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Executives

John Rogers – VP, Finance and Controller

William McCaffrey – President and CEO

Donald Moe – SVP, Supply and Marketing

Analysts

Phil Skolnick – Canaccord Genuity

Mark Friesen – RBC Capital

David McColl – Morningstar

MEG Energy Corporation (OTCPK:MEGEF) Q1 2014 Earnings Conference Call April 30, 2014 9:30 AM ET

Operator

Good morning. My name is Sally and I would be your conference operator today. At this time, I would like to welcome everyone to the MEG Energy Corporations First Quarter Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]. Thank you.

I would now like to turn the meeting over to Mr. John Rogers. Please go ahead sir.

John Rogers

Great. Thanks, Sally and good morning, everyone. And welcome to our first, MEG’s first quarter conference call. Today we have with us of course our CEO Bill McCaffrey. We also have our Chief Financial Officer Eric Toews and our Senior Vice President of Supply and Marketing, Mr. Don Moe.

I’ll remind you that today’s call contains forward-looking information, so please turn to our quarterly results and other on CEDAR at our website for cautions and assumptions around these forward-looking statements.

So with that, I’ll turn it over to Bill, who will give his comments on the quarter. Bill?

William McCaffrey

Well, thanks, John and good morning everyone. I am pleased to report that 2014 is off to an excellence start. The momentum that was generated in 2013 with the launch of Phase 2B and the ongoing positive impact of RISER continue to demonstrate exciting results in the first quarter.

As reported this morning, we achieved a record quarterly production level in Q1 of more than 58,600 barrels a day, and that’s an increase of nearly 40% over our previous record in the fourth quarter of last year. Building on that performance our April production levels are coming in at over 70,000 barrels a day as both 2B and RISER continue to exhibit strong performances.

So let me start by talking about our progress on 2B. Since the startup in the fourth quarter of 2013 the ramp up has gone very well. In fact at this stage we’re ahead of ramp up phase that we saw on Phase 2. And as of the end of April, we’re producing approximately 32,000 barrels a day, from well started up since the commissioning of our Phase 2B facilities I would say definitely these wells are currently producing at more than 90% of the 2B design capacity.

The second part of the ongoing production ramp up is a result of our RISER initiative, which has been deployed over our Phase 1 and 2 assets. As a reminder, the RISER initiatives uses proprietary technology called eMSAGP in combination with plant de-bottlenecking to expand Phase 1 and 2 throughput capacities.

The Phase 1 and 2 path well patterns are currently producing approximately 37,000 to 40,000 barrels a day. And at 40,000 barrels a day the wells are producing at levels that are 60% above the design of those facilities.

As overall production levels increased during Q1, the field-wide steam-oil ratio lowered to 2.5 and that’s an improvement of about 14% from the previous quarter. Field-wide SORs are now at levels we consider to be extremely attractive from an economic point of view.

And when we consider that during these the majority of the first quarter several new well pairs associated with 2B, we’re still in the steam circulation mode and had not yet been put into production. These results are especially encouraging. And as the wells continue to wrap up to their steady state levels over the next several months we’ll continue to work towards lowering our SORs even further.

The Q1 operating results for Phase 2B and RISER are a strong indication that we’re on track for our production target of 60,000 barrels to 65,000 barrels a day for this year and the 80,000 barrel a day target by 2015. And when we talk about these targets I must mention that we have a scheduled Phase 2 plant turnaround in the second quarter that is factored into the 60,000 barrels to 65,000 barrels a day average.

Before continuing, let me just say a few words about the upcoming turnaround. With the 2B plant now fully operational and with existing interconnections between the plans in place, we plan to move some production from the Phase 2 wells to the 2B facilities during the turnaround. And this still allow us to reduce the impact of turnaround we’ll have on our Q2 production levels, but there will be some impact.

The turnaround is also scheduled to last about three weeks and then there is a ramp-up after that. And if things stand right now, we’re not planning to do a similar turnaround for our Phase 2B plant until 2015.

Similar to the exciting results that we are seeing on our reservoir, we are also very encouraged by the Phase 2B processing that outperformed. Over the last several months, we’ve been testing the capabilities of the new plants by moving both Phase 2 and 2B production through the 2B facilities. And result that’s far confirmed that the 2B plant is capable of operating reliably above its 35,000 barrels a day nameplate capacity. And in fact, we are currently testing the final daily rates above 14,000 barrels a day.

We’ve framed a lot about the potential of the RISER initiative on Phase 1 and 2 and we’re now beginning to turn our attention to the, an expanded RISER initiative on Phase 2B. In particular, water treatment and oil flow capacity tests are being conducted, but determine what 2B’s current limitations could be as throughput volumes increase.

The test will occur over the next several months and once complete will allow us to define the ultimate size and scope of our Phase 2B brownfield expansion which will be a key driver of our medium-term production growth lines. As work on the reservoir and plants continue we also need to consider how we’re going to move our increasing volumes to market.

And on that note, I’d like to turn it over to Don Moe our Senior VP, Supply and Marketing to provide an update on our overall strategies and market conditions.

Donald Moe

Thank you, Bill. To start I would like to review the changes that we saw in Q1 in the broader pricing environment in North America. During the quarter, we saw a significant improvement in the price realizations for our sales volumes as compared to the fourth quarter of 2013. This strengthening has been driven by a number of factors that have improved market access.

These include additional pipeline takeaway capacity from the U.S. Midwest resulting in decreased apportionment on the Enbridge Mainline. Increased refining capacity for heavy oil with the ramp up in demand at the BP Whiting refinery complex and increased takeaway optionality in Western Canada resulting from added transportation capacity associated with various crude by rail initiatives.

We believe that in 2014 there will additional opportunities to expand our market reach with the restoration of Enbridge’s Line 6B capacity to Sarnia. And the expansion of the Flanagan/Seaway pipeline system which is expected to come on stream later this year. MEG has secured long-term capacity on the Flanagan/Seaway pipeline to the U.S. Gulf Coast as a part of market diversification strategy.

Now let me – how we’ve continued to move forward with our strategy to find opportunities to capture and improve pricing through our production. Our hub and spoke strategy focuses on establishing options for moving crude oil to the highest priced markets available, while at the same time minimizing transportation cost along the value chain from the well head to the refinery gate.

We continue to make progress in advancing this strategy and during the quarter, we were able to affirm on more than one occasion are drilling ability to move our production volumes to higher price markets and avoid congestion. For example, in January, there is the mid-month apportionment on Enbridge’s Mainline as a result of the unplanned outages.

MEG was able to avoid the shut in or sale at lower prices of its barrels by rerouting them initially to our Stonefell Terminal and subsequently shipping these volumes to be a pipeline connected rail capacity in the next month.

We are confident that this evolving combination of pipeline barge and rail will continue to increase our flexibility in the movement of our products to the best available markets as our production continues to grow.

William McCaffrey

Thanks Don. To wrap up, I’d like to emphasize that our overall strategy is to develop our resource base at the lowest possible capital and operating cost while working to get the highest available market price for our product. This is a ongoing journey, but I think our results demonstrated progress thus far.

To put these results into context, in the first quarter, we delivered record quarterly production, record quarterly cash flow and importantly, record quarterly cash flow per share. MEG achieved these records while still in the process of ramping-up Phase 2B which is on track to occur even faster than our previous ramp-up at Phase 2. And all while maintaining operating cost among the lowest in the industry. We believe all these efforts enhance shareholder value and we’ll continue with our work in these areas going forward.

And on that note I’ll turn it back to John to open the lines for questions.

John Rogers

Great, thank you Bill and Sally why don’t we open up the lines for questions. I’d like to remind everyone that I think in the interest of everyone’s times if we could keep the questions at a strategic level of course Helen and I and Jen be around after the call to help you with your detailed modeling question. So Sally why don’t we go ahead and take questions from the audience.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Phil Skolnick with Canaccord Genuity. Your line is open.

Phil Skolnick – Canaccord Genuity

Yeah thanks. Few questions first of all, is that 70000 barrels a day was that an April average or is that a current production?

William McCaffrey

That’s an April average Phil.

Phil Skolnick – Canaccord Genuity

Okay, great. And so where – could you give us a sense to where it’s at today?

William McCaffrey

It’s right in the same zone maybe slightly higher on that right now.

Phil Skolnick – Canaccord Genuity

Okay. How many more wells do you need to add to get to production continue ramp-up?

William McCaffrey

We have most of the wells either in – just finishing off circulation or very early stage starting on their production. But what we do right now is we’re going to continue to as I said bring those on more on the production and then I don’t think we have too many more to actually circulate on stream –.

Phil Skolnick – Canaccord Genuity

Okay, great. In terms of the turnaround, that’s just on one for 2A. Does 2B – will that have any excess capacity to maybe take on some additional volumes then? Or is that turnaround on the well?

William McCaffrey

No, it’s on the plan, so it is on Phase 1 and 2 plants. And what we’ve been working on there, Phil is that we’ve been – we have connected – I would have mentioned there’s a few quarters where we have connected Phase 1 and 2 to 2B, so that we can move volumes over to 2B. And so over the last little while we are ramping up the wells for 2B, we’ve also been moving production from Phase 1 and 2 over to 2B to test its capabilities. And we’re currently testing the plants capabilities in excess of 40,000 barrels a day.

So what our thoughts are is that as we take down Phases 1 and 2 plants, we’ll move as much production from those wells that were going to those facilities to the Phase 2B facility. And at the same time, we’ll use that incremental production to evaluate the plant’s capability go to higher rates.

Phil Skolnick – Canaccord Genuity

Okay, perfect. And then my final question is can you give us any sense of the uptick on your netbacks or realized prices down when you rail up to the coast. Or if not, how narrow the debt TAN discounts get?

William McCaffrey

Right now, well I can’t obviously give you the numbers on the improvement. But just suffice it to say that we’re very pleased with the pricing that we do get. And that the TAN discount that you typically get in the – what we do as we are headed towards where price is basically on the other end but the TAN discount is as you typically get is more of a negotiated numbers associated with the availability of crude versus demand for crude. So as we break out into raw pricing that number tends to fall away – discount but it’s very minor might be in the $0.50 to $1 range.

Phil Skolnick – Canaccord Genuity

Okay. Perfect. Thanks.

William McCaffrey

Yes.

Donald Moe

Thanks, Phil.

Operator

Your next question comes from the line of Mark Friesen with RBC Capital Markets. Your line is open.

Mark Friesen – RBC Capital

Thanks. Good morning. Just throw this question out to all three of you. You ended your prepared comments by talking about the overall marketing strategy, I just wanted to get into that a little bit more. I wondered if you could mention first of all how many unit-trains or how much volume was shipped by rail during the quarter?

And then if you could – you can maybe provide some context in terms of how the marketing strategy is fitting together in terms of how much of the improved netback do you think came from the rail marketing versus the use of the Stonefell Terminal as you mentioned you are able to use that to work through in the post shipment issues?

William McCaffrey

Thanks, Mark. Yeah the way we look at the whole marketing strategy it’s a hub and spoke strategy, so it’s build on flexibility. So it allows us to take an event it occurred, so in January where there was unscheduled apportioned and we capture those volumes in Stonefell and redirect them to other areas. So we can utilize other tools that we have such as rail and redirect them to higher priced markets.

We would have our own game plan every month of thinking, what’s the best way to move these barrels through the various spots, but because of the strategic nature of Stonefell we can’t capture and redirect and adapt the changes of course. So, I can’t give you an answer on that amount of rail that we moved for in the first quarter, but it’s suffice it to say it was everything that we wanted to do. We had no restrictions on it and we’re very pleased to have the ability to get to a pricing with those particular scope if you want.

Mark Friesen – RBC Capital

Okay. You mentioned – I think it’s on Q4 call you mentioned fixing the train shipped in January. So, with the exception of 18 to 20 be reasonable for the quarter?

William McCaffrey

That’s real high, but it’s just not unreasonable.

Mark Friesen – RBC Capital

Okay. Still I guess sticking with – looking at Stonefell can you mention how you can maybe use Stonefell to offset the impact of line sale issues and may be the outage at Bruderheim facility mid-year?

William McCaffrey

Yeah, we are working closely with the Canexus people on their work that they are going to do. It is as I said there is a strength to our system by being able to capture barrels and redirect them, but we are also able to plan some of that. And right now we do have some line fill plants for the third quarter I believe it is associated with our Access Pipeline being completed and the Flanagan systems when that does come on. And so we’re comfortable that the work that these people are doing that Canexus is not going to have any meaningful impact on what we are doing right now.

Mark Friesen – RBC Capital

Can you quantify the line fill?

William McCaffrey

Not really. I guess the best way to do it is, think of a 42-inch pipe and we’re 50% of it and its 300 kilometers long. I haven’t done the math on it. That’s the access point. And then I just don’t know the volumes or that for the Flanagan system, or the precise timing of it right now.

Mark Friesen – RBC Capital

And finally, my last question just relates to the – with your view didn’t hear any updates on that. Or can you provide an update on that in terms of timing or cost or – on that?

William McCaffrey

Yeah. We’re doing the – we’re in the act of engineering phase right now. We won’t have numbers for a little bit in terms of what the actual cost is because you have to do all that work and that work is underway. And then in terms of building again, I’m not trying to avoid to answering it, but it just don’t know the actual date, could be obviously – somewhere later next year or shortly thereafter.

Mark Friesen – RBC Capital

Okay. That’s it for me. Thanks very much.

William McCaffrey

Yeah. Thanks.

Donald Moe

Thanks Mark.

Operator

[Operator Instructions] Your next question comes from the line of David McColl with Morningstar. Your line is open.

David McColl – Morningstar

Yeah. Good morning, everyone. Thanks for taking the call. I just wanted to move forward a little bit too when finally it’s coming online. I’m wondering what plans you might have in place if you’re unable to get crude on the Enbridge Canadian system, given that it’s going to be monthly bidding for capacity. And from what I understand from Enbridge there is no attempt to I guess high capacity equivalents, down streams on the pipelines through the Canadian Systems. So just wondering how you might deal with any apportionment that could happen or actually kind of Enbridge?

William McCaffrey

Well apportionment is based off of your takeaway capacity. And with the strength of our Flannigan side of it and plus the strength of the barging aspect of it, it allows us to commit because we can’t take away those barrels to a fair amount but have ability to take away the barrels towards the nominated on the system. But we do have the ability to vary that too.

So we can, if we don’t get all of those barrels we do have the ability to redirect barrels by rail and with the hub up streams we do have – as I say ability to capture barrels and moving out later if there was an issue. But we do think we are managing it on all of the system.

David McColl – Morningstar

Okay. Is there any concern that situation could develop where you can’t get the barrels on like Canadian Mainline?

William McCaffrey

We’re not too concerned on it, right now. Because as I said with the hub and spoke strategy is that the front end of that system so it is build to actually go around and if we had to, but we also have the ability to pull meaningful barrels through that system.

David McColl – Morningstar

Okay. Great, thank you. I appreciate the color and bye guys.

William McCaffrey

Yeah. Thanks.

Operator

[Operator Instructions] There are no further questions at this time. I’d turn the call back over to presenter.

John Rogers

Okay. Thank you, Sally. And thanks everyone for listening into our first quarter conference call. Of course if you have any detailed questions after Helen, Jen and myself would be happy to help you with your valid questions. So other than that everybody have a good day. Thank you, bye.

Operator

This concludes today’s conference call. You may now disconnect.

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