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Edited Transcript of MEG.TO earnings conference call or presentation 31-Oct-19 12:30pm GMT

Q3 2019 MEG Energy Corp Earnings Call

Calgary Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of MEG Energy Corp earnings conference call or presentation Thursday, October 31, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chi-Tak Yee

MEG Energy Corp. - COO

* Derek W. Evans

MEG Energy Corp. - President, CEO & Director

* Eric Lloyd Toews

MEG Energy Corp. - CFO

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Conference Call Participants

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* Emily Christine Chieng

Goldman Sachs Group Inc., Research Division - Associate

* John Macalister Royall

JP Morgan Chase & Co, Research Division - Analyst

* Philip Ross Skolnick

Eight Capital, Research Division - Principal & MD Research

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Presentation

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Operator [1]

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Good morning. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the MEG Energy's 2019 Third Quarter Results Conference call. (Operator Instructions) Thank you.

Mr. Derek Evans, CEO, you may begin your conference.

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Derek W. Evans, MEG Energy Corp. - President, CEO & Director [2]

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Thank you, Jessica, and good morning, everyone, and thanks for joining us for our third quarter 2019 conference call.

In the room with me this morning, I have Eric Toews, our CFO; Chi-Tak Yee, our COO; and Grant Borbridge, Senior Vice President, Legal, General Counsel and Corporate Secretary.

Just a reminder that this call contains forward-looking information. Please refer to the advisories in our disclosure documents filed on SEDAR and on our website.

This is a relatively straightforward quarter. Instead of rehashing the press release and the MD&A, I'll limit my remarks to a few of the key aspects of the quarter to leave more time for Q&A.

We had an excellent quarter with record-low operating costs, free cash flow of $152 million and additional debt repayments bringing year-to-date debt repayment to $481 million. We remain committed to applying all free cash flow after sustaining capital to further debt reduction, and we're laser focused on reducing all cost structures.

Bitumen production in the third quarter was impacted by ongoing Government of Alberta mandated curtailment. We purchased third-party curtailment credits of approximately 3,100 barrels a day in Q3 versus approximately 8,500 barrel a day of credit in Q2, allowing us to increase production levels to 93,278 barrels a day in Q3 versus Q2 production of 97,288 barrels a day. In Q3, fewer third-party curtailment credits were available to purchase.

MEG realized a third quarter 2019 average AWB blend sales price of USD 45.63 per barrel compared to USD 51.72 per barrel in the second quarter of 2019. The change in average AWB blend sales price for quarter-over-quarter is primarily due to a USD 3.37 per barrel reduction in the benchmark WTI index combined with WTI:AWB differentials at Edmonton widening to USD 14.52 per barrel from USD 12.32 per barrel and at the U.S. Gulf Coast widening to a discount of USD 2.50 per barrel from a premium of USD 1.64 per barrel. MEG sold 33% of its sales volumes to the U.S. Gulf Coast market in the third quarter of 2019 compared to 34% in the second quarter of 2019.

Excluding transportation and storage costs upstream of the Edmonton index sales point, MEG's net AWB blend sales price at Edmonton averaged USD 41.60 per barrel in the third quarter of 2019 compared to the average AWB index price at Edmonton of USD 41.93. Notwithstanding that Enbridge Mainline apportionment averaged 44%, MEG was able to capture pricing in line with the Edmonton index, highlighting the value of MEG's North American marketing strategy.

Adjusted funds flow for Q3 was $192 million or $0.63 per share with $152 million of free cash flow after taking into account $40 million of capital expenditures. For the 9 months ended September 30, we have generated free cash flow of $443 million. As of October 30, we have repaid $481 million of outstanding long-term debt in 2019, including $385 million during the third quarter of 2019 and $88 million subsequent to quarter end. Annualized interest savings from these repurchases are expected to be $30 million. These annualized interest savings, when combined with the annualized $14 million of credit fee savings associated with the amendment of MEG's revolving credit facility, brings the aggregate credit-related cash cost savings contribution to annual free cash flow to approximately $44 million.

In the first 9 months of 2019, capital expenditures totaled $126 million relative to MEG's 2019 capital budget of $200 million which was set during the implementation of the Alberta government's mandated production curtailment program in January 2019. Over the course of 2019, MEG has been successful in finding capital cost savings and undertaking minor scope changes that will allow the corporation to deliver the original $200 million budget for approximately $170 million. As a result, based on the expected operational benefits, including plant integrity and turnaround management, MEG has shifted into 2019 approximately $30 million of expected 2020 capital expenditures to accelerate the completion of the corporation's in-progress brownfield project at the Phase 2B central processing facility, which includes incremental steam generation, water handling and oil treating capacity. This project is expected to be completed in the first half of 2020. And just as a point of clarification, what we're talking about here is the central processing facility. There is no incremental capital associated with growing our production in this additional $30 million.

Third quarter 2019 nonenergy operating costs of $4.22 per barrel and strong power sales had the impact of offsetting 95% of per-barrel energy operating costs, resulting in a net energy operating expense of only $0.08 per barrel and resulting in a record-low net operating costs of $4.30 a barrel. During 2019, the corporation has been able to purchase third-party curtailment credits, which have positively impacted the corporation's production and sales results compared to the original guidance assumptions.

Based on results achieved to date, the corporation has revised its 2019 annual guidance. Production volumes are now targeted to be in the range of 92,000 to 93,000 barrels a day and nonenergy operating costs in the range of $4.75 to $5 per barrel. General and administration expense remains unchanged in the range of $1.95 to $2.05 per barrel. The corporation's operational guidance assumes that Government of Alberta mandated production curtailment program remains in place for 2019 and into 2020.

In conclusion, we remain focused on driving efficiencies in our business from an operational and a cost perspective, and we'll continue to direct all free cash flow to debt repayment. Our focus on debt reduction will preclude us from growing our production capacity until such time as we see at the end of curtailment and additional egress pipeline is built. We're making great progress on reducing debt and our cost structures as well as focusing on capital discipline and optimizing revenue through marketing and egress optionality.

We look forward to providing the market with our 2020 guidance on November 21 of this year.

With that, Jessica, I will turn the call back to you and to our listeners for their questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) All right. Your first question comes from Phil Gresh of JPMorgan.

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John Macalister Royall, JP Morgan Chase & Co, Research Division - Analyst [2]

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This is John Royall filling in for Phil. So with the pull forward of the $30 million of brownfield growth CapEx into this year, how much spending would be left in 2020 to complete Phase 2?

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Derek W. Evans, MEG Energy Corp. - President, CEO & Director [3]

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Hello...

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John Macalister Royall, JP Morgan Chase & Co, Research Division - Analyst [4]

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Yes. Sorry. Can you hear me?

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Derek W. Evans, MEG Energy Corp. - President, CEO & Director [5]

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Sorry. I know we just got disconnected there for a second. Can you just reask your question?

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John Macalister Royall, JP Morgan Chase & Co, Research Division - Analyst [6]

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Yes. No problem. So this is John Royall filling in for Phil. Just had a question on the CapEx. So with the pull forward of the $30 million in brownfield growth, how much would be left in 2020 to complete Phase 2?

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Derek W. Evans, MEG Energy Corp. - President, CEO & Director [7]

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So when we talk about Phase 2, we're just talking about the CPF side of Phase 2, and there will be approximately $20 million worth of capital left to be completed in sort of the first 4 months of 2020.

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John Macalister Royall, JP Morgan Chase & Co, Research Division - Analyst [8]

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2020. Okay. Great. And then given your capital efficiency in 2019, can you give your latest thoughts on the run rate level of sustaining CapEx in the business?

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Derek W. Evans, MEG Energy Corp. - President, CEO & Director [9]

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I think the easiest way to think about the run rate on sustaining CapEx is really to think somewhere between $6 and $8 a barrel. There'll be fluctuations on a year-to-year basis given timing, but as we model the business going forward, we typically use about $7 a barrel sustaining capital number.

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Operator [10]

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Your next question comes from Emily Chieng of Goldman Sachs.

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Emily Christine Chieng, Goldman Sachs Group Inc., Research Division - Associate [11]

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Just following up on the CapEx question. I guess with the pull forward of $30 million into 2019, should we therefore expect a sort of $30 million reduction out of the 2020 budget from current levels?

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Derek W. Evans, MEG Energy Corp. - President, CEO & Director [12]

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I think it's fair to assume, Emily, that we've been modeling sort of $300 million up to this point. So I think as we move towards reducing our 2020 -- or producing our 2020 guidance, you should assume that, that guidance for 2020 on a capital basis is likely to be $270 million or less.

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Emily Christine Chieng, Goldman Sachs Group Inc., Research Division - Associate [13]

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Got it. That's helpful. And just one follow-up please on condensate. Can you remind us again your ability to import from the U.S. Gulf Coast given, I guess, the strength of local condensate pricing? And how should we think about the progress you guys made when it comes to under-blending barrels ahead of rail? Are there any sort of cost-saving targets that you guys are looking at when it comes to condensate management here, please?

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Derek W. Evans, MEG Energy Corp. - President, CEO & Director [14]

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Let me handle the last half of the question, and then I'll ask Eric to talk about the first part. But we continue to work on the 3 initiatives that we have on the go and in terms of under-blending. And the one with the nearest-term potential is the butane blending and we're working with our partners both on the pipeline and the owners of the pipeline to advance that as quickly as possible and realize the significant savings associated with that. So I think it's fair to say that butane blending will be up and running in 2020. Some of us would like to see it up and running a lot sooner than where it's currently scheduled at. And I know there's a meeting next week to try and advance that a lot faster than what is currently on the books, which is to have it on in the second half of 2020, at this point.

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Eric Lloyd Toews, MEG Energy Corp. - CFO [15]

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And Emily, it's Eric. We move about half of our condensate up out of the Gulf Coast on Southern Lights, and then the other half we source in the local markets.

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Operator [16]

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Your next question comes from Phil Skolnick of Eight Capital.

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Philip Ross Skolnick, Eight Capital, Research Division - Principal & MD Research [17]

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Couple questions. One, it was reported in Bloomberg last week that there was some Canadian access work from blend that was shipped to the west coast of India. Just if that was anything from your production. And how do you see that progressing from your standpoint?

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Derek W. Evans, MEG Energy Corp. - President, CEO & Director [18]

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That was not our production going to India. So that limits the number of players somewhat substantially. But I think, more to the point, it's a very interesting market, as is China and Asia, in particular on crude oil to chemicals business. We see this as a growing market, and as we said before, part of the reason we've added to tankage on the U.S. Gulf Coast and have the ability to lift cargoes out of the U.S. Gulf Coast is we believe that, that market could get overrun as -- with incremental volume. So the development of overseas markets, I think, is very, very important in terms of the long-term viability of the AWB product.

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Philip Ross Skolnick, Eight Capital, Research Division - Principal & MD Research [19]

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Okay. Just back on the 2B facilities. So next year, I guess you're going to be having a turnaround. Like how does -- well, this should -- does this provide any kind of flexibility in terms of steam and being able to use that to -- I guess, to offset some of the impacts on the production side of the turnaround?

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Derek W. Evans, MEG Energy Corp. - President, CEO & Director [20]

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Absolutely. So the -- there's -- the Phase 2B facility side includes an evaporator and 2 drum boilers -- 2 new drum boilers. So -- and I think those drum boilers are about 13,000 barrels a day of steam, Chi-Tak...

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Chi-Tak Yee, MEG Energy Corp. - COO [21]

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Oil.

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Derek W. Evans, MEG Energy Corp. - President, CEO & Director [22]

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Oil. So there will be somewhere in the neighborhood of, well, 3x that. So almost 40,000 barrels a day of steam. So that is highly valuable as we go through the turnaround because that part of the facility doesn't get turned around, and it allows us to continue to produce steam while the other part of the facility is down. And just for clarity, we're not taking the whole facility down. We'll be taking a portion, and we'll provide greater clarity as to what that turnaround could fundamentally look like in terms of time and also the amount of oil that it will have off production as we drive towards our 2020 guidance release on November 21.

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Philip Ross Skolnick, Eight Capital, Research Division - Principal & MD Research [23]

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Okay. And then just finally, the Alberta government just announced the curtailment relief for rail shipment literally when your conference call started. Any -- I mean I'm assuming that you have been in talk with them. Any thoughts in terms of like what the upside is on your production levels based on this?

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Eric Lloyd Toews, MEG Energy Corp. - CFO [24]

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Phil, it's Eric. We saw that come across the wire. We're -- look, we have a sense it's going to be based off Q1 obviously. So we know what that number is. It might be 8,000 to 10,000 barrels a day for us potentially. We have to work through that with our team here with the government.

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Philip Ross Skolnick, Eight Capital, Research Division - Principal & MD Research [25]

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Is that a blend number? Or is that a bitumen number?

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Eric Lloyd Toews, MEG Energy Corp. - CFO [26]

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Blend.

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Operator [27]

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(Operator Instructions) All right. It appears there are no further questions at this time. Please proceed.

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Derek W. Evans, MEG Energy Corp. - President, CEO & Director [28]

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Well, Jessica, thank you. And for the people that joined us on the call, thank you very much. I hope everybody has a great day. We look forward to talking to you next quarter.

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Operator [29]

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Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.