MEG Energy reports record production, record low operating costs per barrel and strong funds flow

An aerial view of the Christina Lake Project. — Photo courtesy MEG Energy

MEG Energy Corp. (TSX:MEG) has reported third quarter 2018 operating and financial results.

Highlights include:

• Record quarterly bitumen production volumes of 98,751 barrels per day (bpd) and low steam-oil-ratio (SOR) of 2.2. Annual production is well on-track to achieve 2018 guidance of 87,000 to 90,000 bpd;
• Record low per barrel net operating costs of $4.34, including low non-energy operating costs of $4.38 per barrel;
• Strong adjusted funds flow from operations of $116 million or $0.39 per share, including $88 million of realized net hedging losses. Adjusted funds flow from operations excluding realized net hedging losses totalled $0.68 per share;
• Total cash capital investment of $145 million in the quarter, primarily directed to advance the Phase 2B Brownfield expansion and eMVAPEX pilot;
• Cash and cash equivalents of $373 million; MEG's covenant-lite US$1.4 billion facility remains undrawn;
• Subsequent to the quarter, MEG executed a binding agreement to access 30,000 bpd of unit train rail loading capacity at the Bruderheim terminal, operated by Cenovus. The term of this agreement is for three years, with a one-year extension at MEG's option; and
• On October 17, 2018, MEG announced that its Board of Directors (the "MEG Board") unanimously rejected Husky Energy's unsolicited bid to acquire the Company and recommended MEG shareholders NOT tender their shares.

"The MEG of today is more robust on every measure. We are entering an exciting period of greater financial strength and flexibility, as the Company reaches a critical inflection point transforming from a net consumer of cash to a generator of significant cash flow, well in excess of future capital investment requirements. Through our world-class asset base and industry-leading technology, the Board and Management remain committed to maximizing value for our shareholders," says Derek Evans, President and Chief Executive Officer.

"The record high production and record low net operating costs per barrel in the third quarter reflects the successful application of MEG's proprietary eMSAGP technology on existing wells at Christina Lake Phase 2B. The spending on this phase of the roll-out was substantially completed during the quarter, with lower than expected total costs of $320 million or $16,000 per flowing barrel," Evans continued. "Our innovative approach to maximizing the value of our steam and achieving among the best-in-class SORs through the application of eMSAGP and eMVAPEX supports our highly efficient capital re-investment, industry-leading cost structure, and enhanced environmental performance. MEG has a pipeline of execution-ready brownfield projects with the potential to double production in the next 10 years."

Third quarter bitumen production averaged a record 98,751 bpd, a 19% increase relative to the same period in 2017. This strong production growth was achieved as new wells were brought on-stream as part of the Phase 2B eMSAGP implementation. Trending lower for the eighth consecutive quarter, net operating costs per barrel were 28% lower than the third quarter of 2017. The low per barrel net operating costs were supported by higher production volumes, low natural gas prices and strong power revenues.

Pricing and Market Access

MEG achieved strong blend sales realizations of $63.67 per barrel in the third quarter of 2018, 33% higher than the third quarter of 2017. The higher blend sales realization was the result of stronger benchmark crude oil prices, partially offset by wider WTI:WCS differentials in the period. MEG's bitumen realization averaged $49.58 per barrel, 24% higher than the third quarter of 2017.

"MEG's diversified marketing strategy allowed the Company to deliver 31% of blend sales into the premium U.S. Gulf Coast market during the third quarter, where the barrels received a pricing uplift of approximately $15 per barrel (net of transportation), relative to sales in the Edmonton market. As a result of this strategy, lower-priced post-apportionment blend sales have been limited to 13% of volumes during the third quarter," said Evans.

During the third quarter MEG doubled rail volumes to 7,800 bpd, with plans to rail approximately 15,000 bpd in the fourth quarter and up to 30,000 bpd by the end of the first quarter of 2019. Subsequent to the quarter, MEG executed a binding agreement at competitive market rates to access 30,000 bpd of unit train rail loading capacity at the Bruderheim terminal, operated by Cenovus. The term of this agreement is for three years, with a one-year extension at MEG's option. As a mechanism to clear barrels during periods of high pipeline apportionment and reduce exposure to the post-apportionment market, the use of rail enables MEG to maximize the price received on its barrels until additional egress capacity from Western Canada is secured. MEG's strategic network of North American storage facilities was also used during the third quarter to mitigate differential and apportionment exposure as MEG put barrels into storage. 

Transportation costs per barrel for the third quarter of 2018 were 29% higher than the third quarter of 2017. The higher transportation costs reflect the sale of the Company's 50% share in the Access Pipeline and 100% of Stonefell Terminal, as well as higher per barrel costs associated with the increased use of rail.

"Although differentials are expected to remain challenging in the fourth quarter, we anticipate them to moderate in 2019 as Canadian rail export volumes increase significantly and PADD II refineries come back on line after what has been the largest heavy oil planned turnaround season in the last five years," added Evans. "In addition, to partially mitigate the financial impact of wider forecasted differentials, MEG plans to reduce its fourth quarter production by 4,000 to 6,000 bpd through advancing a portion of our 2019 scheduled maintenance program into November. Further, we can vary the pace of ramp-up subsequent to the turnaround depending on market conditions. We do not currently anticipate any impact to our previously announced 2018 annual guidance."

A full version of MEG's Third Quarter Report to Shareholders, including unaudited financial statements, is available at www.megenergy.com/investors and at www.sedar.com.

Forward looking statements apply