Operational and Financial Highlights
| 2018 | 2017 | 2016 | |||||||
| ($ millions, except as indicated) | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | |
| Bitumen production - bbls/d | 93,207 | 90,228 | 83,008 | 72,448 | 77,245 | 81,780 | 83,404 | 83,127 | |
| Bitumen realization - $/bbl | 35.31 | 48.30 | 39.89 | 39.66 | 37.93 | 36.17 | 30.98 | 30.93 | |
| Net operating costs - $/bbl(1) | 5.98 | 5.86 | 6.00 | 7.42 | 8.43 | 8.24 | 7.76 | 7.43 | |
| Non-energy operating costs - $/bbl | 4.55 | 4.53 | 4.57 | 4.23 | 5.20 | 4.99 | 5.32 | 5.81 | |
| Cash operating netback - $/bbl(2) | 20.16 | 33.83 | 26.84 | 22.96 | 22.33 | 21.73 | 16.74 | 16.09 | |
| Adjusted funds flow from operations(3) | 83 | 192 | 83 | 55 | 43 | 40 | 23 | 7 | |
| Per share, diluted(3) | 0.28 | 0.65 | 0.28 | 0.19 | 0.16 | 0.18 | 0.10 | 0.03 | |
| Operating earnings (loss)(3) | (18) | 44 | (43) | (36) | (79) | (72) | (88) | (98) | |
| Per share, diluted(3) | (0.06) | 0.15 | (0.14) | (0.12) | (0.29) | (0.32) | (0.39) | (0.43) | |
| Revenue(4) | 721 | 755 | 546 | 574 | 560 | 566 | 497 | 513 | |
| Net earnings (loss) | 141 | (1) | 84 | 104 | 2 | (305) | (109) | (146) | |
| Per share, basic | 0.48 | (0.00) | 0.29 | 0.36 | 0.01 | (1.34) | (0.48) | (0.65) | |
| Per share, diluted | 0.47 | (0.00) | 0.28 | 0.35 | 0.01 | (1.34) | (0.48) | (0.65) | |
| Total cash capital investment | 148 | 163 | 103 | 158 | 78 | 63 | 19 | 20 | |
| Cash and cash equivalents | 675 | 464 | 398 | 512 | 549 | 156 | 103 | 153 | |
| Long-term debt | 3,543 | 4,637 | 4,636 | 4,813 | 4,945 | 5,053 | 4,910 | 4,871 | |
| (1) | Net operating costs include energy and non-energy operating costs, reduced by power revenue. |
| (2) | Cash operating netback is calculated by deducting the related diluent expense, blend purchases, transportation, operating expenses, royalties and realized commodity risk management gains (losses) from proprietary blend revenues and power revenues, on a per barrel of bitumen sales volume basis. |
| (3) | Adjusted funds flow from (used in) operations, Operating earnings (loss) and the related per share amounts do not have standardized meanings prescribed by IFRS and therefore may not be comparable to similar measures used by other companies. The non-GAAP measure of adjusted funds flow from (used in) operations is reconciled to net cash provided by (used in) operating activities and the non-GAAP measure of operating earnings (loss) is reconciled to net earnings (loss) in accordance with IFRS under the heading "NON-GAAP MEASURES" and discussed further in the "ADVISORY" section. |
| (4) | The total of Petroleum revenue, net of royalties and Other revenue as presented on the Consolidated Statement of Earnings and Comprehensive Income. |
ADVISORY
Basis of Presentation
MEG prepares its financial statements in accordance with International Financial Reporting Standards ("IFRS") and presents financial results in Canadian dollars ($ or C$), which is the Corporation's functional currency.
Non-GAAP Measures
Certain financial measures in this news release including: net marketing activity, funds flow from (used in) operations, adjusted funds flow from (used in) operations, operating earnings (loss), operating cash flow and total debt are non-GAAP measures. These terms are not defined by IFRS and, therefore, may not be comparable to similar measures provided by other companies. These non-GAAP financial measures should not be considered in isolation or as an alternative for measures of performance prepared in accordance with IFRS.
Funds Flow From (Used in) Operations and Adjusted Funds Flow From (Used in) Operations
Funds flow from (used in) operations and adjusted funds flow from (used in) operations are non-GAAP measures utilized by the Corporation to analyze operating performance and liquidity. Funds flow from (used in) operations excludes the net change in non-cash operating working capital while the IFRS measurement "net cash provided by (used in) operating activities" includes these items. Adjusted funds flow from (used in) operations excludes the net change in non-cash operating working capital, realized gain on foreign exchange derivatives not considered part of ordinary continuing operating results, payments on onerous contracts and decommissioning expenditures, while the IFRS measurement "net cash provided by (used in) operating activities" includes these items. Funds flow from (used in) operations and adjusted funds flow from (used in) operations are not intended to represent net cash provided by (used in) operating activities calculated in accordance with IFRS. Funds flow from (used in) operations and adjusted funds flow from (used in) operations are reconciled to net cash provided by (used in) operating activities in the table below.
| Three months ended March 31 | ||||||
| ($000) | 2018 | 2017 | ||||
| Net cash provided by (used in) operating activities | $ | 118,026 | $ | 45,806 | ||
| Net change in non-cash operating working capital items | (8,136) | (8,187) | ||||
| Funds flow from (used in) operations | 109,890 | 37,619 | ||||
| Adjustments: | ||||||
| Realized gain on foreign exchange derivatives(1) | (35,362) | - | ||||
| Payments on onerous contracts | 6,008 | 4,134 | ||||
| Decommissioning expenditures | 2,621 | 1,422 | ||||
| Adjusted funds flow from (used in) operations | $ | 83,157 | $ | 43,175 | ||
| (1) | A gain related to the settlement of forward currency contracts to manage the foreign exchange risk on those Canadian dollar denominated proceeds related to the sale of assets designated for U.S. dollar denominated long-term debt repayment. |
Operating Earnings (Loss)
Operating earnings (loss) is a non-GAAP measure which the Corporation uses as a performance measure to provide comparability of financial performance between periods by excluding non-operating items. Operating earnings (loss) is defined as net earnings (loss) as reported, excluding unrealized foreign exchange gains and losses, unrealized gains and losses on derivative financial instruments, unrealized gains and losses on commodity risk management, realized gains and losses on foreign exchange derivatives, gain on asset dispositions, onerous contracts expense, and the respective deferred tax impact on these adjustments. Operating earnings (loss) is reconciled to "Net earnings (loss)", the nearest IFRS measure.
| Three months ended March 31 | |||||
| ($000) | 2018 | 2017 | |||
| Net earnings (loss) | $ | 140,573 | $ | 1,588 | |
| Adjustments: | |||||
| Unrealized loss (gain) on foreign exchange(1) | 141,298 | (36,707) | |||
| Unrealized loss (gain) on derivative financial liabilities(2) | 2,976 | (2,241) | |||
| Unrealized loss (gain) on commodity risk management(3) | 58,032 | (59,599) | |||
| Realized foreign exchange loss (gain) on foreign exchange derivatives(4) | (35,362) | - | |||
| Gain on asset dispositions(5) | (318,398) | - | |||
| Onerous contracts expense | 644 | 2,375 | |||
| Deferred tax expense (recovery) relating to these adjustments | (7,778) | 15,230 | |||
| Operating earnings (loss) | $ | (18,015) | $ | (79,354) | |
| (1) | Unrealized net foreign exchange gains and losses result from the translation of U.S. dollar denominated long-term debt and cash and cash equivalents using period-end exchange rates. |
| (2) | Unrealized gains and losses on derivative financial liabilities result from the interest rate floor on the Corporation's long-term debt and interest rate swaps entered into to effectively fix a portion of its variable rate long-term debt. |
| (3) | Unrealized gains or losses on commodity risk management contracts represent the change in the mark-to-market position of the unsettled commodity risk management contracts during the period. |
| (4) | A gain related to the settlement of forward currency contracts to manage the foreign exchange risk on those Canadian dollar denominated proceeds related to the sale of assets designated for U.S. dollar denominated long-term debt repayment. |
| (5) | A gain related to the sale of the Corporation's 50% interest in the Access Pipeline. |
Forward-Looking Information
This document may contain forward-looking information including but not limited to: expectations of future production, revenues, expenses, cash flow, operating costs, steam-oil ratios, pricing differentials, reliability, profitability and capital investments; estimates of reserves and resources; anticipated reductions in operating costs as a result of optimization and scalability of certain operations; and anticipated sources of funding for operations and capital investments. Such forward-looking information is based on management's expectations and assumptions regarding future growth, results of operations, production, future capital and other expenditures, plans for and results of drilling activity, environmental matters, and business prospects and opportunities.
By its nature, such forward-looking information involves significant known and unknown risks and uncertainties, which could cause actual results to differ materially from those anticipated. These risks include, but are not limited to: risks associated with the oil and gas industry, for example, results securing access to markets and transportation infrastructure; availability of capacity on the electricity transmission grid; uncertainty of reserve and resource estimates; uncertainty associated with estimates and projections relating to production, costs and revenues; health, safety and environmental risks; risks of legislative and regulatory changes to, amongst other things, tax, land use, royalty and environmental laws; assumptions regarding and the volatility of commodity prices, interest rates and foreign exchange rates, and, risks and uncertainties related to commodity price, interest rate and foreign exchange rate swap contracts and/or derivative financial instruments that MEG may enter into from time to time to manage its risk related to such prices and rates; risks and uncertainties associated with securing and maintaining the necessary regulatory approvals and financing to proceed with MEG's future phases and the expansion and/or operation of MEG's projects; risks and uncertainties related to the timing of completion, commissioning, and start-up, of MEG's future phases, expansions and projects; the operational risks and delays in the development, exploration, production, and the capacities and performance associated with MEG's projects; and uncertainties arising in connection with any future disposition of assets.
Although MEG believes that the assumptions used in such forward-looking information are reasonable, there can be no assurance that such assumptions will be correct. Accordingly, readers are cautioned that the actual results achieved may vary from the forward-looking information provided herein and that the variations may be material. Readers are also cautioned that the foregoing list of assumptions, risks and factors is not exhaustive.
Further information regarding the assumptions and risks inherent in the making of forward-looking statements can be found in MEG's most recently filed Annual Information Form ("AIF"), along with MEG's other public disclosure documents. Copies of the AIF and MEG's other public disclosure documents are available through the company's website at www.megenergy.com/investors and through the SEDAR website at www.sedar.com.
The forward-looking information included in this document is expressly qualified in its entirety by the foregoing cautionary statements. Unless otherwise stated, the forward-looking information included in this document is made as of the date of this document and MEG assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances, except as required by law.
A full version of MEG's First Quarter Report to Shareholders, including unaudited financial statements, is available at www.megenergy.com/investors and at www.sedar.com.
A conference call will be held to review the operating and financial results at 9 a.m. Mountain Time (11 a.m. Eastern Time) on Thursday, May 10, 2018. The North American toll-free conference call number is 1-888-231-8191. The international conference call number is 647-427-7450.
A recording of the call will be available from 12 noon Mountain Time (2 p.m. Eastern Time) on May 10, 2018 until 9:59 p.m. Mountain Time (11:59 p.m. Eastern Time) on June 7, 2018. To access the recording, dial toll-free 1-855-859-2056 or local 403-451-9481 and enter the pass code 3184979.
MEG Energy Corp. is focused on sustainable in situ oil sands development and production in the southern Athabasca oil sands region of Alberta, Canada. MEG is actively developing enhanced oil recovery projects that utilize SAGD extraction methods. MEG's common shares are listed on the Toronto Stock Exchange under the symbol "MEG".
For further information, please contact:
Investors
Helen Kelly
Director, Investor Relations
403-767-6206
helen.kelly@megenergy.com
Media
Davis Sheremata
Senior Advisor, External Communications
587-233-8311
davis.sheremata@megenergy.com
SOURCE MEG Energy Corp.
