MEG Power Corp. (OTCPK:MEGEF) Q1 2024 Earnings Convention Name Might 7, 2024 8:30 AM ET
Firm Members
Darlene Gates – Chief Government OfficerRyan Kubik – Chief Monetary OfficerErik Alson – Senior Vice President of Advertising
Convention Name Members
Greg Pardy – RBC Capital MarketsNeil Mehta – Goldman SachsDennis Fong – CIBC World MarketsJohn Royall – JPMorgan
Operator
Good morning. My title is Colin, and I can be your convention operator in the present day. At the moment, I wish to welcome everybody to the MEG Power’s 2024 Q1 Outcomes Convention Name. All traces have been positioned on mute to forestall any background noise. After the audio system’ remarks, there can be a question-and-answer session. [Operator Instructions] Thanks.
That is Darlene Gates, CEO. Chances are you’ll start your convention.
Darlene Gates
Good morning, everybody, and thanks for becoming a member of us to assessment MEG Power’s first quarter 2024 monetary and working outcomes. With me on this name are Ryan Kubik, our Chief Monetary Officer; Lyle Yuzdepski, our Senior Vice President of Authorized & Company Improvement; and Erik Alson, our Senior Vice President of Advertising.
I’d prefer to remind our listeners that this name accommodates forward-looking data. Please check with the advisories in our disclosure paperwork filed on SEDAR and our web site. I’ll hold my remarks transient in the present day. In case you’d like additional element on our first quarter outcomes, please check with yesterday’s press launch.
MEG Power is a frontrunner in sustainable, revolutionary and accountable vitality improvement and I’m excited and grateful to guide this group in my new capability as President and CEO. On behalf of the complete Board and administration workforce, I need to thank Derek Evans for his contributions to the group over the previous six years.
MEG has a brilliant future forward and can preserve its concentrate on security, operational excellence, and shareholder returns. I’m assured that we’ll leverage the distinctive energy of our asset and the skills of our folks to proceed delivering long-term worth for our shareholders. This was demonstrated in our sturdy first quarter security, working, advertising and marketing and monetary efficiency.
Regardless of report chilly climate and elevated drilling exercise within the quarter, we achieved a complete recordable damage fee of 0.22 and no misplaced time incidents. First quarter manufacturing averaged 104,000 barrels per day, which was delivered at a high tier steam to grease ratio of two.37. Our 2024 redevelopment in infill program kicked off to a robust begin. We additionally started steaming the primary our two effectively pad program, which is scheduled to start out up within the second quarter and can attain peak manufacturing later this yr.
We’re performing deliberate upkeep within the second quarter and anticipate manufacturing to common round 100,000 barrels per day. However our considerably lowered turnaround scope unfold extra evenly all year long will assist obtain our 2024 manufacturing steering of 102,000 to 108,000 barrels per day.
Working bills web of energy income within the first quarter averaged an industry-leading $6.37 per barrel, which included non-energy working prices of $5.18 per barrel. Low pure fuel and favorable energy costs proceed to learn our enterprise with energy revenues offsetting 68% of vitality working prices.
Capital investments for the quarter totaled $112 million directed in direction of drilling exercise on SAGD pads and our quick cycle redevelopment and infill program. Engineering and design work on our progress plans can be progressing effectively with a closing funding determination and related ramp up in expenditures anticipated within the second half of the yr.
On the income aspect, we proceed to appreciate sturdy worth for our bitumen. Common first quarter bitumen realization after web transportation and storage expense was $60 per barrel, which represents a 38% improve over the identical interval in 2023 regardless of greater mainland apportionment. Within the second quarter, our advertising and marketing technique with entry to the U.S. Gulf Coast elevated our Edmonton realized mix gross sales value after web transportation and storage expense by US$1.54 per barrel relative to Edmonton AWB index. These value enhancements together with sturdy operational efficiency generated $329 million of adjusted funds circulate for the quarter. After $112 million in capital expenditures, MEG generated $217 million of free money circulate.
That free money circulate facilitated the compensation of US$105 million in senior notes and repurchase of a $127 million or 4.7 million MEG shares. Our web debt on the finish of the quarter was US$687 million and we’re on monitor to achieve our US$600 million web debt goal within the third quarter.
At that time, we’ll transition to returning 100% of free money circulate to shareholders. In March, we renewed our regular course issuer bid for an additional yr, which facilitates that continued return of capital to our shareholders. As introduced final week, the Trans Mountain pipeline enlargement is authorised for operation. This marks a big milestone not only for MEG, but additionally for Alberta.
This pipeline offers extra transportation capability out of Canada for the primary time in a few years, which ought to slim and cut back the volatility of our heavy oil differential. The Pathways Alliance continues to advance its proposed foundational carbon seize and storage mission.
The alliance is in discussions with the federal and Alberta provincial governments on totally different fiscal and coverage instruments for big scale tasks corresponding to ours. This help will assist us to derisk the investments wanted to construct a aggressive clear economic system and assist meet Canada’s local weather targets. Regulatory functions to the Alberta Power Regulator started in mid-March, searching for approvals for the Pathways CO2 transportation community and storage hub.
Formal session and engagement with indigenous teams alongside the proposed CO2 transportation hall and storage community started within the fall of 2023. These discussions alongside conferences with communities and landowners continues to happen. The current federal finances additionally signaled a number of essential measures that would probably assist get the Pathways mission to closing funding determination, however extra work is important.
Lastly, I’m excited to share that Bob Rooney is standing for election to MEG’s Board of Administrators on the Company’s Annual Shareholders Assembly later in the present day. Mr. Rooney is at present an govt advisor with Enbridge and has over 40 years of vitality sector expertise in strategic planning, capital allocation, company finance and governance. The board and I are trying ahead to formally welcoming one other remarkably certified Canadian oil and fuel {industry} veteran onto our workforce.
As I convey my remarks to a detailed, I need to emphasize my dedication to the imaginative and prescient and strategic course to our workforce that our workforce has established in recent times. With favorable value fundamentals and unprecedented egress capability, MEG is effectively positioned to proceed delivering long-term worth to our shareholders. I’m excited to maneuver MEG ahead into its subsequent chapter. I’m assured in our potential to execute the 2024 plans with our workforce. On behalf of MEG’s board of administrators and our administration workforce, I need to thanks on your continued help.
With that, I’ll flip the decision again over to Colin to start the Q&A.
Query-and-Reply Session
Operator
Thanks. Girls and gents, we’ll now start the question-and-answer session. [Operator Instructions] Your first query comes from Greg Pardy from RBC Capital Markets. Greg, please go forward.
Greg Pardy
Sure. Thanks. Good morning and thanks for the rundown. One other stable quarter. Darlene and Ryan, I imply, the questions are actually round return of capital. So the primary one can be, is it doable that you may hit that $600 million flooring by the top of June? Like, may you – do you suppose – is it doable so that you can obtain it within the second quarter? And are you simply being conservative by way of pondering 3Q?
Ryan Kubik
Greg, it’s Ryan. I assume, it’s doable, relying on what oil value you assume, FX fee, et cetera. So the chances there to hit the online debt goal at $600 million. However as soon as once more, we’re going to proceed to buyback our 2027 bonds which can be excellent. That can take us a bit bit additional into the quarter, and with that we’ll have US$600 million of whole debt excellent, the 2029 bonds. So we’ll hit it. We’re going to proceed to buyback the bonds after that and ensure we give ourselves some runway out to 2029.
Greg Pardy
Okay. Thanks for that. After which the second query actually comes again to dividends. However from two views, I assume, one is, what’s the urge for food amongst administration workforce and the board for implementing only a base dividend? That may be query one. After which simply type of a subset associated to the buyback. To the extent, you don’t have room underneath the NCIB to meet the 100%, would you simply do variables to complement issues as want be?
Ryan Kubik
Sure. I imply, the bottom dividend that’s into consideration by the board at this cut-off date, but to be decided whether or not that call is made, that’s a Board determination, clearly, however it’s into consideration. We are going to proceed to emphasise the NCIB to your level. So we can be emphasizing share buybacks. And underneath sure eventualities, you’ll be able to hit the utmost 10% buyback underneath that program. I might say that we might – at that time, in all probability look towards an SIB relatively than variable dividends. We do hear from our shareholders loud and clear that they don’t consider that variable dividends are appropriately priced into the share value. So much less more likely to put a variable dividend in place, extra probably to take a look at an SIB.
Greg Pardy
Understood. Thanks very a lot.
Operator
Your subsequent query comes from Neil Mehta from Goldman Sachs. Neil, please go forward.
Neil Mehta
Sure, good morning, workforce. Would simply love your perspective on the place we’re by way of the egress dynamics and provides fast replace on TMX timing. What you suppose occurs to the market when TMX comes on-line. And I assume the follow-up query is simply, do you suppose Canadian oil producers develop into the incremental capability? How do you suppose that performs out on the again finish? So any massive image ideas there can be terrific.
Darlene Gates
Thanks, Neil. As you may need picked up, we’ve acquired our Senior Vice President, Advertising right here, simply to reply these questions in the present day, as a result of it’s our particular time. So I’m going to cross it off to Erik.
Erik Alson
Thanks, Neil. It’s Erik. We’re trying ahead to the approaching startup of the TMX pipeline. It’s nice for {industry} and Canada to have that super asset out there. With this vital infrastructure now full, we anticipate that gentle heavy differentials will stay slim for years whereas Canadian egress stays unconstrained. Your query about egress, I imply, as an {industry}, there’s a historical past of filling the out there egress, and I feel that may occur once more over time.
There are numerous estimates on the market when that would happen. Seeing issues as current as two years, others inside 5 – 6, our pondering is nearer to the outer finish of that timeframe. Earlier than TMX fills, I feel you’ll see extra egress from an Enbridge mainline enlargement. And whereas I don’t see one other pipeline being constructed, I consider there’s debottlenecking of different present pipelines that may happen.
Neil Mehta
That’s actually useful coloration. And it’s nice to see this asset nearly coming on-line. My follow-up is simply on 2025 goes to be a heavier yr as you’ve gotten already signaled for turnarounds. So simply love your perspective as you concentrate on a few of these upkeep tasks and progress tasks over the subsequent yr or two. What do you suppose the market ought to concentrate on? What do you suppose is essential? What do you need to accomplish, notably in 2025, which is the most important nut?
Darlene Gates
Effectively, I’ll begin there. It’s Darlene. I might say, for 2025, as you talked about, we’ve acquired our turnaround that we’ve acquired a decrease exercise degree for 2024 that’s permitting us to plan higher for the 2025 turnaround. We’re actually taking a look at optimizing the scope of that turnaround to reduce its affect. Workforce is doing plenty of actually good work proper now. They’ve really freezed the scope. That permits us to do much more higher planning and scheduling and searching on the resourcing that we’d like. So we’re in actually fine condition there. Loads of good exercise by the workforce to arrange for that. So we really feel we’re in fine condition.
On the identical time, you’ll have seen us introduce within the capital program expenditures for [indiscernible] for extra steam. That’s making ready for the potential for 2025 of whether or not we’ll put extra steam into place that permits us to have that optionality. After which actually our focus in 2025 would be the third processing prepare the place we ramp up most of that mission.
By the top of this yr, the workforce can have the ultimate funding determination proposal for the board that may have much more certainty on that capital profile and scope and schedule, and we should always have that in place and be in fine condition.
Neil Mehta
Thanks, workforce.
Operator
Your subsequent query comes from Dennis Fong from CIBC World Markets. Dennis, please go forward.
Dennis Fong
Hello, good morning, and thanks for taking my questions. The primary one possibly simply comes off the again of a few of your ready remarks there, Darlene. You famous that there was a bit little bit of remoted affect from facility upkeep and chilly climate. How ought to we be excited about the cadence of driving the SOR again in direction of a decrease degree? Is that similar to, effectively, startups, or are there different form of concerns we needs to be excited about?
Darlene Gates
Sure. Thanks, Dennis. Completely. You’ve acquired that proper. The affect on the steam to grease ratio is admittedly simply the timing, for MEG this yr, we often have been beginning up one pad a yr. This yr, we’ve acquired two pads, two rigs going. And on account of that, we’re simply pulling on that steam. And as you already know, after we’re placing the steam within the reservoir, whereas we’re heating up the reservoir, we don’t get that manufacturing again initially, and that drives up the steam to grease ratio a bit greater for this yr. No different messaging in that.
Dennis Fong
Nice. After which secondarily, I do know you guys don’t hedge for realizations or form of the highest line amount value danger administration, however you guys do take a look at layering in some form of amount danger administration associated to value construction. I used to be simply questioning, how do you concentrate on managing these prices by means of each 2024 and 2025, simply given some potential extra egress that would come out from the pure fuel perspective, in addition to the way you’re excited about condensate within the go ahead surroundings?
Ryan Kubik
Sure, I imply, I’ll begin there. Dennis, it’s Ryan. We do look to hedge among the enter prices. I assume the pure fuel enter prices, the condensate to your level. We do have some positions on in 2024, however pure fuel costs are comparatively low this yr. Begin to tick up within the ahead curve, I assume, into 2025 as LNG Canada comes on.
I might say we nonetheless suppose that there’s adequate provide on the market. After we take a look at the provision demand dynamics, we don’t essentially really feel like we have to rush to get any positions on to hedge these enter prices. We are going to clearly take a look at it because the market dynamic form of strikes ahead, however we’re snug staying unhedged on that place at this cut-off date as we transfer ahead.
On the condensate entrance, I might say related factor. We’re shopping for a good portion of our condensate out of the U.S. Gulf Coast. Costs there proceed to be delicate relative to the place they’ve been traditionally talking, and we don’t really feel. We really feel that with differentials the best way they’re, et cetera. We don’t have to rush and hedge these enter prices.
Erik Alson
Sure, that is Erik. There’s nothing I might add, apart from we’ll sometimes take a look at nat fuel condensate regularly, and if we do see uneven danger, we might contemplate hedging, nevertheless it’s not one thing that we’re actively engaged on at this level.
Dennis Fong
Nice. Thanks. And should you allow me, one fast follow-up to Neil’s query simply on TMX. I do know you guys have a good quantity of expertise advertising and marketing barrels down within the U.S. Gulf Coast. How ought to we be excited about the relative measurement of your dedicated capability on TMX versus your potential to, we’ll name it market, both off the dock or how are you going to handle that publicity?
Erik Alson
Thanks, Dennis, it’s Erik once more. You probably did point out the advertising and marketing capabilities that we do have out of the Gulf Coast. We are going to leverage these in how we’re advertising and marketing for TMX. I’ll say we’re augmenting the capabilities that we’ve got by a partnership with a world operator that has intensive transport capabilities. That partnership and the small print of our form of first gross sales are commercially delicate, so I gained’t get into specifics on that. So what I might say is the partnership is working as meant.
Dennis Fong
Nice. I admire that coloration. I’ll flip it again.
Operator
Your subsequent query comes from John Royall from JPMorgan. John, please go forward.
John Royall
Hello, good morning. Thanks for taking my query. Are you able to discuss concerning the manufacturing cadence for the remainder of the yr, notably within the affect of turnarounds, albeit I do know they’re minor and unfold out this yr, however will we see a barely decrease 2Q, albeit possibly not as gentle as typical. And the way ought to we take into consideration second half manufacturing given we’ll have the pad version phasing in.
Darlene Gates
Thanks, John. It’s Darlene. As I discussed within the dialogue, the second quarter can be round 100,000 barrels a day. That’s the outcome. Q2 and Q3 can have extra of our upkeep exercise. So these can be impacted extra by means of that, however not a serious turnaround. One other means I might say it’s should you take a look at the primary half of 2024 in comparison with the primary half of 2023, we’ve acquired a a lot greater manufacturing between the primary half.
So once you common it out between 2023 and 2024, trying stronger. As you sit up for the second half of 2024, you’ll begin to see the affect of that new pad being introduced on-line. And we’ll be beginning up the second pad in late, steaming that the second pad and produce that late. So once more, end sturdy marketing campaign and are available out exit charges needs to be fairly excessive. Anticipate the second half for certain above 105,000 barrels per day.
John Royall
Okay. Thanks. That’s useful. After which my subsequent query is simply in your tax standing. So do you’ve gotten any up to date views sitting in the present day in a considerably improved value surroundings when it’s possible you’ll flip to full taxpaying?
Ryan Kubik
Hey John, our greatest guess nonetheless is true round mid-2027 timeframe, we nonetheless acquired $4 billion of tax swimming pools, plenty of these instantly deductible. So after we look ahead, form of mid-2027 timeframe nonetheless appears affordable to us.
John Royall
Thanks.
Operator
There are not any additional questions presently. I’ll flip it again to Darlene for closing remarks.
Darlene Gates
Thanks, Colin, and thanks to everyone that joined us this morning for our Q1 outcomes convention name. We look ahead to updating you once more after we launch our Q2 ends in July. I hope everyone has a secure and nice day.
Operator
Girls and gents, this concludes your convention name for in the present day. We thanks for collaborating and ask that you just please disconnect your traces.