MEG Energy announces third quarter 2023 financial and operating results

2023-11-06

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 , Nov. 6, 2023 /CNW/ - MEG Energy Corp. (TSX: MEG) ("MEG" or the "Corporation") reported its third quarter 2023 operational and financial results.

[](https://mma.prnewswire.com/media/2267903/MEG_Energy_CorpMEG_Energy_announces_third_quarter_2023_financi.pdf?p=original)

"Increased bitumen production and strong bitumen realizations resulted in over $400 million of free cash flow in the quarter allowing us to advance our debt reduction and return of capital strategy while continuing to deliver safe and reliable operations," said Derek Evans Chief Executive Officer. "At current oil prices we expect to reach our US$600 million net debt target in mid-2024, at which point our return of capital to shareholders will rise from 50% to 100% of free cash flow, and at the same time, we will be well-positioned to sanction highly economic projects for modest production growth over the next few years. MEG's financial turnaround and current business strength has been governed by the Board of Directors led over the last few years by Ian Bruce as Chair. His business insight, support and kindness will be greatly missed."

Third quarter 2023 highlights include:

Funds flow from operating activities ("FFO") and adjusted funds flow ("AFF") of $492 million , or $1.71 per share. Year-to-date FFO and AFF totaled $1,118 million and $1,044 million , or $3.85 and $3.60 per share, respectively; Bitumen production of 103,726 barrels per day ("bbls/d") at a 2.28 steam-oil ratio ("SOR") reflecting the Corporation's continued focus on short-cycle redevelopment programs, enhanced completion designs and optimized well spacing. Year-to-date bitumen production averaged 98,835 bbls/d; Bitumen realization after net transportation and storage expense of $84.75 per barrel reflecting the Corporation's strategic market access together with supportive supply/demand fundamentals for its Access Western Blend ("AWB") product. Bitumen realization after net transportation and storage expense in the first nine months of 2023 was $62.04 per barrel; Free cash flow ("FCF") of $409 million after $83 million of capital expenditures. Year-to-date FCF totaled $699 million after $345 million of capital expenditures; Debt repayment of US$68 million (approximately $92 million ) during the third quarter of 2023 and US$194 million (approximately $263 million ) year-to-date. Net debt declined to US$885 million (approximately $1.2 billion ) at the end of the third quarter of 2023; MEG returned $58 million to shareholders during the third quarter of 2023 through the buyback and cancellation of 2.3 million shares at a weighted average price of $25.40 per share. Year-to-date buybacks totaled 10.3 million shares, returning $227 million to shareholders; Operating expenses net of power revenue of $5.11 per barrel. Power revenue more than offset energy operating costs, resulting in a recovery of energy operating costs net of power revenue of $0.04 per barrel and non-energy operating costs of $5.15 per barrel. Year-to-date operating expenses net of power revenue were $5.91 per barrel, including non-energy operating costs of $5.16 per barrel and $0.75 per barrel of energy operating costs net of power revenue; 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; and On September 13, 2023 , Fitch Ratings raised the Corporation's long-term issuer credit rating to BB- with a stable outlook from B+ and affirmed the issue-level rating on the Corporation's senior unsecured notes at BB-.

| | Nine months ended Sept 30 | 2023 | 2022 | 2021 | | | | | | | | ($millions, except as indicated) | 2023 | 2022 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | | Bitumen production - bbls/d | 98,835 | 90,126 | 103,726 | 85,974 | 106,840 | 110,805 | 101,983 | 67,256 | 101,128 | 100,698 | | | | | | | | | | | | | | Steam-oil ratio | 2.26 | 2.42 | 2.28 | 2.25 | 2.25 | 2.22 | 2.39 | 2.46 | 2.43 | 2.42 | | | | | | | | | | | | | | Bitumen sales - bbls/d | 97,194 | 89,662 | 101,625 | 83,531 | 106,480 | 113,582 | 95,759 | 73,091 | 100,186 | 98,894 | | | | | | | | | | | | | | Bitumen realization after net transportation

and storage expense (1) - $/bbl | 62.04 | 86.02 | 84.75 | 57.64 | 43.40 | 54.75 | 74.75 | 103.29 | 84.31 | 59.67 | | | | | | | | | | | | | | Non-energy operating costs (2) - $/bbl | 5.16 | 4.90 | 5.15 | 5.66 | 4.77 | 4.34 | 4.49 | 5.65 | 4.74 | 4.56 | | Energy operating costs net of power

revenue (1) - $/bbl | 0.75 | 3.89 | (0.04) | 0.97 | 1.36 | 1.49 | 0.96 | 7.32 | 4.24 | 3.64 | | | | | | | | | | | | | | Cash operating netback (1) - $/bbl | 45.19 | 70.61 | 58.64 | 42.38 | 34.32 | 43.89 | 62.63 | 81.75 | 70.21 | 37.87 | | | | | | | | | | | | | | General & administrative expense -

$/bbl of bitumen production volumes | 1.84 | 1.84 | 1.73 | 1.85 | 1.94 | 1.62 | 1.72 | 2.37 | 1.61 | 1.58 | | | | | | | | | | | | | | Funds flow from operating activities | 1,118 | 1,500 | 492 | 278 | 348 | 383 | 501 | 412 | 587 | 260 | | Per share, diluted | 3.85 | 4.80 | 1.71 | 0.96 | 1.19 | 1.28 | 1.63 | 1.31 | 1.87 | 0.83 | | Adjusted funds flow (3) | 1,044 | 1,533 | 492 | 278 | 274 | 401 | 496 | 478 | 559 | 274 | | Per share, diluted (3) | 3.60 | 4.91 | 1.71 | 0.96 | 0.94 | 1.34 | 1.61 | 1.52 | 1.78 | 0.88 | | Free cash flow (3) | 699 | 1,263 | 409 | 129 | 161 | 295 | 418 | 374 | 471 | 168 | | | | | | | | | | | | | | Revenues | 4,209 | 4,673 | 1,438 | 1,291 | 1,480 | 1,445 | 1,571 | 1,571 | 1,531 | 1,307 | | | | | | | | | | | | | | Net earnings (loss) | 466 | 743 | 249 | 136 | 81 | 159 | 156 | 225 | 362 | 177 | | Per share, diluted | 1.61 | 2.38 | 0.86 | 0.47 | 0.28 | 0.53 | 0.51 | 0.72 | 1.15 | 0.57 | | | | | | | | | | | | | | Capital expenditures | 345 | 270 | 83 | 149 | 113 | 106 | 78 | 104 | 88 | 106 | | | | | | | | | | | | | | Long-term debt, including current portion | 1,323 | 1,803 | 1,323 | 1,382 | 1,466 | 1,581 | 1,803 | 2,026 | 2,440 | 2,762 | | Net debt (3) - C$ | 1,198 | 1,634 | 1,198 | 1,316 | 1,381 | 1,389 | 1,634 | 1,782 | 2,150 | 2,401 | | Net debt (3) - US$ | 885 | 1,193 | 885 | 994 | 1,020 | 1,026 | 1,193 | 1,384 | 1,722 | 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

AFF and FFO in the third quarter of 2023 decreased to $492 million from $496 million and $501 million , respectively, in the comparative 2022 period. Increased sales volumes due to higher bitumen production largely offset a 6% decline in cash operating netback, to $58.64 per barrel, reflecting a higher bitumen realization after net transportation and storage expense more than offset by increased post-payout royalties.

Third quarter 2023 bitumen realization after net transportation and storage expense rose to $84.75 from $74.75 per barrel in the same period of 2022. A lower WTI oil price was more than offset by narrower WTI:AWB differentials and a weaker Canadian dollar. In addition, diluent expense fell from $9.63 to $0.06 per barrel reflecting a lower purchase cost of diluent relative to WTI, narrower WTI:AWB differentials and use of diluent linefill recorded at a lower historical accounting value. Diluent costs were fully recovered through blend sales in the third quarter of 2023 compared to a 79% recovery in the same 2022 period.

The Corporation's Christina Lake operation reached post-payout status under the Oil Sands Royalty Regulation in the second quarter of 2023. The resulting royalty rate increase raised third quarter 2023 royalties to $181 million from $66 million in the same period of 2022.

The Corporation sold 73% and 66% of blend sales volumes in the USGC market during the third quarters of 2023 and 2022, respectively. Average heavy oil apportionment on the Enbridge mainline system was 1% and 3% in those periods.

Third quarter 2023 FCF was $409 million , compared to $418 million in the same period of 2022, reflecting lower AFF and an increase in capital spending.

Capital expenditures rose to $83 million in the third quarter of 2023 from $78 million in the same quarter of 2022 due to increased 2023 scope, inflation and timing of field development and maintenance activities.

Net earnings increased to $249 million in the third quarter of 2023 from $156 million in the comparative 2022 period, mainly reflecting a smaller unrealized foreign exchange loss on long-term debt.

Operating Results

Bitumen production rose approximately 2% in the third quarter of 2023 to 103,726 bbls/d, from 101,983 bbls/d in the same period of 2022. Higher 2023 production was delivered at a 2.28 SOR, a 5% reduction from 2.39 in the third quarter of 2022. This reflects the Corporation's continued focus on short-cycle redevelopment programs, enhanced completion designs, optimized well spacing and targeted facility enhancements.

Third quarter 2023 non‐energy operating costs increased to $5.15 per barrel of bitumen sales from $4.49 per barrel during the same period of 2022, primarily reflecting the timing of maintenance activities and inflationary pressures on the cost of services, treating chemicals and staff costs.

Power revenue exceeded energy operating costs in the third quarter of 2023 generating a $0.04 per barrel net recovery relative to a $0.96 per barrel expense in the comparable 2022 period. Weaker natural gas prices reduced energy operating costs more than the offsetting impact of a lower realized price on power revenue. Power revenue offset 101% and 84% of energy operating costs in the third quarters of 2023 and 2022, respectively.

Debt Repurchases and Share Buybacks

The $409 million of third quarter 2023 FCF was used to fund working capital requirements, repurchase debt and buy back shares. The Corporation repurchased US$68 million (approximately $92 million ) of outstanding 7.125% senior unsecured notes at a weighted average price of 101.7%. Share buybacks totaled $58 million through the repurchase and cancellation of 2.3 million shares at a weighted average price of $25.40 per share. Year-to-date the Corporation repurchased US$194 million (approximately $263 million ) of outstanding 7.125% senior unsecured notes at a weighted average price of 102.1%, and share buybacks totaled $227 .4 million through the repurchase and cancellation of 10.3 million shares at a weighted average price of $22.07 per share.

The Corporation remains focused on its strategy of debt reduction and returning capital to shareholders. From April 1, 2022 through November 3, 2023 , 33.1 million shares have been repurchased and cancelled returning $668 million to shareholders at a weighted average price of $20.16 per share. Debt repurchases have totaled US$853 million (approximately $1.1 billion ) over that same period.

Capital Allocation Strategy

Approximately 50% of 2023 FCF is being allocated to debt reduction with the remainder applied to share buybacks. 100% of FCF will be returned to shareholders when the Corporation reaches its US$600 million net debt target, which is expected to occur mid-2024 at current oil prices. The Corporation exited the third quarter of 2023 with net debt of US$885 million .

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 in 2022 and early 2023, including the establishment of a new mid-term absolute GHG emissions reduction target of 0.63 megatonnes per annum by year-end 2030 (an approximately 30% reduction from 2019 levels); $72 million spent on goods and services provided by Indigenous businesses in 2022 (a 30% increase over 2021); launching our Diversity, Equity and Inclusion education and awareness campaign focused on amplifying the voices of every team member to enhance our decision making, innovation, employee engagement and the Corporation's long-term success; and the continued advancement of safety management programs and systems to ensure safe, sustainable and reliable operations.

MEG, along with its Pathways Alliance ("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 safely and permanently underground in the Cold Lake region of Alberta . During the third quarter of 2023, technical teams continued to advance detailed evaluations of the proposed carbon storage hub. The Alliance is working to obtain a carbon sequestration agreement from the Government of Alberta by year-end 2023 to support regulatory submissions. In addition, the Alliance continued to advance engineering work, environmental field programs to minimize the project's environmental disturbance, and consultations with Indigenous and local communities along the proposed CO2 transportation and storage network corridor. The 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 . Updated draft legislation was released for consultation in the third quarter of 2023. It will be important for governments to work together with industry to ensure that the ITC implementation delivers required support to enable CCS project development.

For further details on the 2023 ESG Report and on the Corporation's approach to ESG matters, please refer to the "Sustainability" section of the Corporation's website at www.megenergy.com and the most recently filed AIF on www.sedarplus.ca .

Outlook

The 2023 guidance remains unchanged. Forecast bitumen production for the second half of the year is unchanged at approximately 105,000 bbls/d, with annual production still trending towards the low end of the guidance range and non-energy operating costs and G&A expense still trending towards the high end of their respective ranges.

The Corporation has capacity to ship 100,000 bbls/d of AWB blend sales, on a pre-apportionment basis, to the USGC market via its committed FSP capacity. In addition, 20,000 bbls/d of capacity is contracted on the TMX pipeline system to Canada's West Coast. TMX is scheduled to come into service at the end of the first quarter of 2024, which will further broaden MEG's market access.

| (1) 2023 guidance includes the bitumen production impact of the second quarter turnaround which impacted annual average bitumen production by approximately 6,000 bbls/d. |

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 low end of 2023 production guidance, US$80.00/bbl WTI, US$18.50/bbl WTI:AWB Edmonton discount, US$9.00/bbl WTI:AWB Gulf Coast 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 GJ/MWh heat rate. |

Conference Call

A conference call will be held to review MEG's third quarter 2023 operating and financial results at 6:30 a.m. Mountain Time ( 8:30 a.m. Eastern Time ) on November 7, 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 p.m. Mountain Time ( 2 p.m. Eastern Time ) on the same day at 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, 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.