MEG Energy announces record quarterly production, strong Q3 results, and achievement of its US$1.2 billion net debt target

2022-11-09

TSX - Toronto Stock Exchange · 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, operating expenses net of power revenue, non-energy operating costs, energy operating costs, adjusted funds flow, free cash flow and net debt. |

CALGARY, AB , Nov. 9, 2022 /CNW/ - MEG Energy Corp. (TSX: MEG) ("MEG" or the "Corporation") reported its third quarter 2022 operational and financial results.

[](https://mma.prnewswire.com/media/1943046/MEG_Energy_CorpMEG_Energy_announces_record_quarterly_productio.pdf?p=original)

"MEG's record third quarter production reflects our continued focus on operational excellence including optimized well spacing, enhanced completion designs, capital efficient well redevelopment programs, and steam allocation techniques that are lowering field steam-oil ratios and associated GHG intensity," said Derek Evans , President and Chief Executive Officer. "We remain focused on debt reduction and returning cash to shareholders. The $1.3 billion of free cash flow generated in the first nine months of this year allowed us to repurchase $1.1 billion of debt and return $0.2 billion to shareholders. Net debt is now at US$1.2 billion , and we are increasing free cash flow allocated to share buybacks to 50%."

Third quarter 2022 highlights include:

Record quarterly bitumen production of 101,983 barrels per day (bbls/d) at a steam-oil ratio ("SOR") of 2.39; Adjusted funds flow of $496 million ( $1.61 per share) less total third quarter capital expenditures of $78 million , resulted in free cash flow of $418 million in the third quarter; Free cash flow of $1,263 million was recognized during the first nine months of 2022; Operating expenses net of power revenue of $5.45 per barrel, including non‐energy operating costs of $4.49 per barrel. Power revenue offset 84% of energy operating costs resulting in record low energy operating costs net of power revenue of $0.96 per barrel; Debt repurchases of US$866 million (approximately $1,121 million ) during the nine months ended September 30, 2022 , including US$262 million (approximately $349 million ) in the third quarter; MEG returned $92 million to shareholders through the buyback of 5.6 million shares during the third quarter and returned $186 million during the nine months ended September 30, 2022 through the buyback of 10.1 million shares; and As at September 30, 2022 , MEG reached its US$1.2 billion net debt target and is raising the allocation of free cash flow to share buybacks to 50%.

| | Nine months ended September 30 | 2022 | 2021 | 2020 | | | | | | | | | | | | | | | | | | | | ($millions, except as indicated) | 2022 | 2021 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | | Bitumen production - bbls/d | 90,126 | 91,386 | 101,983 | 67,256 | 101,128 | 100,698 | 91,506 | 91,803 | 90,842 | 91,030 | | | | | | | | | | | | | | Steam-oil ratio | 2.42 | 2.44 | 2.39 | 2.46 | 2.43 | 2.42 | 2.56 | 2.39 | 2.37 | 2.31 | | | | | | | | | | | | | | Bitumen sales - bbls/d | 89,662 | 89,861 | 95,759 | 73,091 | 100,186 | 98,894 | 92,251 | 89,980 | 87,298 | 95,731 | | | | | | | | | | | | | | Bitumen realization (1) - $/bbl | 101.68 | 59.28 | 90.33 | 122.69 | 97.28 | 71.06 | 64.91 | 60.09 | 52.34 | 38.64 | | | | | | | | | | | | | | Operating expenses - $/bbl | 12.43 | 8.58 | 10.61 | 16.05 | 11.54 | 10.78 | 9.23 | 8.11 | 8.39 | 8.43 | | Operating expenses net of power

revenue (1) - $/bbl | 8.79 | 6.00 | 5.45 | 12.97 | 8.98 | 8.20 | 7.17 | 5.54 | 5.25 | 6.98 | | | | | | | | | | | | | | Non-energy operating costs (2) - $/bbl | 4.90 | 4.12 | 4.49 | 5.65 | 4.74 | 4.56 | 4.46 | 3.84 | 4.05 | 4.70 | | | | | | | | | | | | | | Cash operating netback (1) - $/bbl | 70.61 | 31.71 | 62.63 | 81.75 | 70.21 | 37.87 | 37.31 | 31.30 | 26.03 | 18.66 | | | | | | | | | | | | | | General & administrative expense -

$/bbl of bitumen production volumes | 1.84 | 1.68 | 1.72 | 2.37 | 1.61 | 1.58 | 1.72 | 1.56 | 1.77 | 1.65 | | | | | | | | | | | | | | Funds flow from operating activities | 1,500 | 493 | 501 | 412 | 587 | 260 | 212 | 160 | 121 | 81 | | Per share, diluted | 4.80 | 1.59 | 1.63 | 1.31 | 1.87 | 0.83 | 0.68 | 0.51 | 0.39 | 0.26 | | Adjusted funds flow (3) | 1,533 | 551 | 496 | 478 | 559 | 274 | 243 | 184 | 124 | 88 | | Per share, diluted (3) | 4.91 | 1.78 | 1.61 | 1.52 | 1.78 | 0.88 | 0.78 | 0.59 | 0.40 | 0.29 | | Free cash flow (3) | 1,263 | 326 | 418 | 374 | 471 | 168 | 159 | 113 | 54 | 48 | | | | | | | | | | | | | | Revenues | 4,673 | 3,014 | 1,571 | 1,571 | 1,531 | 1,307 | 1,091 | 1,009 | 914 | 786 | | | | | | | | | | | | | | Net earnings (loss) | 743 | 105 | 156 | 225 | 362 | 177 | 54 | 68 | (17) | 16 | | Per share, diluted | 2.38 | 0.34 | 0.51 | 0.72 | 1.15 | 0.57 | 0.17 | 0.22 | (0.06) | 0.05 | | | | | | | | | | | | | | Capital expenditures | 270 | 225 | 78 | 104 | 88 | 106 | 84 | 71 | 70 | 40 | | | | | | | | | | | | | | Long-term debt, including current

portion | 1,803 | 2,769 | 1,803 | 2,026 | 2,440 | 2,762 | 2,769 | 2,820 | 2,852 | 2,912 | | Net debt (3) - C$ | 1,634 | 2,559 | 1,634 | 1,782 | 2,150 | 2,401 | 2,559 | 2,661 | 2,798 | 2,798 | | Net debt (3) - US$ | 1,193 | 2,007 | 1,193 | 1,384 | 1,722 | 1,897 | 2,007 | 2,145 | 2,226 | 2,194 |

| (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

Funds flow from operating activities and adjusted funds flow increased to $501 million and $496 million , respectively, in the third quarter of 2022 compared to $412 million and $478 million in the second quarter of 2022. Higher bitumen sales volumes, following the completion of the second quarter turnaround, were partially offset by a lower average bitumen realization.

Third quarter of 2022 free cash flow rose to $418 million from $374 million in the second quarter of 2022 due to higher adjusted funds flow and lower capital spending.

Capital expenditures declined to $78 million in the third quarter of 2022 from $104 million in the second quarter of 2022, due to the major second quarter turnaround.

The Corporation's third quarter of 2022 net earnings decreased to $156 million from $225 million in the second quarter of 2022. Third quarter net earnings were impacted by the same factors affecting funds flow from operating activities as well as higher depreciation and depletion expense and an unrealized foreign exchange loss on long-term debt due to the weakening Canadian dollar.

The Corporation's cash operating netback averaged $62.63 per barrel in the third quarter of 2022 compared to $81.75 per barrel in the second quarter of 2022. The third quarter decline mainly reflects a lower WTI price and a wider AWB differential compared to the second quarter.

MEG realized an average AWB blend sales price of US$76.55 per barrel during the third quarter of 2022 compared to US$100.42 per barrel during the second quarter of 2022. MEG sold 66% of its sales volumes at the U.S. Gulf Coast in the third quarter of 2022 compared to 79% in the second quarter of 2022, reflecting the second quarter turnaround.

Operating Results

Bitumen production averaged 101,983 bbls/d at an SOR of 2.39 in the third quarter of 2022, compared to 67,256 bbls/d at an SOR of 2.46 in the second quarter of 2022. The production increase reflects strong performance following the second quarter major turnaround and positions MEG to achieve the upper end of its June 29, 2022 production guidance range.

Non‐energy operating costs decreased to $4.49 per barrel of bitumen sales in the third quarter of 2022 from $5.65 per barrel in the second quarter of 2022, mainly reflecting increased volumes following the turnaround.

Energy operating costs, net of power revenue, averaged $0.96 per barrel in the third quarter of 2022 compared to $7.32 per barrel in the second quarter of 2022. The decrease reflects a lower AECO natural gas price and higher Alberta power prices. Power revenue offset 84% of energy operating costs during the third quarter of 2022 compared to 30% in the second quarter of 2022.

General & administrative expense ("G&A") was $16 million , or $1.72 per barrel of production, in the third quarter of 2022 compared to $15 million , or $2.37 per barrel of production, in the second quarter of 2022. On a per barrel basis, G&A expense in the second quarter of 2022 was impacted by lower production volumes associated with the Corporation's major turnaround.

Capital Allocation Strategy

The Corporation is executing its capital allocation strategy of applying free cash flow to ongoing debt reduction and share buybacks. The Corporation generated $1.3 billion of free cash flow in the first nine months of 2022. During that time, MEG repurchased approximately $1.1 billion of outstanding indebtedness and returned approximately $0.2 billion to shareholders through share buybacks. MEG remains committed to continued debt reduction as a key component of its capital allocation strategy.

The Corporation reached US$1.2 billion net debt as at September 30, 2022 and is increasing the percentage of free cash flow allocated to share buybacks to approximately 50% with the remainder applied to further debt reduction. Once the net debt floor of US$600 million is reached 100% of free cash flow will be returned to shareholders.

Debt Repurchases

During the third quarter of 2022, MEG repurchased and extinguished US$262 million (approximately $349 million ) of MEG's outstanding 7.125% senior unsecured notes due February 2027 at a weighted average price of 102.2%.

MEG has repaid US$866 million (approximately $1,121 million ) of debt during the nine months ended September 30, 2022 .

Share Buybacks

During the third quarter of 2022, MEG repurchased for cancellation 5.6 million common shares, returning $92 million to shareholders.

In the first nine months of the year, MEG repurchased for cancellation 10.1 million common shares, returning $186 million to shareholders.

Outlook

The Corporation's outlook remains unchanged from the guidance provided on June 29, 2022 .

| Summary of 2022 Guidance | Revised Guidance

(June 29, 2022) | Original Guidance

Pathways Alliance

MEG and its Pathways Alliance ("Alliance") partners are making significant progress in advancing the early work required to build one of the world's largest carbon capture and storage ("CCS") facilities. The goal of this unique alliance and project is to support Canada in meeting its climate commitments, position Canada as the preferred global supplier of crude oil and to achieve net zero GHG emissions from oil sands operations by 2050.

On October 4, 2022 , the Alliance was one of 19 CCS proposals chosen to proceed to the next stage of evaluation by the Alberta government. Securing the right to continue exploratory work to define the suitability and capacity of the CCS storage hub is an essential part of the Alliance's plan to reduce emissions by 22 million tonnes per year by 2030. MEG would like to acknowledge the Alberta government's continued support as we work together to decarbonize emissions from the oil sands.

Stakeholder engagement and engineering work to develop the project is already underway. The Alliance has progressed engagement with more than 20 Indigenous communities along the proposed CO 2 storage corridor, completed pre-engineering for the CO 2 pipeline and is conducting field programs to support regulatory applications and engineering studies related to the CO 2 capture facilities. The Alliance partners have identified $24.1 billion of investments in CCS projects by 2030 and other emissions reduction projects as part of the first phase of its goal to reach net zero emissions from the oil sands by 2050.

The Alliance continues to work with the Federal and Alberta governments on the appropriate co-investment mechanisms, in addition to the planned Federal Investment Tax Credit, required to get major CCS projects off the drawing board and into the field.

MEG is encouraged by the urgency expressed by the Federal government's fall economic update to advance major energy infrastructure projects and to stay globally competitive on clean technology investment. We appreciate the Federal government's recognition that Canada must be on a level playing field, with incentives equivalent to those contained within the U.S. Inflation Reduction Act, in order to kick start major projects. The introduction of a Canada Growth Fund with mechanisms that include carbon contracts for differences and off-take contracts could increase certainty for major decarbonization investments and help get projects to final investment decision faster.

Conference Call

A conference call will be held to review MEG's third quarter of 2022 operating and financial results at 6:30 a.m. Mountain Time ( 8:30 a.m. Eastern Time ) on Thursday November 10, 2022 . 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 Corporation's share price was at a historic low of $1.57 per share. Concurrent with the issuance, the Corporation entered into equity price risk management contracts to manage share price volatility in the three-year period following the issuance, effectively eliminating cash flow risk associated with share price appreciation over that time period. The significant 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. Since the actual cash impact of the 2020 cash-settled RSUs is subject to equity price risk management contracts, there is no cash impact over the term of these RSUs beyond the value at the date of issue of $1.57 per share.

As a result of the equity risk management contracts, the Corporation's operating performance and cash flow generating ability are not impacted by the April 2020 cash-settled RSUs issued and the associated equity price risk management contracts. Therefore, the financial statement impacts of the cash-settled stock-based compensation associated with the April 2020 issuance 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:

| | Three months ended September 30 | Nine months ended September 30 | | | | ($millions) | 2022 | 2021 | 2022 | 2021 | | Funds flow from operating activities | $ 501 | $ 212 | $ 1,500 | $ 493 | | Adjustments: | | | | | | Impact of cash-settled SBC units subject to equity price risk management | (5) | 4 | 79 | 27 | | Realized equity price risk management gain | — | — | (46) | (8) | | Settlement expense | — | 21 | — | 21 | | Payments on onerous contract | — | 6 | — | 18 | | Adjusted funds flow | 496 | 243 | 1,533 | 551 | | Capital expenditures | (78) | (84) | (270) | (225) | | Free cash flow | $ 418 | $ 159 | $ 1,263 | $ 326 |

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, 2022 | December 31, 2021 | | Long-term debt | $ 1,771 | $ 2,477 | | Current portion of long-term debt | 32 | 285 | | Cash and cash equivalents | (169) | (361) | | Net debt - C$ | $ 1,634 | $ 2,401 | | Net debt - US$ | $ 1,193 | $ 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.