MEG Energy reports record production, record low net operating costs per barrel, and strong funds flow from operations in third quarter of 2018
Solid operations deliver production and cash flow growth
All financial figures in Canadian dollars ($ or C$) unless otherwise noted
CALGARY, Nov 1, 2018 - MEG Energy Corp. (TSX:MEG) today reported third quarter 2018 operating and financial results. Highlights include:
- Record quarterly bitumen production volumes of 98,751 barrels per day (bpd) and low steam-oil-ratio (SOR) of 2.2. Annual production is well on-track to achieve 2018 guidance of 87,000 to 90,000 bpd;
- Record low per barrel net operating costs of $4.34, including low non-energy operating costs of $4.38 per barrel;
- Strong adjusted funds flow from operations of $116 million or $0.39 per share, including $88 million of realized net hedging losses. Adjusted funds flow from operations excluding realized net hedging losses totalled $0.68 per share;
- Total cash capital investment of $145 million in the quarter, primarily directed to advance the Phase 2B Brownfield expansion and eMVAPEX pilot;
- Cash and cash equivalents of $373 million; MEG's covenant-lite US$1.4 billion facility remains undrawn;
- Subsequent to the quarter, MEG executed a binding agreement to access 30,000 bpd of unit train rail loading capacity at the Bruderheim terminal, operated by Cenovus. The term of this agreement is for three years, with a one-year extension at MEG's option; and
- On October 17, 2018, MEG announced that its Board of Directors (the "MEG Board") unanimously rejected Husky Energy's unsolicited bid to acquire the Company and recommended MEG shareholders NOT tender their shares.
"The MEG of today is more robust on every measure. We are entering an exciting period of greater financial strength and flexibility, as the Company reaches a critical inflection point transforming from a net consumer of cash to a generator of significant cash flow, well in excess of future capital investment requirements. Through our world-class asset base and industry-leading technology, the Board and Management remain committed to maximizing value for our shareholders," says Derek Evans, President and Chief Executive Officer.
"The record high production and record low net operating costs per barrel in the third quarter reflects the successful application of MEG's proprietary eMSAGP technology on existing wells at Christina Lake Phase 2B. The spending on this phase of the roll-out was substantially completed during the quarter, with lower than expected total costs of $320 million or $16,000 per flowing barrel," Evans continued. "Our innovative approach to maximizing the value of our steam and achieving among the best-in-class SORs through the application of eMSAGP and eMVAPEX supports our highly efficient capital re-investment, industry-leading cost structure, and enhanced environmental performance. MEG has a pipeline of execution-ready brownfield projects with the potential to double production in the next 10 years."
Third quarter bitumen production averaged a record 98,751 bpd, a 19% increase relative to the same period in 2017. This strong production growth was achieved as new wells were brought on-stream as part of the Phase 2B eMSAGP implementation. Trending lower for the eighth consecutive quarter, net operating costs per barrel were 28% lower than the third quarter of 2017. The low per barrel net operating costs were supported by higher production volumes, low natural gas prices and strong power revenues.
Pricing and Market Access
MEG achieved strong blend sales realizations of $63.67 per barrel in the third quarter of 2018, 33% higher than the third quarter of 2017. The higher blend sales realization was the result of stronger benchmark crude oil prices, partially offset by wider WTI:WCS differentials in the period. MEG's bitumen realization averaged $49.58 per barrel, 24% higher than the third quarter of 2017.
"MEG's diversified marketing strategy allowed the Company to deliver 31% of blend sales into the premium U.S. Gulf Coast market during the third quarter, where the barrels received a pricing uplift of approximately $15 per barrel (net of transportation), relative to sales in the Edmonton market. As a result of this strategy, lower-priced post-apportionment blend sales have been limited to 13% of volumes during the third quarter," said Evans.
During the third quarter MEG doubled rail volumes to 7,800 bpd, with plans to rail approximately 15,000 bpd in the fourth quarter and up to 30,000 bpd by the end of the first quarter of 2019. Subsequent to the quarter, MEG executed a binding agreement at competitive market rates to access 30,000 bpd of unit train rail loading capacity at the Bruderheim terminal, operated by Cenovus. The term of this agreement is for three years, with a one-year extension at MEG's option. As a mechanism to clear barrels during periods of high pipeline apportionment and reduce exposure to the post-apportionment market, the use of rail enables MEG to maximize the price received on its barrels until additional egress capacity from Western Canada is secured. MEG's strategic network of North American storage facilities was also used during the third quarter to mitigate differential and apportionment exposure as MEG put barrels into storage.
Transportation costs per barrel for the third quarter of 2018 were 29% higher than the third quarter of 2017. The higher transportation costs reflect the sale of the Company's 50% share in the Access Pipeline and 100% of Stonefell Terminal, as well as higher per barrel costs associated with the increased use of rail.
"Although differentials are expected to remain challenging in the fourth quarter, we anticipate them to moderate in 2019 as Canadian rail export volumes increase significantly and PADD II refineries come back on line after what has been the largest heavy oil planned turnaround season in the last five years," added Evans. "In addition, to partially mitigate the financial impact of wider forecasted differentials, MEG plans to reduce its fourth quarter production by 4,000 to 6,000 bpd through advancing a portion of our 2019 scheduled maintenance program into November. Further, we can vary the pace of ramp-up subsequent to the turnaround depending on market conditions. We do not currently anticipate any impact to our previously announced 2018 annual guidance."
Capital Investment
Total cash capital investment in the quarter was $145 million. The largest area of spending was on the Phase 2B Brownfield expansion, with construction proceeding on-schedule and on-budget. Completion and ramp-up of the project is anticipated in the second half of 2019, bringing total expected production to 113,000 bpd by the end of 2019. Spending on the current application of eMSAGP on Phase 2B was substantially completed in the quarter. Additionally, the Company invested $14 million on the eMVAPEX pilot, including spending on the propane recycling unit, which is expected to be fully operational in the fourth quarter of this year.
Adjusted Funds Flow and Operating Loss
Adjusted funds flow from operations were $116 million in the third quarter of 2018, compared to $83 million in the third quarter of 2017. The 40% increase reflects stronger benchmark crude oil prices and higher sales volumes, partially offset by realized net losses on commodity risk management contracts totaling approximately $88 million. With current cash reserves, higher commodity prices and lower anticipated levels of capital spending in 2019, MEG expects to hedge a substantially lower percentage of barrels in 2019.
The Company recognized an operating loss of $19 million in the third quarter of 2018, compared to an operating loss of $43 million for the same period of 2017. The decrease in the operating loss is primarily the result of higher bitumen realizations, partially offset by realized losses on commodity risk management contracts.
Operational and Financial Highlights
| Nine months | 2018 | 2017 | 2016 | |||||||
| ($ millions, except as indicated) | 2018 | 2017 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 |
| Bitumen production - bbls/d | 87,781 | 77,588 | 98,751 | 71,325 | 93,207 | 90,228 | 83,008 | 72,448 | 77,245 | 81,780 |
| Bitumen realization - $/bbl | 43.92 | 39.17 | 49.58 | 47.20 | 35.31 | 48.30 | 39.89 | 39.66 | 37.93 | 36.17 |
| Net operating costs - $/bbl(1) | 5.28 | 7.26 | 4.34 | 5.64 | 5.98 | 5.86 | 6.00 | 7.42 | 8.43 | 8.24 |
| Non-energy operating costs - $/bbl | 4.75 | 4.66 | 4.38 | 5.47 | 4.55 | 4.53 | 4.57 | 4.23 | 5.20 | 4.99 |
| Cash operating netback - $/bbl(2) | 21.09 | 24.09 | 23.96 | 18.53 | 20.16 | 33.83 | 26.84 | 22.96 | 22.33 | 21.73 |
| Adjusted funds flow from operations(3) | 217 | 182 | 116 | 18 | 83 | 192 | 83 | 55 | 43 | 40 |
| Per share, diluted(3) | 0.73 | 0.63 | 0.39 | 0.06 | 0.28 | 0.65 | 0.28 | 0.19 | 0.16 | 0.18 |
| Operating earnings (loss)(3) | (107) | (158) | (19) | (70) | (18) | 44 | (43) | (36) | (79) | (72) |
| Per share, diluted(3) | (0.36) | (0.55) | (0.06) | (0.24) | (0.06) | 0.15 | (0.14) | (0.12) | (0.29) | (0.32) |
| Revenue(4) | 2,213 | 1,720 | 803 | 689 | 721 | 755 | 576 | 584 | 560 | 566 |
| Net earnings (loss) | 80 | 190 | 118 | (179) | 141 | (1) | 84 | 104 | 2 | (305) |
| Per share, basic | 0.27 | 0.66 | 0.40 | (0.61) | 0.48 | 0.00 | 0.29 | 0.36 | 0.01 | (1.34) |
| Per share, diluted | 0.27 | 0.66 | 0.39 | (0.61) | 0.47 | 0.00 | 0.28 | 0.35 | 0.01 | (1.34) |
| Total cash capital investment | 475 | 339 | 145 | 183 | 148 | 163 | 103 | 158 | 78 | 63 |
| Cash and cash equivalents | 373 | 398 | 373 | 564 | 675 | 464 | 398 | 512 | 549 | 156 |
| Long-term debt | 3,544 | 4,636 | 3,544 | 3,607 | 3,543 | 4,668 | 4,636 | 4,813 | 4,945 | 5,053 |
| (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. Effective January 1, 2018, petroleum revenues are presented on a gross basis as they represent separate performance obligations, as discussed in the "NEW ACCOUNTING STANDARDS" section of the Corporation's Management Discussion and Analysis (MD&A) dated October 31, 2018. Prior quarters have been revised as applicable to reflect the new presentation. |
Take-Over Offer from Husky
On October 2, 2018, Husky Energy Inc. ("Husky") made a formal offer to acquire all of the issued and outstanding common shares of MEG, at the election of each MEG shareholder, for (i) ?$11.00 in cash or (ii) 0.485 of a common share ("Husky Share") of Husky for each MEG common share, subject to a maximum aggregate cash consideration of $1 billion and a maximum aggregate number of Husky Shares of approximately 107 million (the "Husky Offer"). The Husky Offer must remain open until January 16, 2019 unless otherwise extended, accelerated or withdrawn in accordance with its terms. Based upon the closing price of the Husky Shares on the TSX on October 31, 2018, the current value of the Husky Offer is approximately $9.61 per MEG common share as implied by the exchange ratio.
Upon receipt of the Husky Offer, the MEG Board, operating through a Special Committee, engaged with financial and legal advisors to diligently review the Husky Offer. The MEG Board, on the recommendation of the Special Committee, has unanimously concluded that the Husky Offer significantly undervalues the Company and is not in the best interests of MEG or its shareholders. The MEG Board unanimously recommends that MEG shareholders reject the Husky Offer and not tender their common shares to the Husky Offer. No action is required to reject the Husky Offer.
The Directors' Circular, filed on October 17, 2018 by the Board, provides information for MEG shareholders about the Company's prospects and the MEG Board's analysis, deliberations and recommendations. The Directors' Circular is available at www.megenergy.com/RejectHusky and at www.sedar.com. Additional information can be found in the Investor Presentation, which is also available at www.megenergy.com/RejectHusky.
In its Directors' Circular, the Board describes the reasons for its recommendations. Among other things, the Board notes:
- MEG's stand-alone plan is worth substantially more than the value proposed to be delivered by Husky in the Husky Offer.
- The timing of the Husky Offer is opportunistic and was timed to deny MEG Shareholders the opportunity to fully evaluate the plans, and experience the value creation of MEG's new CEO, Mr. Evans.
- In addition to being financially inadequate, the form of consideration offered in the Husky Offer is disadvantageous to MEG Shareholders.
- As the Husky Offer is presently structured, Husky's existing owners are receiving the lion's share of the benefits of the combination, many of which Husky has not even acknowledged.
The Special Committee has given its financial advisor, BMO Capital Markets, a mandate to investigate alternative transactions to the Husky Offer. A data room containing confidential information about MEG has been created to help interested parties establish the true value of the Company. MEG will not be providing additional information to the market on the status of the strategic alternatives process until MEG has material developments to disclose.
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 Company'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, 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 presented to assist management and investors in analyzing 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.
In this press release, cash flow refers to funds flow from (used in) operations as defined above.
| Three months ended | Nine months ended | |||||||||
| ($000) | 2018 | 2017 | 2018 | 2017 | ||||||
| Net cash provided by (used in) operating activities | $ | 3,409 | $ | 7,979 | $ | 186,678 | $ | 117,397 | ||
| Net change in non-cash operating working capital items | 107,549 | 51,133 | 47,577 | 28,922 | ||||||
| Funds flow from (used in) operations | 110,958 | 59,112 | 234,255 | 146,319 | ||||||
| Adjustments: | ||||||||||
| Realized gain on foreign exchange derivatives(1) | — | — | (35,362) | — | ||||||
| Contract cancellation expense(2) | — | 18,765 | — | 18,765 | ||||||
| Payments on onerous contracts | 4,332 | 5,089 | 14,576 | 14,691 | ||||||
| Decommissioning expenditures | 452 | 386 | 3,823 | 1,847 | ||||||
| Adjusted funds flow from (used in) operations | $ | 115,742 | $ | 83,352 | $ | 217,292 | $ | 181,622 | ||
| (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. |
| (2) | During the third quarter of 2017, the Corporation recognized a contract cancellation expense of $18.8 million relating to the termination of a long-term marketing transportation contract that had not yet commenced. |
Operating Earnings (Loss)
Operating earnings (loss) is a non-GAAP measure which the Company 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 not considered part of ordinary continuing operating results, gain on asset dispositions, contract cancellation expense, onerous contracts expense, insurance proceeds and the respective deferred tax impact on these adjustments. Operating earnings (loss) is reconciled to "Net earnings (loss)", the nearest IFRS measure in the table below.
| Three months ended | Nine months ended | |||||||
| ($000) | 2018 | 2017 | 2018 | 2017 | ||||
| Net earnings (loss) | $ | 118,160 | $ | 83,885 | $ | 80,163 | $ | 189,755 |
| Adjustments: | ||||||||
| Unrealized loss (gain) on foreign exchange(1) | (58,253) | (180,448) | 145,422 | (345,116) | ||||
| Unrealized loss (gain) on derivative financial liabilities(2) | (192) | (3,490) | 2,674 | (7,346) | ||||
| Unrealized loss (gain) on commodity risk management(3) | (107,949) | 57,470 | 11,371 | (19,353) | ||||
| Realized foreign exchange loss (gain) on | ||||||||
| foreign exchange derivatives(4) | — | — | (35,362) | — | ||||
| Gain on asset dispositions(5) | — | — | (318,398) | — | ||||
| Contract cancellation expense(6) | — | 18,765 | — | 18,765 | ||||
| Onerous contracts expense | 897 | (27) | 1,686 | 5,681 | ||||
| Insurance proceeds | — | (183) | — | (183) | ||||
| Deferred tax expense (recovery) relating to | ||||||||
| these adjustments | 28,326 | (18,543) | 5,244 | 218 | ||||
| Operating earnings (loss) | $ | (19,011) | $ | (42,571) | $ | (107,200) | $ | (157,579) |
| (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. |
| (6) | During the third quarter of 2017, the Corporation recognized a contract cancellation expense of $18.8 million relating to the termination of a long-term marketing transportation contract that had not yet commenced. |
Forward-Looking Information
Certain statements contained in this news release may constitute forward-looking statements within the meaning of applicable Canadian securities laws. These statements relate to future events or MEG's future performance. All statements other than statements of historical fact may be forward-looking statements. The use of any of the words "anticipate", "continue", "estimate", "expect", "may", "will", "project", "should", "believe", "plan", "intend" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are often, but not always, identified by such words. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements.
In particular, this news release contains forward-looking statements with respect to: expectations regarding the value of MEG's stand alone plan; expectations that MEG's business plan will generate substantial or significant cash flow over the next several years; expectations that MEG is at an inflection point with its business plan; expectations respecting MEG's prospects for growth, profitability and creation of shareholder value; expectations with respect to the benefits to the Husky shareholders of Husky if the Husky Offer is successful; the expected disadvantages to the MEG Shareholders if the Husky Offer is successful; the intrinsic value of MEG's business; expectations respecting MEG's future capital efficiencies and operations; expectations of future production; anticipated future commodity prices and pricing differentials; future rail export volumes and plans; anticipated timing of the completion of the Phase 2B brownfield expansion and eMVAPEX pilot project; future capital spending plans; hedging policy and plans; and anticipated sources of funding for operations and capital investments.
Forward-looking information contained in this news release is based on management's expectations and assumptions regarding, among other things: future crude oil, bitumen blend, natural gas, electricity, condensate and other diluent prices, foreign exchange rates and interest rates; the recoverability of MEG's reserves and contingent resources; MEG's ability to market production of bitumen blend successfully to customers; future growth, results of operations and production levels; future capital and other expenditures; plans for and results of drilling activity; the regulatory framework governing royalties, land use, taxes and environmental matters in which MEG conducts and will conduct its business; 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, the securing of adequate access to markets and transportation infrastructure; the availability of capacity on the electricity transmission grid; the uncertainty of reserve and resource estimates; the uncertainty of 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 news release is expressly qualified in its entirety by the foregoing cautionary statements. Unless otherwise stated, the forward-looking information included in this news release is made as of the date of this news release and MEG assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances, except as required by law.
This news release contains future-oriented financial information and financial outlook information (collectively, "FOFI") about MEG's prospective results of operations including, without limitation, cash flow and various components thereof, all of which are subject to the same assumptions, risk factors, limitations, and qualifications as set forth above. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on FOFI. MEG's actual results, performance or achievement could differ materially from those expressed in, or implied by, these FOFI, or if any of them do so, what benefits MEG will derive therefrom. MEG has included the FOFI in order to provide readers with a more complete perspective on MEG's future operations and such information may not be appropriate for other purposes. MEG disclaims any intention or obligation to update or revise any FOFI statements, whether as a result of new information, future events or otherwise, except as required by law.
A full version of MEG's Third 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 8 a.m. Mountain Time (10 a.m. Eastern Time) on Thursday, November 1, 2018. The North American toll-free conference call number is 1-888-390-0546. The international conference call number is 587-880-2171.
A recording of the call will be available by 12 noon Mountain Time (2 p.m. Eastern Time) on November 1, 2018 on the Company's website at www.megenergy.com/investors/presentations-and-events.
About MEG
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 and External Communications
403-767-6206
helen.kelly@megenergy.com
Media
Megan Hjulfors
Senior Advisor, Investor Relations and External Communications
403-767-6211
megan.hjulfors@megenergy.com
SOURCE MEG Energy Corp.
