MEG Energy announces third quarter 2024 financial and operating results

2024-11-05

TSX - Toronto Stock Exchange · Canada

Canada NewsWire

CALGARY, AB , Nov. 5, 2024 /CNW/ - MEG Energy Corp. (TSX: MEG) ("MEG" or the "Corporation") reported its third quarter 2024 operational and financial results. 1

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"Following another strong financial and operational quarter, we have delivered on our long-standing commitment to reduce net debt. Moving forward, 100% of free cash flow will be returned to shareholders through expanded share buybacks and a quarterly base dividend," said Ms. Darlene Gates , President & CEO. "We continue to focus on capital returns to shareholders and disciplined capital investment. Our focus on delivering safe, reliable, and predictable performance continues to create value for MEG and our shareholders."

Third quarter highlights:

Generated funds flow from operating activities ("FFO") of $362 million ( $1.34 per share), while investing capital expenditures of $141 million , resulting in free cash flow of $221 million ( $0.82 per share); Successfully completed the Corporation's debt reduction and balance sheet strengthening strategy, positioning the Corporation to deliver enhanced return of capital to shareholders; Reduced net debt to US$478 million (approximately $646 million ) as at September 30, 2024 ; Outstanding debt is comprised solely of 5.875% senior unsecured notes due 2029; Repurchased and cancelled 4.1 million shares for $108 million in the third quarter. Year-to-date repurchases total 11.1 million shares for $303 million ; Paid the inaugural quarterly base dividend of $0.10 per share on October 15, 2024 ; Commenced return of 100% of free cash flow to shareholders in October 2024 through expanded share buybacks and a quarterly base dividend;

Delivered average bitumen production of 103,298 bbls/d (2.36 steam-oil ratio) despite significant wildfires on the Christina Lake Regional Project lease; Initiated steaming of second new well pad in late September with production scheduled to begin in December; Maintained top-tier operating performance with non-energy operating costs of $5.18 per barrel and energy operating costs net of power revenue of $0.64 per barrel; On November 5, 2024 , the Corporation's Board of Directors declared a quarterly base dividend of $0.10 per share for payment on January 15, 2025 , to shareholders of record on December 16, 2024 ; and The Corporation's 2024 operating and capital guidance remains unchanged.

| | | | 1 | 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, 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. |

| | Nine months ended Sept 30 | 2024 | 2023 | 2022 | | | | | | | | ($millions, except as indicated) | 2024 | 2023 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | | Operational results: | | | | | | | | | | | | Bitumen production - bbls/d | 102,641 | 98,835 | 103,298 | 100,531 | 104,088 | 109,112 | 103,726 | 85,974 | 106,840 | 110,805 | | Steam-oil ratio | 2.39 | 2.26 | 2.36 | 2.44 | 2.37 | 2.28 | 2.28 | 2.25 | 2.25 | 2.22 | | Bitumen sales - bbls/d | 101,324 | 97,194 | 105,255 | 93,140 | 105,534 | 112,634 | 101,625 | 83,531 | 106,480 | 113,582 | | Benchmark pricing: | | | | | | | | | | | | WTI - US$/bbl | 77.54 | 77.39 | 75.09 | 80.57 | 76.96 | 78.32 | 82.26 | 73.78 | 76.13 | 82.65 | | Differential - WTI:WCS - Edmonton

US$/bbl | (15.49) | (17.65) | (13.55) | (13.61) | (19.31) | (21.89) | (12.91) | (15.16) | (24.88) | (25.89) | | AWB - Edmonton - US$/bbl | 60.86 | 57.60 | 60.62 | 65.99 | 55.96 | 54.53 | 67.88 | 56.41 | 48.50 | 53.51 | | Financial results: | | | | | | | | | | | | Bitumen realization after net

transportation & storage expense (1)

$/bbl | 66.22 | 62.04 | 65.61 | 73.84 | 60.10 | 63.52 | 84.75 | 57.64 | 43.40 | 54.75 | | | | | | | | | | | | | | Non-energy operating costs (2) - $/bbl | 5.32 | 5.16 | 5.18 | 5.63 | 5.18 | 4.64 | 5.15 | 5.66 | 4.77 | 4.34 | | Energy operating costs net of power

revenue (1) - $/bbl | 0.94 | 0.75 | 0.64 | 0.99 | 1.19 | 1.46 | (0.04) | 0.97 | 1.36 | 1.49 | | Operating expenses net of power

revenue (1) - $/bbl | 6.26 | 5.91 | 5.82 | 6.62 | 6.37 | 6.10 | 5.11 | 6.63 | 6.13 | 5.83 | | Cash operating netback (1) - $/bbl | 42.65 | 45.19 | 41.35 | 47.14 | 39.99 | 38.65 | 58.64 | 42.38 | 34.32 | 43.89 | | | | | | | | | | | | | | General & administrative expense -

$/bbl of bitumen production volumes | 1.99 | 1.84 | 1.80 | 1.98 | 2.18 | 1.89 | 1.73 | 1.85 | 1.94 | 1.62 | | | | | | | | | | | | | | Royalties | 459 | 270 | 169 | 162 | 128 | 186 | 181 | 58 | 31 | 54 | | | | | | | | | | | | | | Funds flow from operating activities | 1,045 | 1,118 | 362 | 354 | 329 | 358 | 492 | 278 | 348 | 383 | | Per share, diluted | 3.83 | 3.85 | 1.34 | 1.30 | 1.19 | 1.27 | 1.71 | 0.96 | 1.19 | 1.28 | | Adjusted funds flow (3) | 1,045 | 1,044 | 362 | 354 | 329 | 358 | 492 | 278 | 274 | 401 | | Per share, diluted (3) | 3.83 | 3.60 | 1.34 | 1.30 | 1.19 | 1.27 | 1.71 | 0.96 | 0.94 | 1.34 | | Capital expenditures | 376 | 345 | 141 | 123 | 112 | 104 | 83 | 149 | 113 | 106 | | Free cash flow (3) | 669 | 699 | 221 | 231 | 217 | 254 | 409 | 129 | 161 | 295 | | | | | | | | | | | | | | Debt repayments - US$ | 258 | 194 | 100 | 53 | 105 | 128 | 68 | 40 | 86 | 150 | | Share repurchases - C$ | 303 | 227 | 108 | 68 | 127 | 219 | 58 | 66 | 103 | 196 | | | | | | | | | | | | | | Revenues | 4,002 | 4,209 | 1,265 | 1,373 | 1,364 | 1,444 | 1,438 | 1,291 | 1,480 | 1,445 | | | | | | | | | | | | | | Net earnings (loss) | 401 | 466 | 167 | 136 | 98 | 103 | 249 | 136 | 81 | 159 | | Per share, diluted | 1.47 | 1.61 | 0.62 | 0.50 | 0.36 | 0.37 | 0.86 | 0.47 | 0.28 | 0.53 | | | | | | | | | | | | | | Long-term debt, including

current portion | 804 | 1,323 | 804 | 954 | 1,015 | 1,124 | 1,323 | 1,382 | 1,466 | 1,581 | | Net debt (3) - US$ | 478 | 885 | 478 | 634 | 687 | 730 | 885 | 994 | 1,020 | 1,026 |

| (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

FFO and AFF decreased to $362 million in the third quarter of 2024 from $492 million in the comparable 2023 period. A lower cash operating netback was partially offset by reduced interest expense and cash-settled stock-based compensation expense. Cash operating netback declined to $41.35 per barrel in the third quarter of 2024 mainly reflecting a lower bitumen realization after net transportation and storage expense per barrel partially offset by higher sales volumes.

Bitumen realization after net transportation and storage expense fell to $65.61 per barrel in the third quarter of 2024, from $84.75 per barrel in the same period of 2023, primarily driven by a lower average WTI benchmark price, higher diluent expense and a lower price realization associated with diverse market access.

FCF decreased to $221 million in the third quarter of 2024, from $409 million in the comparable 2023 quarter, reflecting lower AFF and higher capital expenditures.

Net earnings decreased to $167 million in the third quarter of 2024 from $249 million in the same period of 2023 primarily driven by lower adjusted funds flow in the third quarter of 2024 and higher depletion and depreciation expense partially offset by an unrealized foreign exchange gain on long-term debt and decreased deferred income tax expense.

The $221 million of third quarter 2024 FCF, plus cash on hand, was used to redeem debt and return capital to shareholders. The Corporation redeemed the remaining US$100 million (approximately $136 million ) of outstanding 7.125% senior unsecured notes at a redemption price of 101.8% and returned $108 million to shareholders through the repurchase and cancellation of 4.1 million shares at a weighted-average price of $26.29 per share.

The $669 million of FCF in the nine months ended September 30, 2024 was used to redeem debt, return capital to shareholders and fund working capital requirements. The Corporation redeemed the remaining US$258 million (approximately $351 million) of outstanding 7.125% senior unsecured notes at a redemption price of 101.8% and returned $303 million to shareholders through the repurchase and cancellation of 11.1 million shares at a weighted-average price of $27.40 per share.

Production and Operating Results

Bitumen production in the third quarter of 2024 was 103,298 bbls/d at a 2.36 steam-oil ratio ("SOR") similar to 103,726 bbls/d at a 2.28 SOR in the same period of 2023. A higher 2.36 SOR in the third quarter of 2024 primarily reflects the planned timing of injecting steam in new well starts.

Capital expenditures increased to $141 million in the third quarter of 2024 from $83 million in the same period of 2023, primarily reflecting higher planned field development activity together with investment in moderate capacity growth projects.

Non‐energy operating costs were $5.18 per barrel of bitumen sales in the third quarter of 2024 and in-line with $5.15 per barrel in the same period of 2023.

Energy operating costs net of power revenue increased to $0.64 per barrel in the third quarter of 2024 compared to a $0.04 per barrel net revenue in the comparable 2023 period, as a decline in the realized price on power sales more than offset a weaker AECO price on natural gas purchases. Revenue from the sale of excess power generated by the Corporation's cogeneration facilities offset 62% and 101% of energy operating costs in the third quarters of 2024 and 2023, respectively.

Capital Allocation Strategy

Approximately 50% of FCF was allocated to debt redemption in the nine months ended September 30, 2024 with the remainder applied to share repurchases. The Corporation reached its net debt target of US$600 million in the third quarter of 2024 with net debt of US$478 million (approximately $646 million ) as at September 30, 2024 . As a result, capital returns to shareholders rose to 100% of FCF starting in October 2024 through expanded share buybacks and a quarterly base dividend.

MEG's inaugural $0.10 per share quarterly cash dividend was paid on October 15, 2024 . On November 5, 2024 , the Corporation's Board of Directors declared a $0.10 per share dividend payable on January 15, 2025 to shareholders of record at the close of business on December 16, 2024 . All dividends paid by MEG are designated as eligible dividends for Canadian federal income tax purposes. Declaration of dividends is at the discretion of the Board of Directors and will continue to be evaluated on a quarterly basis.

Pathways Alliance

MEG, along with its Pathways Alliance peers, continues to progress pre-work on the proposed foundational carbon capture and storage ("CCS") project, which will transport CO2 via pipeline from multiple oil sands facilities to be stored permanently underground in the Cold Lake region of Alberta . Pathways Alliance continues to work collaboratively with both the federal and Alberta Governments on the necessary policy and co-financing frameworks required to move the project forward.

Adjusted Funds Flow Sensitivity

MEG's production is comprised entirely of crude oil and AFF is highly correlated with crude oil benchmark prices and light-heavy oil differentials. 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 2024 production guidance, US$75.00/bbl WTI, US$16.25/bbl WTI:WCS Edmonton discount, US$1.50/bbl WCS:AWB Edmonton discount, US$7.75/bbl WTI:AWB Gulf Coast discount, C$1.35/US$ F/X rate, condensate purchased at 100% of WTI and one bbl of bitumen per 1.42 bbls of blend sales (1.42 blend ratio). | | (3) | Assumes 1.4 GJ/bbl of bitumen, 65% of 160 MW of power generation sold externally and a 25.0 GJ/MWh heat rate. |

Conference Call

A conference call will be held to review MEG's third quarter 2024 operating and financial results at 6:30 a.m. Mountain Time ( 8:30 a.m. Eastern Time ) on November 6, 2024 . To participate, please dial the North American toll-free number 1-888-510-2154, or the international call number 1-437-900-0527.

A recording of the call will be available by 12 p.m. 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 as issued by the International Accounting Standards Board ("IFRS Accounting Standards") 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.

The following table reconciles FFO to AFF to FCF:

| | Three months ended September 30 | Nine months ended September 30 | | | | ($millions) | 2024 | 2023 | 2024 | 2023 | | Funds flow from operating activities | $ 362 | $ 492 | $ 1,045 | $ 1,118 | | Adjustments: | | | | | | Impact of cash-settled SBC units subject to equity price risk management | — | — | — | 13 | | Realized equity price risk management gain | — | — | — | (87) | | Adjusted funds flow | 362 | 492 | 1,045 | 1,044 | | Capital expenditures | (141) | (83) | (376) | (345) | | Free cash flow | $ 221 | $ 409 | $ 669 | $ 699 |

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 | September 30, 2024 | December 31, 2023 | | Long-term debt | $ 804 | $ 1,124 | | Cash and cash equivalents | (158) | (160) | | Net debt - C$ | $ 646 | $ 964 | | Net debt - US$ | $ 478 | $ 730 |

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.

Revenues is an IFRS measure in the Corporation's consolidated statement of earnings and comprehensive income which is the most directly comparable primary financial statement measure to cash operating netback. A reconciliation from revenues to cash operating netback has been provided below:

| | Three months ended September 30 | Nine months ended September 30 | | | | ($millions) | 2024 | 2023 | 2024 | 2023 | | Revenues | $ 1,265 | $ 1,438 | $ 4,002 | $ 4,209 | | Diluent expense | (403) | (359) | (1,271) | (1,220) | | Transportation and storage expense | (171) | (157) | (448) | (452) | | Purchased product | (214) | (279) | (859) | (1,066) | | Operating expenses | (66) | (80) | (218) | (252) | | Realized gain (loss) on commodity risk management | (10) | (14) | (22) | (19) | | Cash operating netback | $ 401 | $ 549 | $ 1,184 | $ 1,200 |

Blend Sales and Bitumen Realization

Blend sales and bitumen realization are non-GAAP financial measures, or ratios when expressed on a per barrel basis, and are used as a measure of the Corporation's marketing strategy by isolating petroleum revenue and costs associated with its produced and purchased products and excludes royalties. Their 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. Blend sales per barrel is based on blend sales volumes and bitumen realization per barrel is based on bitumen sales volumes.

Revenues is an IFRS measure in the Corporation's consolidated statement of earnings and comprehensive income, which is the most directly comparable primary financial statement measure to blend sales and bitumen realization. A reconciliation from revenues to blend sales and bitumen realization has been provided below:

| | Three months ended September 30 | Nine months ended September 30 | | | | | | | | | 2024 | 2023 | 2024 | 2023 | | | | | | ($millions, except as indicated) | | $/bbl | | $/bbl | | $/bbl | | $/bbl | | Revenues | $ 1,265 | | $ 1,438 | | $ 4,002 | | $ 4,209 | | | Power and transportation revenue | (10) | | (33) | | (46) | | (98) | | | Royalties | 169 | | 181 | | 459 | | 270 | | | Petroleum revenue | 1,424 | | 1,586 | | 4,415 | | 4,381 | | | Purchased product | (214) | | (279) | | (859) | | (1,066) | | | Blend sales | 1,210 | $ 90.51 | 1,307 | $ 101.53 | 3,556 | $ 90.37 | 3,315 | $ 88.18 | | Diluent expense | (403) | (7.25) | (359) | (0.06) | (1,271) | (8.06) | (1,220) | (9.20) | | Bitumen realization | $ 807 | $ 83.26 | $ 948 | $ 101.47 | $ 2,285 | $ 82.31 | $ 2,095 | $ 78.98 |

Net Transportation and Storage Expense

Net transportation and storage expense 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. Per barrel amounts are based on bitumen sales volumes.

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