To Our Shareholders

A Message from Bill McCaffrey

110120Meg64119.jpg 2016 and 2017 have been extremely important for MEG Energy. Our comprehensive refinancing plan, successfully completed in late January, extended the maturity profile of our debt to nearly five years under favourable terms. This refinancing included a $518 million equity issuance, which opened the door for us to refocus on growth toward 210,000 barrels per day.

In 2016, MEG Energy utilized its proven, proprietary eMSAGP technology to achieve record annual production of 81,245 barrels per day while at the same time reducing annual per barrel net operating costs and per barrel non-energy operating costs to record lows. We are now using the same technology to springboard forward our growth plans on Phase 2B. In 2017, we will direct approximately $320 million toward this initiative out of our capital budget of $590 million. 

The benefits of eMSAGP

Over the past six years we have proven and commercially applied eMSAGP on Phase 1 and 2, which account for approximately 25% of our total field-wide production. Where implemented, the eMSAGP process has reduced the steam-oil ratio by about 50% to an industry-leading range of 1.0 to 1.25. As we apply eMSAGP to the remainder of our wells at Phase 2B, we believe the value of this technology is going to become very apparent. 

We estimate at this time that our second project, known as the Phase 2B brownfield expansion, could proceed some time in mid to late 2018. This plant expansion will add a further 13,000 barrels per day and can be done concurrently with the implementation of eMSAGP. 

We expect the implementation of eMSAGP and the brownfield expansion to bring production to approximately 113,000 barrels per day, and reduce our cash costs by $6 to $7 per barrel. These savings contribute directly to MEG’s bottom line and will increase the ability of the company to respond to swings in the marketplace, while further reducing the breakeven price we need to advance our growth plans.

As MEG increases production, we will also be in a more advantageous position to improve the company’s overall debt metrics. Based on a WTI price in the mid to low $US fifties, we believe we can reach a net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio in the 3x to 4x range once the first two projects are completed. We anticipate there will be further improvements to our debt metrics as subsequent projects are developed. 

The journey to 210,000 barrels per day

Meg Site

Following completion of these two projects, we plan to continue our journey to 210,000 barrels per day with a series of additional high return, short-cycle brownfield development projects, each in the range of 10,000 to 20,000 barrels per day. This block-by-block strategy breaks down a large project, which formerly could have taken three-plus years to fund and construct, into a series of smaller-scale projects which can each be implemented on a 12 to 18 month basis. MEG can also get from our initial investment to cash flow in as little as nine to 12 months. 

This approach enables us to reach the same finish line as we would have with a large-scale project, but we are able to implement it more efficiently with less capital and with a quicker path to cash flow. Because each added project requires significantly less capital than might have been the case before, we have considerable flexibility around our timing. We are comfortable we can speed up or slow down development of each component depending on market conditions. 

With the strong returns associated with these projects, even at lower oil prices, we believe it makes sense for MEG to go ahead with them. It is the company’s intention to fund these projects from cash flow. 

We continue to apply our hedging strategy, which is focused on protecting MEG’s capital program against downward oil price movements. Our objective is to set a floor price that is set at or above the company’s costs, while leaving room to take advantage of improving oil prices. 

Marketing Strategy

In addition, we continue to work to diversify markets and reduce the price differential for MEG’s heavy oil production. An important component of the company’s marketing strategy is our access to the Gulf of Mexico through the Flanagan-Seaway pipeline system. Combined with our use of rail, Flanagan-Seaway gives MEG a competitive advantage to gaining access to that important market as we continue to pursue additional transportation opportunities. 

May River Application

MEG has recently submitted an application to the Alberta Energy Regulator for the May River Project, which has a total planned capacity of approximately 160,000 barrels per day. MEG now has close to 500,000 barrels per day of production approved or under regulatory review. 

MEG has put in place a very solid foundation to move forward with its plans. Our focus through 2017 is on the successful execution of those plans.

 

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Bill McCaffrey
President & CEO
MEG Energy