MEG Energy announces 2022 financial and operating results

2023-02-27

TSX - Toronto Stock Exchange · Oil · Bitumen · Natural Gas · Natural Gas Liquids · Canada

Canada NewsWire

| All financial figures are in Canadian dollars ($ or C$) and all references to barrels are per barrel of bitumen unless otherwise noted. The Corporation's Non-GAAP and Other Financial Measures are detailed in the Advisory section of this news release. They include: cash operating netback, blend sales, bitumen realization net of transportation and storage expense, operating expenses net of power revenue, energy operating costs net of power revenue, non-energy operating costs, energy operating costs, adjusted funds flow, free cash flow and net debt. |

CALGARY, AB , Feb. 27, 2023 /CNW/ - MEG Energy Corp. (TSX: MEG) ("MEG" or the "Corporation") reported its full year 2022 operational and financial results.

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"I am extremely proud of the safety, operating, and financial performance delivered by MEG in 2022", said Derek Evans , President and Chief Executive Officer. "Record annual and quarterly production was achieved along with industry leading steam-oil ratios, while we repaid approximately $1.3 billion of debt and repurchased $382 million of shares. We remain committed to our ongoing debt reduction and share buyback program which should drive continued shareholder value through 2023 and beyond. Long-term value has been delivered to shareholders through the collective strength of our MEG team."

Highlights include:

Record annual bitumen production of 95,338 barrels per day ("bbls/d") at a 2.36 steam-oil ratio ("SOR"), including fourth quarter average bitumen production of 110,805 bbls/d at a 2.22 SOR; Adjusted funds flow of $1,934 million , or $6.26 per share, and $1,882 million of funds flow from operating activities; Free cash flow of $1,558 million , after $376 million of capital expenditures; Debt repayment of US$1.0 billion (approximately $1.3 billion ). Net debt declined to US$1.0 billion (approximately $1.4 billion ) at the end of the year; MEG returned $382 million to shareholders through the buy back of 20.7 million shares, or approximately 7% of the December 31, 2021 issued and outstanding shares; Operating expenses net of power revenue of $7.91 per barrel. Power revenue offset 56% of energy operating costs, resulting in energy operating costs net of power revenue of $3.18 per barrel and non-energy operating costs of $4.73 per barrel. Fourth quarter operating expenses net of power revenue were $5.83 per barrel, including $1.49 per barrel of energy operating costs net of power revenue and non-energy operating costs of $4.34 per barrel; and Subsequent to year end, MEG's Board of Directors approved the filing of a renewal application of MEG's existing normal course issuer bid ("NCIB") with the Toronto Stock Exchange ("TSX"). Once approved it will allow MEG to buyback up to 10% of its public float as defined by the TSX over a one year period.

| | Three months ended December 31 | Year ended December 31 | | | | ($millions, except as indicated) | 2022 | 2021 | 2022 | 2021 | | Bitumen production - bbls/d | 110,805 | 100,698 | 95,338 | 93,733 | | | | | | | | Steam-oil ratio | 2.22 | 2.42 | 2.36 | 2.43 | | | | | | | | Bitumen sales - bbls/d | 113,582 | 98,894 | 95,691 | 92,138 | | | | | | | | Bitumen realization after net transportation

and storage expense (1) - $/bbl | 54.75 | 59.67 | 76.66 | 51.54 | | | | | | | | Operating expenses - $/bbl | 11.05 | 10.78 | 12.02 | 9.18 | | Operating expenses net of power revenue (1) -

$/bbl | 5.83 | 8.20 | 7.91 | 6.60 | | | | | | | | Non-energy operating costs (2) - $/bbl | 4.34 | 4.56 | 4.73 | 4.24 | | | | | | | | Cash operating netback (1) - $/bbl | 43.89 | 37.87 | 62.61 | 33.37 | | | | | | | | General & administrative expense -

$/bbl of bitumen production volumes | 1.62 | 1.58 | 1.78 | 1.65 | | | | | | | | Funds flow from operating activities | 383 | 260 | 1,882 | 753 | | Per share, diluted | 1.28 | 0.83 | 6.09 | 2.42 | | Adjusted funds flow (3) | 401 | 274 | 1,934 | 826 | | Per share, diluted (3) | 1.34 | 0.88 | 6.26 | 2.65 | | Free cash flow (3) | 295 | 168 | 1,558 | 495 | | | | | | | | Revenues | 1,445 | 1,307 | 6,118 | 4,321 | | | | | | | | Net earnings (loss) | 159 | 177 | 902 | 283 | | Per share, diluted | 0.53 | 0.57 | 2.92 | 0.91 | | | | | | | | Capital expenditures | 106 | 106 | 376 | 331 | | | | | | | | Long-term debt, including current portion | 1,581 | 2,762 | 1,581 | 2,762 | | Net debt - C$ (3) | 1,389 | 2,401 | 1,389 | 2,401 | | Net debt - US$ (3) | 1,026 | 1,897 | 1,026 | 1,897 |

| (1) Non-GAAP financial measure - please refer to the Advisory section of this news release. | | (2) Supplementary financial measure - please refer to the Advisory section of this news release. | | (3) Capital management measure - please refer to the Advisory section of this news release. |

Financial Results

Adjusted funds flow and funds flow from operating activities rose to $1,934 million and $1,882 million , respectively, in 2022, compared to $826 million and $753 million in 2021, mainly reflecting higher WTI prices, which increased 2022 bitumen realization after net transportation and storage expense, and 2021 commodity risk management losses.

Annual 2022 free cash flow was $1,558 million compared to $495 million in 2021. Higher 2022 adjusted funds flow was partially offset by capital spending, which increased to $376 million from $331 million in 2021. A turnaround was completed in 2022 but was not required in the prior year.

Net earnings for 2022 increased to $902 million from $283 million in 2021. Higher 2022 funds flow from operating activities was partially offset by increased deferred tax expense, higher depletion and depreciation expense and an unrealized foreign exchange loss on long-term debt.

Cash operating netback rose to $62.61 per barrel in 2022 from $33.37 per barrel in 2021, mainly reflecting a higher bitumen realization after net transportation and storage expense, partially offset by increased royalty expense, and reduced commodity risk management activity compared to 2021.

Bitumen realization after net transportation and storage expense was $76.66 per barrel in 2022 compared to $51.54 per barrel during 2021. A stronger 2022 WTI benchmark price was partially offset by wider WTI:AWB differentials and increased net transportation and storage expense compared to 2021. MEG US Gulf Coast sales volumes rose to 66% in 2022 from 42% in 2021 reflecting incremental egress out of the Edmonton area following completion of the Enbridge Line 3 Replacement Project.

Operating Results

Bitumen production rose to 95,338 bbls/d, at a 2.36 SOR, in 2022, compared to 93,733 bbls/d at a 2.43 SOR in 2021. The production increase reflects a continued focus on operating excellence, including optimized well spacing, enhanced completion designs, and capital efficient well redevelopment.

Non–energy operating costs increased to $4.73 per barrel of bitumen sales in 2022 from $4.24 per barrel in 2021, primarily due to inflationary increases in chemical treating, fuel costs, staffing, and planned maintenance. In 2021, the Corporation also benefited from government-led initiatives to assist the industry through unprecedented market volatility, which decreased non-energy operating costs.

Energy operating costs, net of power revenue, averaged $3.18 per barrel in 2022, compared to $2.36 per barrel in the prior year. The increase primarily reflects a stronger 2022 AECO natural gas price partially offset by higher Alberta power prices. Power revenue offset 56% and 52% of energy operating costs in 2022 and 2021, respectively.

General and administrative ("G&A") expense was $61 million, or $1.78 per barrel of production, during 2022, compared to $56 million, or $1.65 per barrel of production, in 2021. G&A expense in 2022 reflects increased staff costs and one-time recruitment payments, while 2021 G&A expense benefited from government-led initiatives to assist the industry through unprecedented market volatility.

Capital Allocation Strategy

Free cash flow is being allocated to ongoing debt repayment and share buybacks. The Corporation generated $1 ,558 million of free cash flow in 2022, which combined with cash on hand, was used to repurchase approximately $1.3 billion of outstanding indebtedness and buyback $382 million of shares.

The Corporation started the year allocating all free cash flow to debt reduction. In the second quarter, upon reaching net debt of US$1.7 billion , the Corporation initiated the allocation of approximately 25% of free cash flow to share buybacks with the remainder applied to debt reduction. At the end of the third quarter, net debt declined to US$1.2 billion , and free cash flow allocated to share buybacks was raised to approximately 50% with the remainder applied to debt reduction. This allocation will remain until US$600 million of net debt is achieved. The Corporation exited 2022 with net debt of US$1.0 billion .

Debt Repurchases

Debt reduction during 2022 totaled US$1.0 billion (approximately $1.3 billion ), including the repurchase of US$620 million ( $820 million ) of outstanding 7.125% senior unsecured notes at a weighted average price of 102.5% and the redemption of US$396 million ( $505 million ) of 6.50% senior secured second lien notes at 101.625%.

Share Buybacks

During the year ended December 31, 2022 , MEG repurchased for cancellation 20.7 million common shares, or approximately 7% of the 2021 outstanding year-end balance, returning $382 million to shareholders.

As the current NCIB will expire on March 9, 2023 , MEG's Board of Directors approved the filing of a renewal application of MEG's existing NCIB with the TSX. Once approved it will allow MEG to buyback up to 10% of its public float as defined by the TSX over a one year period.

Sustainability and Pathways Update

The Corporation remains committed to its long-term goal of reaching net zero Scope 1 1 and Scope 2 2 GHG emissions by 2050. In early 2023, the Corporation replaced its mid-term target of reaching a 30% reduction in bitumen GHG emissions intensity (Scope 1 and Scope 2) from 2013 levels by 2030, with a mid-term target of reducing its absolute GHG emissions (Scope 1 and Scope 2) by 0.63 megatonnes per annum by year-end 2030, representing a reduction of approximately 30% absolute Scope 1 and Scope 2 emissions from 2019 levels.

MEG, along with its Pathways Alliance ("Alliance") peers, is progressing pre-work on the proposed foundational carbon capture and storage project, which will transport CO2 via pipeline from multiple oil sands facilities to be stored safely and permanently in the Cold Lake region of Alberta . In the fourth quarter of 2022, the Corporation and its Alliance peers reached a significant milestone entering into a carbon sequestration evaluation agreement with the Government of Alberta and starting the detailed evaluation of the proposed Cold Lake area geological storage hub. The Corporation and its Alliance peers continue to work closely with the federal and provincial governments to land on policy that supports the progress of these large decarbonization projects while ensuring Canada remains globally competitive and continues to attract investment.

For further details on the Corporation's approach to ESG matters, please refer to the Corporation's 2021 ESG Report and its 2022 ESG Performance Data Supplement available in the "Sustainability" section of MEG's website at www.megenergy.com and in the Corporation's annual 2022 MD&A and most recently filed AIF on www.sedar.com .

| | | 1 Scope 1 refers to direct GHG emissions from sources that are owned or controlled by the Corporation. | | 2 Scope 2 refers to indirect GHG emissions that result from the generation of purchased electricity, heating, cooling or steam consumed at assets owned or controlled by the Corporation. |

2023 Guidance

| (1) 2023 guidance includes the impact of the scheduled second quarter turnaround which is expected to impact annual production by approximately 6,000 bbls/d. |

Adjusted Funds Flow ("AFF") Sensitivity

MEG's production is entirely comprised of crude oil and AFF is highly correlated with crude oil benchmark prices. The following table provides an annual sensitivity estimate to the most significant market variables.

| (1) | Each sensitivity is independent of changes to other variables. | | (2) | Assumes mid point of 2023 production guidance, US$80/bbl WTI, US$23/bbl WTI:AWB Edmonton discount, C$1.32/US$ F/X rate, condensate purchased at 100% of WTI and one bbl of bitumen per 1.44 bbls of blend sales (1.44 blend ratio). | | (3) | Assumes 1.3 GJ/bbl of bitumen, 70% of 150 MW of power generation sold externally and a 30.0 heat rate (every $0.50/GJ change in AECO natural gas price changes the power price by C$15.00/MWh). |

Conference Call

A conference call will be held to review MEG's year ended 2022 operating and financial results at 6:30 a.m. Mountain Time ( 8:30 a.m. Eastern Time ) on February 28, 2023 . To participate, please dial the North American toll-free number 1-888-390-0546, or the international call number 1-416-764-8688.

A recording of the call will be available by 12 noon Mountain Time ( 2 p.m. Eastern Time ) on the same day at https://www.megenergy.com/investors/presentations-events/ .

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 and Other Financial Measures

Certain financial measures in this news release are non-GAAP financial measures or ratios, supplementary financial measures and capital management measures. These measures are not defined by IFRS and, therefore, may not be comparable to similar measures provided by other companies. These non-GAAP and other financial measures should not be considered in isolation or as an alternative for measures of performance prepared in accordance with IFRS.

Adjusted Funds Flow and Free Cash Flow

Adjusted funds flow and free cash flow are capital management measures and are defined in the Corporation's consolidated financial statements. Adjusted funds flow and free cash flow are presented to assist management and investors in analyzing operating performance and cash flow generating ability. Funds flow from operating activities is an IFRS measure in the Corporation's consolidated statement of cash flow. Adjusted funds flow is calculated as funds flow from operating activities excluding items not considered part of ordinary continuing operating results. By excluding non-recurring adjustments, the adjusted funds flow measure provides a meaningful metric for management and investors by establishing a clear link between the Corporation's cash flows and cash operating netback. Free cash flow is presented to assist management and investors in analyzing performance by the Corporation as a measure of financial liquidity and the capacity of the business to repay debt and return capital to shareholders. Free cash flow is calculated as adjusted funds flow less capital expenditures.

In the second quarter of 2022, an adjustment was made to the presentation of adjusted funds flow and free cash flow. In April 2020 , the Corporation issued cash-settled RSUs under its long-term incentive ("LTI") plan when the share price was at a historic low of $1.57 per share. Concurrent with the issuance, the Corporation entered equity price risk management contracts to manage share price volatility in the subsequent three-year period, effectively reducing share price appreciation cash flow risk. The increase in the Corporation's share price from April 2020 to June 30, 2022 resulted in the recognition of a significant cash-settled stock-based compensation expense, which was previously included as a component of adjusted funds flow and free cash flow. The actual cash impact of the 2020 cash-settled RSUs, however, is subject to equity price risk management contracts, so the cash impact over the term of these RSUs has been reduced and the change in value does not provide a valuable indication of operating performance.

Therefore, the financial statement impacts of the April 2020 cash-settled stock-based compensation and the equity price risk management contracts have been excluded from adjusted funds flow and free cash flow. All prior periods presented have been adjusted to reflect this change in presentation. The adjustments to prior periods are as follows:

| | 2022 | 2021 | 2020 | | | | | | | ($millions, except as indicated) | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | | Adjusted funds flow, as previously presented | $ 587 | $ 266 | $ 239 | $ 166 | $ 127 | $ 84 | $ 26 | $ 89 | | Adjustments: | | | | | | | | | | Impact of cash-settled SBC units subject to equity price

risk management | 18 | 8 | 4 | 18 | 5 | 4 | — | 2 | | Realized equity price risk management gain | (46) | — | — | — | (8) | — | — | — | | Adjusted funds flow, current presentation | $ 559 | $ 274 | $ 243 | $ 184 | $ 124 | $ 88 | $ 26 | $ 91 | | | | | | | | | | | | Free cash flow, as previously presented | $ 499 | $ 160 | $ 155 | $ 95 | $ 57 | $ 44 | $ (9) | $ 69 | | Adjustments: | | | | | | | | | | Impact of cash-settled SBC units subject to equity

price risk management | 18 | 8 | 4 | 18 | 5 | 4 | — | 2 | | Realized equity price risk management gain | (46) | — | — | — | (8) | — | — | — | | Free cash flow, current presentation | $ 471 | $ 168 | $ 159 | $ 113 | $ 54 | $ 48 | $ (9) | $ 71 |

The following table reconciles funds flow from operating activities to adjusted funds flow to free cash flow:

| ($millions) | | | 2022 | 2021 | | Funds flow from operating activities | | | $ 1,882 | $ 753 | | Adjustments: | | | | | | Impact of cash-settled SBC units subject to equity price risk management | | | 98 | 35 | | Realized equity price risk management gain | | | (46) | (8) | | Settlement expense | | | — | 21 | | Payments on onerous contract | | | — | 25 | | Adjusted funds flow | | | 1,934 | 826 | | Capital expenditures | | | (376) | (331) | | Free cash flow | | | $ 1,558 | $ 495 |

Net Debt

Net debt is a capital management measure and is defined in the Corporation's consolidated financial statements. Net debt is an important measure used by management to analyze leverage and liquidity. Net debt is calculated as long-term debt plus current portion of long-term debt less cash and cash equivalents.

The following table reconciles the Corporation's current and long-term debt to net debt:

| As at | December 31, 2022 | December 31, 2021 | | Long-term debt | $ 1,578 | $ 2,477 | | Current portion of long-term debt | 3 | 285 | | Cash and cash equivalents | (192) | (361) | | Net debt - C$ | $ 1,389 | $ 2,401 | | Net debt - US$ | $ 1,026 | $ 1,897 |

Cash Operating Netback

Cash operating netback is a non-GAAP financial measure, or ratio when expressed on a per barrel basis. Its terms are not defined by IFRS and, therefore, may not be comparable to similar measures provided by other companies. This non-GAAP financial measure should not be considered in isolation or as an alternative for measures of performance prepared in accordance with IFRS.

Cash operating netback is a financial measure widely used in the oil and gas industry as a supplemental measure of a company's efficiency and its ability to generate cash flow for debt repayment, capital expenditures, or other uses. The per barrel calculation of cash operating netback is based on bitumen sales volumes.