Solid operational and financial results, along with substantial liquidity, position MEG well for its next stage of growth
CALGARY, May 10, 2018 /CNW/ - MEG Energy Corp. (TSX:MEG) today reported first quarter 2018 operating and financial results. Highlights include:
Record first quarter production volumes of 93,207 barrels per day (bpd), reflecting the continued ramp-up of MEG's eMSAGP growth initiative at Christina Lake Phase 2B;
First quarter non-energy operating costs of $4.55 per barrel and net operating costs of $5.98 per barrel;
The repayment of approximately $1.225 billion of MEG's senior secured term loan from the majority of the $1.5 billion net cash proceeds received from the sale of the company's interest in the Access Pipeline and Stonefell Terminal. The remaining $275 million is allocated towards fully funding MEG's previously announced 13,000 bpd brownfield expansion at Christina Lake Phase 2B;
Total cash capital investment of $148 million, mainly directed towards advancing the company's objective to reach 113,000 bpd in 2020; and
Cash and cash equivalents of $675 million. MEG's four-year covenant-lite US$1.4 billion credit facility remains undrawn.
MEG's growth is proceeding on schedule and on budget, with the eMSAGP implementation expected to be completed later this year bringing production to 100,000 bpd by early 2019. The company anticipates the Phase 2B brownfield expansion to increase production capacity to approximately 113,000 bpd in 2020. MEG continues to target 2018 average production of 85,000 to 88,000 bpd and 2018 exit production of 95,000 to 100,000 bpd. The 2018 average production guidance takes into account a planned maintenance turnaround at Christina Lake Phase 2B scheduled for the second quarter.
"Taking into consideration the market dynamics in the first quarter of 2018, MEG delivered solid operating and financial results," said Bill McCaffrey, President and Chief Executive Officer. "We were able to effectively mitigate pipeline apportionment issues by utilizing the network of storage and rail facilities we have available to us, and we continue to have good access to the Gulf Coast via the Flanagan South and Seaway pipeline systems, which enables us to sell a significant percentage of our barrels at world prices."
MEG's current contract of 50,000 bpd of transportation capacity on Flanagan South and Seaway will double to 100,000 bpd in mid-2020, moving approximately two-thirds of the company's forecast blend sales volume to the Gulf Coast and world pricing. This combination of growing pipeline access and continued optionality around rail advances MEG's strategy of reliable and diversified access to the broadest possible markets.
Net operating costs per barrel for the first quarter of 2018 were 29% lower than in the first quarter of 2017, while non-energy operating costs per barrel decreased 13% over the same time period. The ongoing reduction in net operating costs and non-energy operating costs in the first quarter of 2018 is primarily a result of efficiency gains and continued cost management.
"The implementation of eMSAGP and the brownfield expansion on Phase 2B are key components for achievement of MEG's Vision 20/20," said Bill McCaffrey. "Following the implementation of these two phases of growth, we will have decreased our overall cash costs by approximately $3 per barrel from current levels, improved our balance sheet metrics, and positioned the company to grow thereafter while generating free cash flow."
Capital investment during the first quarter of 2018 totalled $148 million. The majority of the capital was dedicated towards the drilling of new infills and well pairs as the implementation of eMSAGP continued on Phase 2B. The brownfield expansion on Phase 2B commenced during the quarter and is proceeding on schedule. Construction of the eMVAPEX pilot was also advanced.
"Vision 20/20, once completed, will enable MEG to enter a new chapter. From a stronger operating and financial foundation, we will be in an improved position to respond to changing market conditions," said McCaffrey. "It is with this clear vision in mind that this is the right time for me to retire. With Management and the Board fully aligned on this vision, I am confident that MEG has the internal bench strength and the technical and financial capabilities to successfully carry out this transition."
MEG realized adjusted funds flow from operations of $83 million for the first quarter of 2018 compared to adjusted funds flow from operations of $43 million in the same quarter of 2017. This 93% increase primarily reflects increased bitumen sales volumes and a reduction in net interest expense primarily due to realized gains on the company's interest rate swap contract.
The company recorded a first quarter 2018 operating loss of $18 million compared to an operating loss of $79 million for the same period in 2017. The decrease in the operating loss was primarily the result of higher bitumen sales volumes. Bitumen sales averaged 91,608 bpd for the first quarter of 2018 compared to 74,703 bpd for the same time period in 2017.
Cash operating netback is calculated by deducting the related diluent expense, blend purchases, transportation, operating expenses, royalties and realized commodity risk management gains (losses) from proprietary blend revenues and power revenues, on a per barrel of bitumen sales volume basis.
Adjusted funds flow from (used in) operations, Operating earnings (loss) and the related per share amounts do not have standardized meanings prescribed by IFRS and therefore may not be comparable to similar measures used by other companies. The non-GAAP measure of adjusted funds flow from (used in) operations is reconciled to net cash provided by (used in) operating activities and the non-GAAP measure of operating earnings (loss) is reconciled to net earnings (loss) in accordance with IFRS under the heading "NON-GAAP MEASURES" and discussed further in the "ADVISORY" section.
The total of Petroleum revenue, net of royalties and Other revenue as presented on the Consolidated Statement of Earnings and Comprehensive Income.
Funds flow from (used in) operations and adjusted funds flow from (used in) operations are non-GAAP measures utilized by the Corporation to analyze operating performance and liquidity. Funds flow from (used in) operations excludes the net change in non-cash operating working capital while the IFRS measurement "net cash provided by (used in) operating activities" includes these items. Adjusted funds flow from (used in) operations excludes the net change in non-cash operating working capital, realized gain on foreign exchange derivatives not considered part of ordinary continuing operating results, payments on onerous contracts and decommissioning expenditures, while the IFRS measurement "net cash provided by (used in) operating activities" includes these items. Funds flow from (used in) operations and adjusted funds flow from (used in) operations are not intended to represent net cash provided by (used in) operating activities calculated in accordance with IFRS. Funds flow from (used in) operations and adjusted funds flow from (used in) operations are reconciled to net cash provided by (used in) operating activities in the table below.
A gain related to the settlement of forward currency contracts to manage the foreign exchange risk on those Canadian dollar denominated proceeds related to the sale of assets designated for U.S. dollar denominated long-term debt repayment.
Operating earnings (loss) is a non-GAAP measure which the Corporation uses as a performance measure to provide comparability of financial performance between periods by excluding non-operating items. Operating earnings (loss) is defined as net earnings (loss) as reported, excluding unrealized foreign exchange gains and losses, unrealized gains and losses on derivative financial instruments, unrealized gains and losses on commodity risk management, realized gains and losses on foreign exchange derivatives, gain on asset dispositions, onerous contracts expense, and the respective deferred tax impact on these adjustments. Operating earnings (loss) is reconciled to "Net earnings (loss)", the nearest IFRS measure.
Further information regarding the assumptions and risks inherent in the making of forward-looking statements can be found in MEG's most recently filed Annual Information Form ("AIF"), along with MEG's other public disclosure documents. Copies of the AIF and MEG's other public disclosure documents are available through the company's website at www.megenergy.com/investors and through the SEDAR website at www.sedar.com.
A full version of MEG's First Quarter Report to Shareholders, including unaudited financial statements, is available at www.megenergy.com/investors and at www.sedar.com.