MEG Energy announces 2023 financial and operating results

2024-02-29

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, 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. 29, 2024 /CNW/ - MEG Energy Corp. (TSX:MEG) ("MEG" or the "Corporation") reported its full year 2023 operational and financial results.

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"I am extremely proud of MEG's safety, operating, and financial performance in 2023", said Derek Evans , President and Chief Executive Officer. "Annual production grew by 6%, averaging over 100,000 barrels per day for the first time and exiting the year at approximately 110,000 barrels per day. MEG's financial performance was also strong generating nearly $1 billion of free cash flow for debt repayment and share buybacks. At current prices MEG is well positioned to achieve US$600 million net debt in the third quarter of 2024, after which 100% of free cash flow will be returned to shareholders."

Highlights include:

Annual free cash flow ("FCF") of $953 million used to repay $437 million of debt and return $446 million of capital to shareholders through the repurchase and cancellation of 19.0 million shares at a weighted average price of $23.54 per share. FCF of $254 million in the fourth quarter was used to repay $173 million of debt and repurchase 8.7 million shares at a weighted average price of $25.29 per share, returning $219 million to shareholders; The Corporation exited 2023 with net debt of US$730 million ( $1.0 billion ); Annual bitumen production of 101,425 barrels per day ("bbls/d") at a 2.27 steam-oil ratio ("SOR"), representing a 6% increase in production and a 4% decrease in SOR from 2022. Fourth quarter bitumen production averaged 109,112 bbls/d at a 2.28 SOR; Annual funds flow from operating activities ("FFO") and adjusted funds flow ("AFF") of $1,476 million and $1,402 million , or $5.13 and $4.87 per share, respectively. FFO and AFF totaled $358 million , or $1.27 per share, during the fourth quarter; Annual capital expenditures of $449 million and fourth quarter capital expenditures of $104 million were focused on sustaining and maintenance activities; Operating expenses net of power revenue declined 25% in 2023 to $5.96 per barrel, including $5.01 per barrel of non-energy operating costs and $0.95 per barrel of energy operating costs net of power revenue. Fourth quarter 2023 operating expenses net of power revenue rose 5% from the comparable 2022 quarter to $6.10 per barrel, including $4.64 per barrel of non-energy operating costs and $1.46 per barrel of energy operating costs net of power revenue; and Intended renewal of the Corporation's normal course issuer bid ("NCIB") for a one-year period upon its expiration on March 9, 2024 , which will allow the repurchase of an additional 10% of MEG's public float 1 .

| | | 1 As defined by the Toronto Stock Exchange |

| | Three months ended December 31 | Year ended December 31 | | | | ($millions, except as indicated) | 2023 | 2022 | 2023 | 2022 | | Operational results: | | | | | | | | | | | | Bitumen production - bbls/d | 109,112 | 110,805 | 101,425 | 95,338 | | Steam-oil ratio | 2.28 | 2.22 | 2.27 | 2.36 | | Bitumen sales - bbls/d | 112,634 | 113,582 | 101,086 | 95,691 | | | | | | | | Benchmark pricing: | | | | | | | | | | | | WTI - US$/bbl | 78.32 | 82.65 | 77.62 | 94.23 | | Differential - WTI:AWB - Edmonton - US$/bbl | (23.79) | (29.14) | (20.79) | (20.64) | | AWB - Edmonton - US$/bbl | 54.53 | 53.51 | 56.83 | 73.59 | | | | | | | | Differential - WTI:AWB - USGC - US$/bbl | (7.43) | (16.35) | (8.72) | (9.62) | | AWB - USGC - US$/bbl | 70.89 | 66.30 | 68.90 | 84.61 | | | | | | | | Financial results: | | | | | | | | | | | | Bitumen realization after net transportation

and storage expense (1) - $/bbl | 63.52 | 54.75 | 62.46 | 76.66 | | | | | | | | Non-energy operating costs (2) - $/bbl | 4.64 | 4.34 | 5.01 | 4.73 | | Energy operating costs net of power

revenue (1) - $/bbl | 1.46 | 1.49 | 0.95 | 3.18 | | Operating expenses net of power revenue -

$/bbl | 6.10 | 5.83 | 5.96 | 7.91 | | | | | | | | Cash operating netback (1) - $/bbl | 38.65 | 43.89 | 43.36 | 62.61 | | | | | | | | General & administrative expense -

$/bbl of bitumen production | 1.89 | 1.62 | 1.86 | 1.78 | | | | | | | | Funds flow from operating activities | 358 | 383 | 1,476 | 1,882 | | Per share, diluted | 1.27 | 1.28 | 5.13 | 6.09 | | Adjusted funds flow (3) | 358 | 401 | 1,402 | 1,934 | | Per share, diluted (3) | 1.27 | 1.34 | 4.87 | 6.26 | | Capital expenditures | 104 | 106 | 449 | 376 | | Free cash flow (3) | 254 | 295 | 953 | 1,558 | | | | | | | | Debt repayments - US$ | 128 | 150 | 322 | 1,016 | | Share repurchases - C$ | 219 | 196 | 446 | 382 | | | | | | | | Revenues | 1,444 | 1,445 | 5,653 | 6,118 | | | | | | | | Net earnings | 103 | 159 | 569 | 902 | | Per share, diluted | 0.37 | 0.53 | 1.98 | 2.92 | | | | | | | | Long-term debt, including current portion | 1,124 | 1,581 | 1,124 | 1,581 | | Net debt - US$ (3) | 730 | 1,026 | 730 | 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. |

Fourth Quarter Results

FCF of $254 million was used to repay US$128 million ( $173 million ) of debt and repurchase 8.7 million shares, returning $219 million to shareholders.

Average bitumen production of 109,112 bbls/d was similar to 110,805 bbls/d in the fourth quarter of 2022 reflecting stable operations and no significant maintenance activity in both periods.

AFF decreased to $358 million , or $1.27 per share, from $401 million in the fourth quarter of 2022, reflecting a 12% decline in the cash operating netback.

The lower cash operating netback reflects increased royalty expense, the result of reaching payout status in the second quarter of 2023, partially offset by a higher bitumen realization due to narrower WTI:AWB differentials and lower diluent expense.

Annual Financial Results

AFF decreased to $1,402 million , or $4.87 per share, in 2023 from $1,934 million , or $6.26 per share, in 2022 driven by a lower cash operating netback partially offset by lower interest expense. The 31% decline in the cash operating netback for 2023 reflects a lower bitumen realization after net transportation and storage expense and higher royalties, the result of reaching payout status.

Bitumen realization after net transportation and storage expense decreased to $62.46 per barrel in 2023, from $76.66 per barrel in 2022, primarily driven by a lower average WTI benchmark price partially offset by the realized price improvement from MEG's strategic market access and marketing optimization activities.

The Corporation sold 66% of blend sales volumes in the U.S. Gulf Coast during both 2023 and 2022 and average heavy oil apportionment on the Enbridge mainline system was 9% and 5%, respectively, in those years.

FCF totaled $953 million in 2023, compared to $1,558 million in 2022, reflecting lower AFF and higher capital spending.

Annual capital expenditures of $449 million were in line with guidance and rose from $376 million in 2022 due to increased scope, inflation and timing of field development and maintenance work. Spending in both years focused on sustaining and maintenance activities.

Net earnings declined to $569 million in 2023 from $902 million in 2022 primarily driven by a lower cash operating netback, higher depletion and depreciation expense and an onerous contract expense. These were partially offset by an unrealized foreign exchange gain on long-term debt and reduced interest and income tax expenses.

Annual Operating Results

Annual bitumen production in 2023 rose 6% to 101,425 bbls/d at a 2.27 SOR from 95,338 bbls/d at a 2.36 SOR in 2022. The production increase and improved SOR reflects a continued focus on short-cycle redevelopment programs, enhanced completion designs, optimized well spacing and targeted facility enhancements. Production was impacted by major planned turnaround activities at the Christina Lake Facility in both years.

Non‐energy operating costs averaged $5.01 per barrel of bitumen sales in 2023, in line with guidance and representing a 6% increase from 2022 despite inflationary pressures on the cost of services, treating chemicals and staff.

Energy operating costs net of power revenue decreased to $0.95 per barrel in 2023 from $3.18 per barrel in 2022 as weaker natural gas prices more than offset reduced power revenue. Revenue from the sale of excess power generated by the Corporation's cogeneration facilities offset 76% and 56% of energy operating costs in 2023 and 2022, respectively.

Annual Debt Repayment and Share Repurchases

The $953 million of 2023 FCF was used to repay debt, return capital to shareholders and fund working capital requirements. The Corporation repaid US$322 million (approximately $437 million ) of outstanding 7.125% senior unsecured notes at a weighted average price of 101.7% and returned $446 million to shareholders through the repurchase and cancellation of 19.0 million shares at a weighted average price of $23.54 per share, approximately 7% of MEG's December 31, 2022 issued and outstanding shares.

Capital Allocation Strategy

Approximately 50% of FCF was allocated to debt repayment in 2023 with the remainder applied to share repurchases. 100% of FCF will be returned to shareholders when the Corporation reaches its US$600 million net debt target, which is anticipated to occur in the third quarter of 2024 assuming a US$75 per barrel WTI price. The Corporation exited 2023 with net debt of US$730 million (approximately $1.0 billion ).

The Corporation intends to renew the current NCIB for a one-year period upon its expiration on March 9, 2024 , which will allow the repurchase of an additional 10% of MEG's public float.

Sustainability and Pathways Update

The Corporation published its third ESG report in September 2023 , which discusses its foundational commitments of Business Model Resilience and Governance and the Corporation's priority ESG topics: Health and Safety; Climate Change and GHG Emissions; Water Management; Energy Security; Energy Affordability; and Indigenous Relations. The ESG report illustrates progress in several areas, including the establishment of a new mid-term absolute GHG emissions (Scope 1 and Scope 2) reduction target of 0.63 megatonnes per year by year-end 2030 (which represents approximately 30% of the Corporation's 2019 GHG emissions); $72 million spent on goods and services provided by Indigenous businesses in 2022 (a 30% increase over 2021); the launch of the Corporation's Diversity, Equity and Inclusion education and awareness campaign focused on ensuring that every team member is valued, respected and heard to enhance decision making, innovation, employee engagement and the Corporation's long-term success; and the continued advancement of the Corporation's safety management programs and systems to ensure safe, sustainable and reliable operations.

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 CO 2 via pipeline from multiple oil sands facilities to be stored safely and permanently underground in the Cold Lake region of Alberta . The Pathways Alliance continues to advance detailed evaluations of the proposed carbon storage hub and is working to obtain a carbon sequestration agreement from the Alberta Government in the first half of 2024 to support regulatory submissions. In addition, the Pathways Alliance continues to advance engineering work, environmental field programs to minimize the project's environmental disturbance, and consultations with Indigenous and local communities along the proposed CO 2 transportation and storage network corridor. The 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. The federal government has proposed an investment tax credit ("ITC") for CCS projects for all sectors across Canada and introduced implementing legislation for the CCS ITC in November 2023 . In addition, the Alberta Government announced an Alberta Carbon Capture Incentive Program ("ACCIP") which aims to help hard-to-abate industries by providing a grant of 12% for new eligible CCS capital costs. The Pathways Alliance is evaluating these proposals and will continue to work with the federal and Alberta Governments to secure the required financial support and regulatory certainty to enable the CCS project to proceed.

Additional information regarding the Corporation's ESG actions, including the Corporation's 2023 ESG Report, is available in the "Sustainability" section of the Corporation's website at www.megenergy.com . The Corporation's ESG Report and contents of MEG's website are expressly not incorporated by reference in this news release.

2024 Guidance

The 2024 annual production estimate incorporates reduced turnaround activities spread evenly throughout the year. The plan also includes the startup of two well pads, with the first pad on-stream mid-year and the second in the fourth quarter. New pad activity supports the 2024 production estimate and builds well capacity for future growth.

The Corporation's 2024 capital expenditure program will allocate $450 million to sustaining activities and $100 million towards multi-year productive capacity growth. The growth investment reflects the commencement of a three-year project with an estimated total cost of approximately $300 million forecasted to deliver incremental productive capacity around the end of 2026.

The Corporation's balance sheet and operating performance provide a solid foundation to fund the 2024 capital expenditure program. As a result, no WTI or WTI:WCS differential risk management contracts have been entered into for 2024.

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 2023 annual operating and financial results at 6:30 a.m. Mountain Time ( 8:30 a.m. Eastern Time ) on March 1, 2024 . 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 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.

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, was subject to equity price risk management contracts, so the cash impact over the term of these RSUs was reduced and the change in value did 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 were excluded from adjusted funds flow and free cash flow. All prior periods presented have been adjusted to reflect this change in presentation.

The following table reconciles FFO to AFF to FCF:

| | Three months ended December 31 | Year ended December 31 | | | | ($millions) | 2023 | 2022 | 2023 | 2022 | | Funds flow from operating activities | $ 358 | $ 383 | $ 1,476 | $ 1,882 | | Adjustments: | | | | | | Impact of cash-settled SBC units subject to equity price risk management | — | 18 | 13 | 98 | | Realized equity price risk management gain | — | — | (87) | (46) | | Adjusted funds flow | 358 | 401 | 1,402 | 1,934 | | Capital expenditures | (104) | (106) | (449) | (376) | | Free cash flow | $ 254 | $ 295 | $ 953 | $ 1,558 |

Earlier from Cenovus Energy Inc.

MEG Energy Announces 2023 Annual Results and Conference Call 2024-02-14
MEG Energy announces 2024 Capital Investment Plan and Operational Guidance 2023-11-27
MEG Energy Appoints New Board Chair 2023-11-08