MEG Energy announces strong third quarter results and revised full year guidance
Canada NewsWire
CALGARY, AB, Nov. 8, 2021
All financial figures are in Canadian dollars ($ or C$) and all references to barrels are per barrel of bitumen unless otherwise noted
CALGARY, AB, Nov. 8, 2021 /CNW/ - MEG Energy Corp. (TSX: MEG) "MEG" or the "Corporation") reported its third quarter of 2021 operational and financial results.
MEG continues to proactively respond to the safety challenges associated with the COVID--19 pandemic and remains committed to ensuring the health and safety of all of its personnel and the safe and reliable operation of the Christina Lake facility.
"The third quarter was another strong operational quarter for MEG as production levels benefited from our team's continued focus on plant reliability, steam utilization and ongoing well optimization." said Derek Evans, President and Chief Executive Officer. "Given what we are seeing operationally we have upwardly revised our annual production guidance and look forward to a strong finish to 2021."
Third quarter financial and operating highlights include:
-- Adjusted funds flow of $239 million ($0.77 per share), impacted by a
realized commodity price risk management loss in the quarter of $66
million ($0.21 per share);
-- Quarterly production volumes of 91,506 barrels per day (bbls/d) at a
steam--oil ratio (SOR) of 2.56. Based on strong operational performance,
annual average production guidance has been upwardly revised from 91,000
-- 93,000 bbls/d to 92,500 -- 93,500 bbls/d;
-- Net operating costs of $7.17 per barrel, including non--energy operating
costs of $4.46 per barrel. Power revenue offset energy operating costs by
43%, resulting in a net impact of $2.71 per barrel. Year to date, power
revenue has offset approximately 60% of MEG's energy operating costs;
-- Total capital investment of $84 million in the quarter with the majority
directed towards sustaining and maintenance activities, resulting in $155
million of free cash flow in the quarter; and
-- During the quarter MEG redeemed US$100 million (approximately $125
million) of MEG's 6.5% senior secured second lien notes due January 2025.
Blend Sales Pricing
MEG realized an average AWB blend sales price of US$59.15 per barrel during the third quarter of 2021 compared to US$56.41 per barrel in the second quarter of 2021. The increase in average AWB blend sales price quarter over quarter was primarily a result of the average WTI price increasing by US$4.49 per barrel. MEG sold 38% of its sales volumes at the premium-priced U.S. Gulf Coast ("USGC") in the third quarter of 2021 compared to 45% in the second quarter of 2021 due to higher apportionment levels on the Enbridge mainline system during the third quarter of 2021.
The reduction in sales volumes sold at the USGC quarter over quarter was consistent with the reduction in transportation and storage costs which averaged US$5.75 per barrel of AWB blend sales in the third quarter of 2021 compared to US$6.17 per barrel of AWB blend sales in the second quarter of 2021.
Operational Performance
Bitumen production averaged 91,506 bbls/d in the third quarter of 2021, consistent with average bitumen production of 91,803 bbls/d in the second quarter of 2021.
Non--energy operating costs averaged $4.46 per barrel of bitumen sales in the third quarter of 2021 compared to $3.84 per barrel in the second quarter of 2021 primarily due to planned maintenance activities. Energy operating costs, net of power revenue, averaged $2.71 per barrel in the third quarter of 2021 compared to $1.70 per barrel in the second quarter of 2021. This increase quarter over quarter resulted from stronger natural gas prices and lower power sales from its cogeneration facilities. Power revenue offset energy operating costs by 43% during the third quarter of 2021 compared to 60% during the second quarter of 2021. Year to date, power revenue has offset approximately 60% of MEG's energy operating costs.
General & administrative expense ("G&A") was relatively consistent quarter over quarter with $14 million, or $1.72 per barrel of production, in the third quarter of 2021 compared to $13 million, or $1.56 per barrel of production, in the second quarter of 2021.
Adjusted Funds Flow and Net Earnings (Loss)
The Corporation's cash operating netback averaged $37.31 per barrel in the third quarter of 2021 compared to $31.30 per barrel in the second quarter of 2021. This increase in cash operating netback was primarily driven by the increase in average bitumen realization due to the higher WTI price, as well as a lower realized commodity price risk management loss quarter over quarter. The increased cash operating netback was the main driver for the increase in the Corporation's adjusted funds flow from $166 million in the second quarter of 2021 to $239 million in the third quarter of 2021.
The Corporation recognized net earnings of $54 million in the third quarter of 2021 compared to net earnings of $68 million in the second quarter of 2021. This decrease in net earnings was primarily the result of an unrealized foreign exchange loss in the third quarter of 2021 compared to an unrealized foreign exchange gain in the second quarter of 2021. This decrease was partially offset by increased cash operating netback quarter over quarter and by an unrealized gain on risk management in the third quarter of 2021 compared to an unrealized loss on risk management in the second quarter of 2021.
Capital Expenditures
MEG invested $84 million in the third quarter of 2021 compared to $70 million in the second quarter of 2021. Capital invested in the quarter was directed towards sustaining and maintenance activities as well as incremental well capital necessary to allow the Corporation to fully utilize the Christina Lake central plant facility's oil processing capacity of approximately 100,000 bbls/d, prior to any impact from scheduled maintenance activity or outages. As previously disclosed in the Corporation's second quarter 2021 release, the total investment for this optimization initiative is approximately $125 million with $75 million included in the 2021 capital investment budget and the remainder expected to be invested in the first half of 2022.
COVID-19 Global Pandemic
MEG continues to proactively respond to the safety challenges associated with COVID-19 and remains committed to ensuring that the health and safety of all its personnel and business partners and the safe and reliable operation of the Christina Lake facility remain a top priority. MEG continues to apply screening procedures, including antigen screening and other protocols, ensuring the health and safety of its people.
Debt Repayment
As previously announced, during the third quarter of 2021 the Corporation continued to prioritize debt repayment with the redemption of US$100 million of the Corporation's 6.50% senior secured second lien notes due January 2025 at a redemption price of 103.25%, plus accrued and unpaid interest to, but not including, the redemption date of August 23, 2021.
Since the beginning of 2018 the Corporation has repaid US$1.6 billion of outstanding indebtedness and remains committed to continued debt reduction as a key component of its capital allocation strategy. All available free cash flow generated in the second half of 2021 will be directed to further debt repayment.
Outlook
Based on better than expected production performance MEG is revising its full year 2021 average production to 92,500 -- 93,500 bbls/d.
Summary of Revised Guidance Revised Revised Original Guidance
2021 Guidance Guidance Guidance
(November 8, 2021) (July 22, 2021) (May 3, 2021) (December 7, 2020)
Bitumen 92,500 - 93,500 91,000 - 93,000 88,000 - 86,000 - 90,000
production - bbls/d bbls/d 90,000 bbls/d bbls/d
annual
average
Non-energy $4.40 - $4.50 per $4.40 - $4.60 $4.60 - $5.00 $4.60 - $5.00 per
operating bbl per bbl per bbl bbl
costs
G&A expense $1.65 - $1.75 per $1.65 - $1.75 $1.70 - $1.80 $1.70 - $1.80 per
bbl per bbl per bbl bbl
Capital
expenditures $335 million $335 million $260 million $260 million
MEG's estimate of full year 2021 total transportation costs range from US$6.00 to US$6.50 per barrel of AWB blend sales.
MEG plans to release its 2022 capital and operating budget on or about November 29, 2021.
2021 Commodity Price Risk Management
During the second half of 2020, MEG entered into enhanced WTI fixed price hedges with sold put options for approximately 30% of forecast bitumen production for the fourth quarter of 2021 at an average price of US$46.18 per barrel. Additionally, MEG has hedged approximately 30% of its expected condensate requirements at a landed-at-Edmonton price equivalent to 98% of WTI, approximately 30% of expected natural gas requirements at an average AECO price of C$2.61 per GJ and fixed the sales price on approximately 30% of expected power available for sale at an average price of C$62.75 per MWh, each for the fourth quarter of 2021. The table below reflects MEG's outstanding fourth quarter of 2021 hedge positions.