SOURCE: MEG Energy Corp.

MEG Energy Corp.

July 28, 2015 05:00 ET

MEG Energy successfully completes major turnaround and remains on track toward record annual production volumes

CALGARY, AB--(Marketwired - July 28, 2015) -

All financial figures in C$ unless otherwise noted.

MEG Energy Corp. (TSX: MEG) today reported second quarter 2015 operating and financial results. Highlights include:

  • Production volumes for the second quarter ahead of plan at 71,376 barrels per day (bpd), which include the impact of major planned plant turnarounds involving Phases 1, 2 and 2B in the quarter;
  • Cash flow from operations of $99 million, or $0.44 per share;
  • Net operating costs of $9.43 per barrel, supported by low non-energy operating costs of $7.01 per barrel, MEG's second best result on record;
  • Continuing strong financial liquidity, exiting the quarter with $438 million of cash and an undrawn US$2.5 billion credit facility;
  • With the overall objective of positioning the company to grow in a low price environment, MEG initiated a review of its financial leverage.

"The major turnaround work for 2015 is now complete, leaving MEG well-positioned for strong operations through the balance of the year," said Bill McCaffrey, President and CEO. "Equally important, plant testing of oil and water processing facilities carried out during the turnaround set the stage to enhance our expansion plans. MEG is utilizing these results to develop its future brownfield expansions that are anticipated to occur over the next several years."

MEG's production during the second quarter was impacted by planned major turnaround work at the company's Phase 1, 2 and 2B facilities, as well as unplanned delays to work schedules due to wildfires in northern Alberta. Staff and contractors working on the turnarounds were temporarily evacuated as a precautionary measure, resulting in a delay of approximately one week to turnaround activities. Despite these impacts, second quarter production averaged 71,376 bpd, above the 68,984 bpd recorded for the second quarter of 2014, during which turnaround activities were relatively minor. Strong projected production volumes over the balance of the year, with operations resuming following the turnaround and the continuing application of the company's RISER initiative, are expected to support targeted record annual production of 78,000 to 82,000 bpd.

Net operating costs for the second quarter averaged $9.43 per barrel compared to $14.49 per barrel for the same period in 2014. The decrease in net operating costs is attributable to a per barrel decrease in energy and non-energy operating costs, partially offset by a decrease in the average power sales price from electricity sold to the market from MEG's cogeneration facilities. Non-energy operating costs decreased to $7.01 per barrel for the three months ended June 30, 2015 compared to $9.64 per barrel for the same period in 2014, which included $1.94 per barrel for annual inspection and maintenance activities at Christina Lake. Non-energy operating costs for 2015 take into account the capitalization of $20.8 million associated with the major turnarounds.

MEG reported cash flow from operations of $99.2 million for the second quarter of 2015 compared to $261.7 million for the second quarter of 2014. The decrease is primarily due to lower U.S. crude oil benchmark pricing and higher transportation and interest costs, partially offset by lower net operating costs and reduced royalties (reflecting lower commodity prices).

MEG recognized an operating loss (adjusted for items that are not indicative of operating performance) of $23.0 million for the second quarter of 2015, compared to operating earnings of $111.1 million for the same period in 2014. Operating earnings were impacted by a lower bitumen realization, primarily as a result of the significant decline of U.S. crude oil benchmark pricing, higher transportation costs and an increase in interest expense, partially offset by lower net operating costs and lower royalties.

Financial Liquidity

As at June 30, 2015, MEG's available capital resources included $438.2 million of cash and cash equivalents and an undrawn US$2.5 billion syndicated revolving credit facility. The corporation also has a US$500 million guaranteed letter of credit facility, under which US$157.3 million of letters of credit have been issued.

The previous guidance for non-energy operating costs of $8 to $10 per barrel contained an estimate for turnaround costs. These costs of $20.8 million are now being capitalized. As a result, the guidance for full-year 2015 non-energy operating costs is now $7.30 to $9.30 per barrel. There is no change to the annual 2015 capital budget of $305 million.

During the second quarter, MEG initiated a review of its financial leverage, with the overall objective of better positioning the Corporation to grow in a low price environment. All of MEG’s outstanding long-term debt is covenant lite, with the first maturity not due until 2020. Notwithstanding the above, MEG and its advisors are reviewing deleveraging options available to the Corporation, including how its interest in the Access Pipeline could contribute to this initiative. Any alternative pursued must align with the Corporation’s overall long-term strategy.

"We continue to have a very solid financial foundation," said McCaffrey. "Our efforts since late last year have been focused on how we can build on that foundation to continue to deliver growth in a lower oil price environment."

Operational and Financial Highlights

The following table summarizes selected operational and financial information of the Corporation for the periods noted. All dollar amounts are stated in Canadian dollars ($ or C$) unless otherwise noted:

         
   Six months ended June 30  2015  2014  2013
($millions, except as indicated)  2015  2014  Q2  Q1  Q4  Q3  Q2  Q1  Q4  Q3
Bitumen production - bbls/d  76,856  63,842  71,376  82,398  80,349  76,471  68,984  58,643  42,251  34,246
                               
Bitumen realization - $/bbl  34.39  68.06  44.54  25.82  50.48  65.12  72.75  62.28  38.22  74.33
                               
Net operating costs - $/bbl(1)  10.01  14.11  9.43  10.49  10.13  10.31  14.49  13.63  11.22  9.40
                               
Non-energy operating costs - $/bbl  7.31  9.38  7.01  7.57  6.42  7.16  9.64  9.05  8.09  9.20
                               
Cash operating netback(2) - $/bbl  18.89  47.89  29.64  9.83  35.56  48.70  51.45  43.51  23.78  59.59
                               
Cash flow from (used in) operations(3)  70  419  99  (30)  134  238  262  157  23  144
  Per share, diluted(3)  0.31  1.86  0.44  (0.13)  0.60  1.06  1.16  0.70  0.10  0.64
Operating earnings (loss)(3)  (147)  152  (23)  (124)  8  87  111  41  (33)  56
  Per share, diluted(3)  (0.66)  0.68  (0.10)  (0.56)  0.04  0.39  0.49  0.18  (0.15)  0.25
Revenue (4)  1,022  1,509  555  467  615  706  829  680  350  402
Net earnings (loss)(5)  (445)  146  63  (508)  (150)  (101)  249  (103)  (148)  115
  Per share, basic  (1.99)  0.65  0.28  (2.27)  (0.67)  (0.45)  1.12  (0.46)  (0.67)  0.52
  Per share, diluted  (1.99)  0.65  0.28  (2.27)  (0.67)  (0.45)  1.11  (0.46)  (0.67)  0.51
                               
Total cash capital investment(6)  171  622  90  80  324  291  299  324  366  455
                               
Cash, cash equivalents and short-term investments  438  840  438  471  656  777  840  890  1,179  647
Long-term debt(7)  4,694  4,016  4,694  4,776  4,366  4,218  4,016  4,162  4,005  2,858
                      
(1)Net operating costs include energy and non-energy operating costs, reduced by power revenue.
(2)Cash operating netbacks are calculated by deducting the related diluent, transportation, operating expenses and royalties from proprietary sales volumes and power revenues, on a per barrel basis.
(3)Cash flow from (used in) operations, Operating earnings (loss), and the related per share amounts do not have standardized meanings prescribed by International Financial Reporting Standards ("IFRS") and therefore may not be comparable to similar measures used by other companies. For the three and six months ended June 30, 2015 and June 30, 2014, the non-GAAP measure of cash flow from operations is reconciled to net cash provided by operating activities and the non-GAAP measure of operating earnings (loss) is reconciled to net earnings (loss) in accordance with IFRS within the reconciliations below and discussed further in the "ADVISORY" section.
(4)The total of Petroleum revenue, net of royalties and Other revenue as presented on the interim Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).
(5)Includes a net unrealized foreign exchange gain of $75.0 million and a net unrealized foreign exchange loss of $295.8 million on the Corporation's U.S. dollar denominated debt and U.S. dollar denominated cash and cash equivalents for the three and six months ended June 30, 2015, respectively. The net earnings for the three and six months ended June 30, 2014 include a net unrealized foreign exchange gain of $135.1 million and a net unrealized foreign exchange loss of $5.5 million, respectively.
(6)Defined as total capital investment excluding capitalized interest and non-cash items.
(7)Includes current and long-term portions, as presented on the Consolidated Balance Sheet.
(8)Totals may not add due to rounding.
Cash Flow from Operations (1)
     
   Three months ended June 30  Six months ended June 30
($000)  2015  2014  2015  2014
Net cash provided by operating activities  $121,761  $296,607  $104,819  $335,656
Add (deduct):                
  Net change in non-cash operating working capital items   (16,993)   (35,491)   (30,481)   82,272
  Contract cancellation recovery   (5,880)   -   (5,880)   -
  Decommissioning expenditures   355   597   1,251   772
Cash flow from operations  $99,243  $261,713  $69,709  $418,700
                 

(1) Cash flow from operations is a non-GAAP measure as defined in the "ADVISORY" section.

Operating Earnings (1)
     
   Three months ended June 30  Six months ended June 30
($000)  2015  2014  2015  2014
Net earnings (loss)  $63,414  $248,954  $(444,893)  $145,513
Add (deduct):                
  Unrealized net loss (gain) on foreign exchange(2)   (75,026)   (135,148)   295,823   5,453
  Unrealized gain on derivative financial liabilities(3)   (7,738)   (590)   (4,207)   (2,217)
  Contract cancellation recovery (4)   (5,880)   -   (5,880)   -
  Deferred tax expense (recovery) relating to these adjustments   2,280   (2,077)   11,786   3,049
Operating earnings (loss)  $(22,950)  $111,139  $(147,371)  $151,798
                 
(1)Operating earnings (loss) is a non-GAAP measure as defined in the "ADVISORY" section.
(2)Unrealized net foreign exchange gains and losses result from the translation of U.S. dollar denominated long-term debt and cash and cash equivalents using period-end exchange rates.
(3)Unrealized gains and losses on derivative financial liabilities result from the interest rate floor on the Corporation's long-term debt and interest rate swaps entered into to effectively fix a portion of its variable rate long-term debt.
(4)A recovery related to project cancellation costs initially recorded in the fourth quarter of 2014.

ADVISORY

Basis of Presentation

The Corporation prepares its financial statements in accordance with International Reporting Standards ("IFRS") and presents financial results in Canadian dollars ($ or C$), which is the Corporation's functional currency.

Non-GAAP Financial Measures

This document includes references to financial measures commonly used in the crude oil and natural gas industry, such as cash flow from (used in) operations and operating earnings (loss). These financial measures are not defined by IFRS as issued by the International Accounting Standards Board and therefore are referred to as non-GAAP measures. The non-GAAP measures used by MEG may not be comparable to similar measures presented by other companies. MEG uses these non-GAAP measures to help evaluate its performance. These non-GAAP measures should not be considered as an alternative to or more meaningful than net cash provided by (used in) operating activities or net earnings (loss), as determined in accordance with IFRS, as an indication of MEG's performance.

Cash Flow from (Used In) Operations

Cash flow from (used in) operations is a non-GAAP measure utilized by the Corporation to analyze operating performance and liquidity. Cash flow from (used in) operations excludes the net change in non-cash operating working capital, contract cancellation cost (recovery) and decommissioning expenditures while the IFRS measurement "Net cash provided by (used in) operating activities" includes these items.

Operating Earnings (Loss)

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 liabilities, unrealized fair value gains and losses on other assets, contract cancellation cost (recovery) and the respective deferred tax impact of these adjustments.

Forward-Looking Information

This document may contain forward-looking information including but not limited to: expectations of future production, revenues, expenses, cash flow, operating costs, steam-oil ratios, pricing differentials, reliability, profitability and capital investments; estimates of reserves and resources; the anticipated reductions in operating costs as a result of optimization and scalability of certain operations; and the anticipated sources of funding for operations and capital investments. Such forward-looking information is based on management's expectations and assumptions regarding future growth, results of operations, production, future capital and other expenditures, plans for and results of drilling activity, environmental matters, 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 supplies and 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; assumptions regarding and the volatility of commodity prices and foreign exchange 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 future phases, expansions and projects; and the operational risks and delays in the development, exploration, production, and the capacities and performance associated with MEG's projects.

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 SEDAR website which is available at www.sedar.com.

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

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."

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