MEG Energy announces disciplined 2019 capital investment plan, maintains optionality to reach 113,000 bpd in 2020

All financial figures in Canadian dollars ($ or C$) unless otherwise noted

CALGARY, Jan. 22, 2019 /CNW/ - MEG Energy Corp. (TSX:MEG) announced today its 2019 capital investment plan and operational guidance. Highlights include:

  • A base capital budget of $200 million, to be fully funded with expected 2019 adjusted funds flow from operations, designed to sustain production capability at 100,000 barrels per day (bpd) in 2019 and 2020, as well as fund future growth projects beyond 2019;

  • A discretionary capital budget of $75 million, which would not be sanctioned until mid-2019 subject to market conditions at that time. Capital would be focused on advancing MEG's Phase 2B Brownfield expansion and allow MEG to achieve its previously announced target of reaching 113,000 bpd in 2020;

  • While MEG has the ability to average 100,000 bpd of production in 2019, due to the Alberta Government mandated production curtailments, MEG expects 2019 production to average 90,000 to 92,000 bpd, and non-energy operating costs in the range of $4.75 to $5.25 per barrel. 2019 non-energy operating costs per barrel are negatively impacted by the expected 8,000 to 10,000 bpd production curtailment;

  • At December 31, 2018 MEG had cash and cash equivalents of $318 million and the Company's covenant-lite US$1.4 billion credit facility, which matures November 2021, remains undrawn; and

  • MEG has focused its commodity price risk management strategy exclusively on PADD II exposed sales, and to date has hedged approximately 35% of its PADD II exposure at an average WCS price of US$43.80 per barrel.

"MEG's disciplined 2019 capital program prioritizes financial strength while maintaining flexibility to enhance value with changing market conditions. The low level of capital required to sustain production illustrates the quality of MEG's assets, highly efficient operations and the ability to adjust capital spending in the event of deteriorating market conditions," said Derek Evans, President and Chief Executive Officer. "In light of the current environment, we have pulled back spending on the Phase 2B Brownfield Expansion project. However, as the temporary production curtailment eases and as pricing stabilizes, we have the ability to layer in additional capital to complete the Brownfield project to grow production to 113,000 bpd. MEG's 2019 budget supports our strategy to profitably grow production and adjusted funds flow from operations."

The 2019 budget includes sustaining and maintenance capital of $115 million, or approximately $3.50 per barrel. Spending is largely directed towards the completion and tie-in of sustaining wells. Given the advancement of a significant portion of a planned 2019 turnaround to November 2018, maintenance capital requirements for 2019 are relatively minor compared to the prior year.

MEG plans to invest $40 million towards growth projects during the year, setting the stage for production growth beyond 2019. Growth capital includes approximately $20 million for the completion of work already underway on the Phase 2B Brownfield Expansion. The Company has spent $165 million to date on the project and continues to anticipate total costs for the Phase 2B Brownfield Expansion of approximately $275 million. MEG also plans to invest $20 million for the advancement of the eMVAPEX pilot and anticipates providing an update on results in late 2019. The majority of the remaining $45 million of capital spending will be allocated towards field infrastructure, corporate and other initiatives.

2019 Base Capital Investment Summary

$ millions

Sustaining and maintenance

115

Growth capital (eMVAPEX, 2B Brownfield Expansion & other)

40

Field infrastructure, corporate and other

45


200

 

2019 Operational Guidance

MEG's operational guidance assumes the Alberta Government mandated production curtailment remains in place for 2019, but eases over the course of the year. In this scenario, MEG expects its 2019 production to average 90,000 to 92,000 bpd. Should the temporary curtailment be lifted, MEG could rapidly return production to 100,000 bpd. Non-energy operating costs for 2019 are anticipated to be in the range of $4.75 to $5.25 per barrel.


2019 guidance1

2018 guidance (revised)

Production (average)

90,000 to 92,000 bpd

87,000 to 90,000 bpd

Non-energy operating costs

$4.75 to $5.25 per barrel

$4.50 to $5.00 per barrel



1

At unrestrained production capacity of 100,000 bpd, assuming no curtailment, the Company's guidance for 2019 non-energy operating costs would otherwise be $4.40 to $4.90 per barrel

 

Market Access

In 2019, MEG will continue to deliver a significant portion of its blend sales into the U.S. Gulf Coast where differentials have remained strong. With 50,000 bpd of firm capacity on the Flanagan South and Seaway pipelines, MEG expects to deliver over 30,000 bpd to the U.S. Gulf Coast, taking into consideration ongoing apportionment on the mainline system. The Company anticipates apportionment to moderate on a full year basis in 2019 relative to 2018, supported by increased crude by rail and the Alberta-wide production curtailments. The potential completion of Enbridge's Line 3 in the fourth quarter of 2019 would provide further improvement to apportionment; however, a 2019 impact from Line 3 is not part of the base MEG planning assumption. MEG remains committed to diversifying markets through the use of rail. The Company has rail capacity for 30,000 bpd and expects to rail over 20,000 bpd in the first quarter of 2019.

Outlook

In 2019, MEG will continue its efforts towards improving overall cost efficiencies of the organization and enhancing its competitive position. In conjunction, the Board is evaluating its composition and has initiated a Board renewal process to ensure that the necessary skillsets and backgrounds are in place to steward the ultimate potential of the Company going forward.   

"As we enter a new year, we remain focused on cost containment, preservation of liquidity and optimizing production under the government mandated curtailments. MEG is well-positioned with an inventory of highly economic, execution-ready expansion projects, which will allow us to respond quickly to improving market conditions," continued Evans. "We remain focused on delivering on our commitment to shareholders to unlock value from our world class resource." 

MEG is re-initiating the strategic alternatives review for its HI-Q® partial upgrading technology and has engaged a financial advisor to assist with the process. The HI-Q® technology has the potential to eliminate the use of diluent for bitumen transport.

Conference Call Details

A conference call will be held to review the 2019 capital budget and outlook at 7:30 a.m. Mountain Time (9:30 a.m. Eastern Time) on Tuesday, January 22, 2019. The North American toll-free conference call number is 1-888-390-0546. The international conference call number is 587-880-2171.

A recording of the call will be available by 12 noon Mountain Time (2 p.m. Eastern Time) on January 22, 2019 on the Company's website at www.megenergy.com/investors/presentations-and-events.

Non-GAAP Measures

This news release contains the term adjusted funds flow from operations which is a non-GAAP measure.  This term is not defined by International Financial Reporting Standards ("IFRS") and, therefore, may not be comparable to similar measures provided by other companies.  This non-IFRS measure should not be considered in isolation or as an alternative for measures of performance prepared in accordance with IFRS.

MEG considers adjusted funds flow to be a key measure that provides a more complete understanding of MEG's operating performance and liquidity. Adjusted funds flow from operations is not intended to represent net cash provided by (used in) operating activities calculated in accordance with IFRS. The definition and reconciliation of non-GAAP measures are presented in the "NON-GAAP MEASURES" section of the Company's Management's Discussion and Analysis ("MD&A") for the three and nine month periods ended September 30, 2018.

Forward-Looking Information

Certain statements contained in this news release may constitute forward-looking statements within the meaning of applicable Canadian securities laws. These statements relate to future events or MEG's future performance. All statements other than statements of historical fact may be forward-looking statements. The use of any of the words "anticipate", "continue", "estimate", "expect", "may", "will", "project", "should", "believe", "plan", "intend", target, potential and similar expressions are intended to identify forward-looking statements. Forward-looking statements are often, but not always, identified by such words. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. In particular, and without limiting the foregoing, this news release contains forward looking statements with respect to our 2019 base capital budget, allocation and funding, expected 2019 funds flow, future production capability, and target, 2019 production, and non-energy operating costs, our focus and strategy, expecting sustaining and maintenance capital and growth capital, market access and diversification plans, plans to improve overall cost efficiencies, and plans regarding board composition.  

Forward-looking information contained in this news release is based on management's expectations and assumptions regarding, among other things: future crude oil, bitumen blend, natural gas, electricity, condensate and other diluent prices, foreign exchange rates and interest rates; the recoverability of MEG's reserves and contingent resources; MEG's ability to produce and market production of bitumen blend successfully to customers; future growth, results of operations and production levels; future capital and other expenditures; revenues, expenses and cash flow; operating costs; reliability; anticipated reductions in operating costs as a result of optimization and scalability of certain operations; anticipated sources of funding for operations and capital investments; plans for and results of drilling activity; the regulatory framework governing royalties, land use, taxes and environmental matters, including the timing and level of government apportionment easing, in which MEG conducts and will conduct its business; and business prospects and opportunities. By its nature, such forward-looking information involves significant known and unknown risks and uncertainties, which could cause actual results to differ materially from those anticipated.

These risks include, but are not limited to: risks associated with the oil and gas industry, for example, the securing of adequate access to markets and transportation infrastructure; the availability of capacity on the electricity transmission grid; the uncertainty of reserve and resource estimates; the uncertainty of estimates and projections relating to production, costs and revenues; health, safety and environmental risks; risks of legislative and regulatory changes to, amongst other things, tax, land use, royalty and environmental laws and curtailment of production; assumptions regarding and the volatility of commodity prices, interest rates and foreign exchange rates, and, risks and uncertainties related to commodity price, interest rate and foreign exchange rate swap contracts and/or derivative financial instruments that MEG may enter into from time to time to manage its risk related to such prices and rates; risks and uncertainties associated with securing and maintaining the necessary regulatory approvals and financing to proceed with MEG's future phases and the expansion and/or operation of MEG's projects; risks and uncertainties related to the timing of completion, commissioning, and start-up, of MEG's turnarounds, and of future phases, expansions and projects; the operational risks and delays in the development, exploration, production, and the capacities and performance associated with MEG's projects; and uncertainties arising in connection with any future disposition of assets.

Although MEG believes that the assumptions used in such forward-looking information are reasonable, there can be no assurance that such assumptions will be correct. Accordingly, readers are cautioned that the actual results achieved may vary from the forward-looking information provided herein and that the variations may be material. Readers are also cautioned that the foregoing list of assumptions, risks and factors is not exhaustive.

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.

The forward-looking information included in this news release is expressly qualified in its entirety by the foregoing cautionary statements. Unless otherwise stated, the forward-looking information included in this news release is made as of the date of this news release and MEG assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances, except as required by law.

This news release contains future-oriented financial information and financial outlook information (collectively, "FOFI") about MEG's prospective results of operations including, without limitation, cash flow and various components thereof, all of which are subject to the same assumptions, risk factors, limitations, and qualifications as set forth above. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on FOFI. MEG's actual results, performance or achievement could differ materially from those expressed in, or implied by, these FOFI, or if any of them do so, what benefits MEG will derive therefrom. MEG has included the FOFI in order to provide readers with a more complete perspective on MEG's future operations and such information may not be appropriate for other purposes. MEG disclaims any intention or obligation to update or revise any FOFI statements, whether as a result of new information, future events or otherwise, except as required by law.

About MEG

MEG Energy Corp. is focused on sustainable in situ oil sands development and production in the southern Athabasca oil sands region of Alberta, Canada. MEG is actively developing enhanced oil recovery projects that utilize SAGD extraction methods. MEG's common shares are listed on the Toronto Stock Exchange under the symbol "MEG".

For further information, please contact:

Investors

Helen Kelly
Director, Investor Relations and External Communications
403-767-6206
helen.kelly@megenergy.com

Media

Megan Hjulfors
Senior Advisor, Investor Relations and External Communications
403-767-6211
megan.hjulfors@megenergy.com

SOURCE MEG Energy Corp.