MEG Energy announces second quarter results including continued debt repayment, inaugural share repurchases and renewal of credit facilities

2022-07-28

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, net transportation and storage, operating expenses net of power revenue, non-energy operating costs, energy operating costs, adjusted funds flow, free cash flow and net debt.

CALGARY, AB , July 28, 2022 /CNW/ - MEG Energy Corp. (TSX: MEG) ("MEG" or the "Corporation") reported its second quarter 2022 operational and financial results.

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"The second quarter saw MEG initiate its share buyback program as well as continue to make significant progress on debt reduction. Year-to-date we have applied over $1 billion of free cash flow to debt repayment and share repurchases," said Derek Evans , President and Chief Executive Officer. "Importantly in the quarter, the team safely completed on time and on budget the major planned turnaround at our Phase 2B facility in what can only be described as a challenging environment as it relates to cost and staffing pressure."

Quarterly highlights include:

Funds flow from operating activities of $412 million ( $1.31 per share) and adjusted funds flow of $478 million ( $1.52 per share); Bitumen production volumes of 67,256 barrels per day (bbls/d) which reflects the successful completion of the major planned turnaround in the quarter as well as the previously announced unplanned electrical event which resulted in a slower than forecast production ramp-up in the month of June; Operating expenses net of power revenue of $12.97 per barrel, including non‐energy operating costs of $5.65 per barrel. Power revenue offset energy operating costs by 30%, resulting in energy operating costs net of power revenue of $7.32 per barrel; Total capital expenditures of $104 million directed primarily towards sustaining and maintenance activities including approximately 44% of which was directed toward the completion of the major planned turnaround undertaken in the quarter, resulting in free cash flow of $374 million ; Year-to-date debt reduction of US$700 million (approximately $896 million ), including US$379 million (approximately $484 million ) repaid in the second quarter of 2022; MEG initiated its share buyback program in the quarter and to date has returned $139 million of capital to shareholders through the repurchase for cancellation of approximately 7.24 million MEG common shares; During the quarter, MEG renewed its existing modified covenant-lite credit facilities resulting in total available credit of $1.2 billion with a maturity date of October 31, 2026 ; and On June 16, 2022 MEG announced the hiring of Mr. Ryan Kubik as the Corporation's next Chief Financial Officer who will succeed, effective August 1, 2022 , Mr. Eric Toews who had previously announced his pending retirement in the first quarter of 2022.

Blend Sales Pricing

MEG realized an average AWB blend sales price of US$100.42 per barrel during the second quarter of 2022 compared to US$83.55 per barrel during the first quarter of 2022. The increase in average AWB blend sales price quarter over quarter was primarily a result of the average WTI price increasing by US$14.12 per barrel. MEG sold 79% of its sales volumes at the U.S. Gulf Coast ("USGC") in the second quarter of 2022 compared to 58% during the first quarter of 2022.

The increase quarter over quarter is primarily the result of apportionment on the Enbridge mainline being 0% in the second quarter of 2022 compared to 10% in the first quarter of 2022.

Net transportation and storage averaged US$10.53 per barrel of AWB blend sales in the second quarter of 2022 compared to US$7.01 per barrel of AWB blend sales in the first quarter of 2022. The increase was primarily a result of more barrels being sold in the USGC in the quarter compared to the first quarter of 2022. Also contributing to the increase was fixed transportation costs being spread over lower bitumen sales volumes, primarily as a result of the major planned turnaround.

Operational Performance

Bitumen production averaged 67,256 bbls/d at a steam-oil ratio ("SOR") of 2.46 in the second quarter of 2022, compared to 101,128 bbls/d at a SOR of 2.43 in the first quarter of 2022. Production in the second quarter of 2022 was impacted by the scheduled major planned turnaround at the Christina Lake Phase 2B facility which began in late April 2022 and was completed in early June 2022 . Despite a tight labour market and supply chain challenges, the turnaround was safely completed on time and on budget. Also contributing to the production decrease, as previously disclosed by MEG on June 29, 2022 , was an unplanned electrical event that occurred at the Christina Lake facility following the turnaround which resulted in a slower than forecast production ramp-up during the month of June. The Christina Lake facility has now returned to full production as at June 30, 2022 and MEG's second half 2022 average production levels are expected to meet or exceed the record production levels the Corporation reached in the first quarter of 2022.

Non‐energy operating costs averaged $5.65 per barrel of bitumen sales in the second quarter of 2022 compared to $4.74 per barrel in the first quarter of 2022. Energy operating costs, net of power revenue, averaged $7.32 per barrel in the second quarter of 2022 compared to $4.24 per barrel in the first quarter of 2022. This increase quarter over quarter resulted primarily from stronger natural gas prices and lower bitumen sales volumes. Power revenue offset energy operating costs by 30% during the second quarter of 2022 compared to 38% in the first quarter of 2022.

General & administrative expense ("G&A") was relatively consistent quarter over quarter with $15 million , or $2.37 per barrel of production, in the second quarter of 2022 compared to $14 million , or $1.61 per barrel of production, in the first quarter of 2022.

Funds Flow from Operating Activities, Adjusted Funds Flow and Net Earnings

The Corporation's cash operating netback averaged $81.75 per barrel in the second quarter of 2022 compared to $70.21 per barrel in the first quarter of 2022. This increase in cash operating netback was primarily driven by the increase in average bitumen realization due to the higher WTI price in the second quarter of 2022. The Corporation's funds flow from operating activities and adjusted funds flow was $412 million and $478 million , respectively, in the second quarter of 2022 compared to $587 million and $559 million in the first quarter of 2022.

The Corporation recognized net earnings of $225 million in the second quarter of 2022 compared to $362 million in the first quarter of 2022. The decrease in funds flow from operating activities, adjusted funds flow and net earnings was primarily due to lower blend sales volumes.

Capital Expenditures

Capital expenditures in the second quarter of 2022 totaled $104 million compared to $88 million in the first quarter of 2022. Capital invested in the quarter was directed towards sustaining and maintenance activities as well as the major planned turnaround.

Capital Allocation Strategy

MEG's capital allocation strategy is designed to provide increasing return of capital to shareholders as progressively lower net debt targets are reached.

At net debt levels above US$1.7 billion 100% of free cash flow was directed to debt reduction. At net debt levels between US$1.7 billion and US$1.2 billion approximately 25% of free cash flow generated is being allocated to share buybacks with the remaining free cash flow applied to ongoing debt reduction. At net debt levels below US$1.2 billion but above MEG's net debt floor of US$600 million approximately 50% of free cash flow generated will be allocated to share buybacks 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.

MEG reached its US$1.7 billion net debt target in the second quarter of 2022. In the current commodity price environment MEG expects to reach its US$1.2 billion net debt target in October 2022 and to reach its US$600 million net debt floor in the second half of 2023.

Debt Repayment

During the second quarter of 2022, MEG repaid US$379 million (approximately $484 million ) through the redemption of the remaining US$171 million (approximately $216 million ) of MEG's outstanding 6.50% senior secured second lien notes due January 2025 at a redemption price of 101.625% and through the repurchase and extinguishment of US$208 million (approximately $268 million ) of MEG's outstanding 7.125% senior unsecured notes due February 2027 at a weighted average price of 103.2%. Subsequent to the quarter, MEG repurchased a further US$96 million (approximately $124 million ) of MEG's outstanding 7.125% senior unsecured notes due February 2027 at a weighted average price of 101%.

Year-to-date, MEG has repaid US$700 million (approximately $896 million ) of outstanding indebtedness, which represents approximately one third of the US$2.3 billion of total outstanding indebtedness repaid since 2018. MEG remains committed to continued debt reduction as a key component of its capital allocation strategy.

Share Repurchases

On March 7, 2022 , MEG received approval from the TSX for a NCIB which allows MEG to purchase for cancellation, from time to time, as the Corporation considers advisable, up to a maximum of 27,242,211 common shares of MEG. The NCIB became effective March 10, 2022 and will terminate on March 9, 2023 or such earlier time as the NCIB is completed or terminated at the option of MEG.

The Corporation began repurchasing MEG common shares for cancellation during the second quarter of 2022. During the second quarter, MEG purchased for cancellation 4.45 million common shares, returning $94 million to MEG shareholders.

Year-to-date, MEG has purchased for cancellation 7.24 million common shares, returning $139 million to MEG shareholders.

Renewal of Credit Facilities

During the second quarter of 2022 MEG amended and restated its revolving credit facility (the "Revolving Credit Facility") and its letters of credit facility guaranteed by Export Development Canada (the "EDC Facility") and extended the maturity date of each facility by 2.3 years to October 31, 2026 . Total credit available under the two facilities was reduced from $1.3 billion to $1.2 billion and is comprised of $600 million under the Revolving Credit Facility and $600 million under the EDC Facility.

The Revolving Credit Facility retains its modified covenant-lite structure, meaning it continues to contain no financial maintenance covenant unless MEG is drawn under the Revolving Credit Facility in excess of 50%. If drawn in excess of 50%, or $300 million , under the Revolving Credit Facility MEG is required to maintain a 1st Lien Net Debt to LTM EBITDA ratio of 3.50 or less. The financial covenant, if triggered, is tested quarterly. MEG continues to have no 1st Lien Debt outstanding.

Sustainability

On June 15, 2022 Canada's major oil sands producers announced the combination of three existing industry groups, all focused on responsible development, into a single organization called the Pathways Alliance. The new organization incorporates the Oil Sands Pathways to Net Zero Alliance, launched in 2021, Canada's Oil Sands Innovation Alliance ("COSIA"), created in 2012, and the Oil Sands Community Alliance ("OSCA"), created in 2013.

The combination of these industry groups integrated into a single organization, with combined leadership, will enhance the Alliance's collaborative efforts to advance responsible oil sands development and to progress the Alliance's goals for responsible development, including achieving net zero greenhouse gas emissions (GHGs) from oil sands production.

A key focus of the new Pathways Alliance will be to continue the considerable work already underway to reduce GHGs from oil sands production by 22 million tonnes annually by 2030, and ultimately achieve its goal of net zero emissions from oil sands production by 2050.

Outlook

As previously disclosed June 29, 2022 , during the second quarter of 2022 the Corporation took its Christina Lake Phase 2B facility down for a scheduled major turnaround. Notwithstanding significant market pressures, the turnaround was safely completed on time and on budget, impacting full year 2022 average production by approximately 6,000 bbls/d. Following the turnaround, the Christina Lake facility experienced an unplanned electrical event which resulted in a slower than forecast production ramp-up during the month of June which impacted full year 2022 average production by approximately 2,000 bbls/d. The Christina Lake facility has now returned to full production and MEG's second half 2022 average production levels are expected to meet or exceed the record production levels the Corporation reached in the first quarter of 2022. Due to the slower June production ramp-up MEG revised its full year 2022 average production guidance to 92,000 to 95,000 bbls/d from 94,000 to 97,000 bbls/d. MEG also revised its full year non-energy operating costs and G&A expense to $4.60 to $4.90 per barrel and $1.75 to $1.90 per barrel, respectively, reflecting lower full year 2022 production guidance.

MEG continues to expect full year 2022 total transportation costs to average between US$7.50 to US$8.00 per barrel of AWB blend sales.

| Summary of 2022 Guidance | Revised Guidance

(June 29, 2022) | Original Guidance

Conference Call

A conference call will be held to review MEG's second quarter of 2022 operating and financial results at 6:30 a.m. Mountain Time ( 8:30 a.m. Eastern Time ) on Friday July 29, 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/ .

Operational and Financial Highlights

| | Six months ended June 30 | 2022 | 2021 | 2020 | | | | | | | | | | | | | | | | | | | | ($millions, except as indicated) | 2022 | 2021 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | | Bitumen production - bbls/d | 84,099 | 91,326 | 67,256 | 101,128 | 100,698 | 91,506 | 91,803 | 90,842 | 91,030 | 71,516 | | | | | | | | | | | | | | Steam-oil ratio | 2.44 | 2.38 | 2.46 | 2.43 | 2.42 | 2.56 | 2.39 | 2.37 | 2.31 | 2.36 | | | | | | | | | | | | | | Bitumen sales - bbls/d | 86,564 | 88,646 | 73,091 | 100,186 | 98,894 | 92,251 | 89,980 | 87,298 | 95,731 | 67,569 | | | | | | | | | | | | | | Bitumen realization (1) - $/bbl | 108.07 | 56.30 | 122.69 | 97.28 | 71.06 | 64.91 | 60.09 | 52.34 | 38.64 | 39.68 | | | | | | | | | | | | | | Operating expenses net of power

revenue (1) - $/bbl | 10.68 | 5.39 | 12.97 | 8.98 | 8.20 | 7.17 | 5.54 | 5.25 | 6.98 | 6.05 | | Operating expenses - $/bbl | 13.46 | 8.24 | 16.05 | 11.54 | 10.78 | 9.23 | 8.11 | 8.39 | 8.43 | 7.13 | | | | | | | | | | | | | | Non-energy operating costs (2) - $/bbl | 5.13 | 3.94 | 5.65 | 4.74 | 4.56 | 4.46 | 3.84 | 4.05 | 4.70 | 3.96 | | | | | | | | | | | | | | Cash operating netback (1) - $/bbl | 75.10 | 28.73 | 81.75 | 70.21 | 37.87 | 37.31 | 31.30 | 26.03 | 18.66 | 16.58 | | | | | | | | | | | | | | General & administrative expense -

$/bbl of bitumen production volumes | 1.92 | 1.66 | 2.37 | 1.61 | 1.58 | 1.72 | 1.56 | 1.77 | 1.65 | 1.50 | | | | | | | | | | | | | | Funds flow from operating activities | 999 | 281 | 412 | 587 | 260 | 212 | 160 | 121 | 81 | 19 | | Per share, diluted | 3.18 | 0.91 | 1.31 | 1.87 | 0.83 | 0.68 | 0.51 | 0.39 | 0.26 | 0.06 | | Adjusted funds flow (3) | 1,038 | 308 | 478 | 559 | 274 | 243 | 184 | 124 | 88 | 26 | | Per share, diluted | 3.30 | 0.99 | 1.52 | 1.78 | 0.88 | 0.78 | 0.59 | 0.40 | 0.29 | 0.09 | | | | | | | | | | | | | | Revenues | 3,102 | 1,923 | 1,571 | 1,531 | 1,307 | 1,091 | 1,009 | 914 | 786 | 533 | | | | | | | | | | | | | | Net earnings (loss) | 587 | 51 | 225 | 362 | 177 | 54 | 68 | (17) | 16 | (9) | | Per share, diluted | 1.87 | 0.17 | 0.72 | 1.15 | 0.57 | 0.17 | 0.22 | (0.06) | 0.05 | (0.03) | | | | | | | | | | | | | | Capital expenditures | 192 | 141 | 104 | 88 | 106 | 84 | 71 | 70 | 40 | 35 | | | | | | | | | | | | | | Long-term debt, including current portion | 2,026 | 2,820 | 2,026 | 2,440 | 2,762 | 2,769 | 2,820 | 2,852 | 2,912 | 3,030 | | Net debt (3) - C$ | 1,782 | 2,661 | 1,782 | 2,150 | 2,401 | 2,559 | 2,661 | 2,798 | 2,798 | 2,981 | | Net debt (3) - US$ | 1,384 | 2,145 | 1,384 | 1,722 | 1,897 | 2,007 | 2,145 | 2,226 | 2,194 | 2,237 |

| (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. |

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.