MEG Energy Corp. (OTCPK:MEGEF) Q4 2019 Results Earnings Conference Call March 5, 2020 8:30 AM ET
Derek Evans - President and CEO
Eric Toews - CFO
Chi-Tak Yee - COO
Lyle Yuzdepski - Senior VP of Legal, General Counsel and Corporate Secretary
Conference Call Participants
Emily Chang - Goldman Sachs
Manish Gupta - Credit Suisse
Benny Wong - Morgan Stanley
John Royall - JP Morgan
Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the MEG Energy’s 2019 Year-End 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. Mr. Derek Evans, you may begin your conference.
Thank you, Joanna, and good morning, everyone. And thanks for joining us for to review MEG's full year 2019 operating and financial results. In the room with me this morning, I have Eric Toews, our CFO; Chi-Tak Yee, our COO; and Lyle Yuzdepski, our Senior VP of Legal, General Counsel and Corporate Secretary.
Just a reminder that this call contains forward-looking information, please refer to the advisories in our loaded up disclosure documents filed on SEDAR and of course on our Web site. I'll limit my remarks to few key highlights of the year to leave more time for questions.
In 2019, our priorities were to improve overall cost efficiencies, preserve financial liquidity and enhance MEG's competitive position. Since making that commitment to shareholders, we've had an extremely strong year. We've remained steadfast in maintaining long term financial liquidity, while aggressively pursuing costs and ongoing debt repayment.
Since the beginning of 2019, the corporation has repaid $633 million of long term debt, including $501 million of long term debt in 2019 and an additional $132 million subsequent to year-end. Additionally, in July of 2019, the corporation entered into a new five-year revolving credit facility and letter of credit facility. The total borrowing capacity under the two facilities was proactively reduced to $1.3 billion comprised of $800 million under the revolving credit facility and $500 million under the letter of credit facility. The facilities contain no financial maintenance covenants, unless MEG has drawn in excess of $400 million under the revolving credit facility. Cash cost savings from the reduction in credit fees and interest savings on debt repaid in 2019 are expected to be $45 million annually.
In January 2020, the corporation successfully closed a private offering of $1.2 billion in aggregate principal amount of seven and an eighth senior unsecured notes due February 2027. The net proceeds of the offering plus cash on hand were used to fully redeem $800 million of the six and three eighth senior unsecured notes due January 2023, and partially redeemed $400 million of the $1 billion 7% senior unsecured notes due March 2024. Post this refinancing, MEG has a four year runway until its next debt maturity represented by the remaining $600 million of March 2024 notes.
2019 was a year of exceptional operation performance. 2019 annual bitumen production of 93,082 barrels a day was a record high and 6% increase over 2018. Non-energy operating costs averaged record low of $4.61 per barrel as the corporation continues to drive efficiency gains into its operations, while maintaining production levels.
General and administrative expenses of $68 million or $1.99 per barrel of production in 2019 compared to $83 million or $2.58 a barrel of production in 2018, the $15 million decrease in aggregate G&A year-over-year is primarily due to the reduction of staffing levels and rationalization of ongoing administrative costs. And lastly, we have continued to improve market access and maximize the pricing we receive. MEG realized an average AWB blend sales price of $46.19 per barrel in 2019 compared to $41.25 per barrel in 2018.
The average WTI price decreased $7.74 per barrel year-over -ear, but this was more than offset by $15.04 per barrel narrowing of the average WTI AWB differential at Edmonton. Also contributing to the realized AWB blend sales price in 2019 was the corporation's ability to deliver 33% of its blend sales volume to the U. S. Gulf Coast, where the WTI AWB differential averaged $1.77 per barrel. Comparatively, in 2018, the corporation delivered 30% of its blend sales volumes to the U. S. Gulf Coast where when the average WTI AWB differential was $6.68 per barrel.
Excluding transportation and storage costs upstream of the Edmonton index sales point, MEG’s net AWB blend field price at Edmonton averaged $42.20 per barrel in 2019 compared to the posted AWB index price at Edmonton of $42.08 per barrel. Notwithstanding that the Enbridge mainline approximate averaged 43% during 2019, MEG was able to capture better pricing than the Edmonton index as a result of its marketing and storage assets and the ability to move barrels into the higher priced U. S. Gulf Coast market. MEG's average pricing against the AWB index price at Edmonton is expected to further improve once MEG's contracted capacity on the Flannigan and Seaway pipeline system doubles to 100,000 barrels of blend in mid-2020.
Looking out at 2020, in November of 2019, MEG announced capital investment plan for 2020 of $250 million that includes $210 million to be directed towards sustaining and maintenance capital, $20 million to be directed towards the completion of the in progress Phase 2b Brownfield expansion expected to be completed in the second quarter of 2020, and the remaining $20 million of capital spending is required for non-discretionary field infrastructure, regulatory and corporate capital costs.
For the first half of 2020, MEG has entered into benchmark WTI fixed price swaps for approximately 70% of forecast first half 2020 production volumes at an average price of $59.15 per barrel. On a full year basis, MEG has hedged approximately 55% of forecast 2020 production by a benchmark WTI fixed price swap and WTI fixed price swaps with sold put options. Additionally, the corporation has hedged approximately 30% of its WTI/WCS differential exposure at an average price of $19.39 per barrel and approximately 50% of condensate exposure at an average price of 101% of WTI.
Looking forward, our objectives and priorities for 2020 are to focus on capital discipline and free cash flow generation, improve market access with our additional 50,000 barrels a day of Flannigan and Seaway capacity coming on in July, debt reduction and financial liquidity where all cash flow will continue to be earmarked for debt reduction. We remain committed to driving efficiencies in our business from a financial, operational and cost perspective. And as I just said, we will continue to direct all available cash flow to debt repayment.
With that, operator, can we please open the lines for questions?
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session [Operator Instructions]. And your first question is from Emily Chang from Goldman Sachs.
Just curious if you guys have -- you latest thinking is on each of the three major pipeline expansion projects and your best guess of when estimated startup timing would be?
I don't think it's really changed very much from our last view. I don't have the exact dates in front of me. But we continue to see that Line 3 is making progress and we expect that it either late this year or I think it was Q1 of 2021, TMX looks like it sometime in 2022 towards the end of 2022. And Keystone is the one that's up in the air and we would hope that that's coming on earlier than what is expected. We see some interesting movement in terms of people trying to push that ahead faster.
And just follow-up if I may, given the current macro environment, which we're sitting in today. Is there a scenario where CapEx can be further reduced from $250 mil in 2020? Or should we expect that if you limit flexibility here?
Emily, I think as we think about CapEx, my Chief Operating Officer will tell me if I continue to drive down his CapEx and still expect him to make miracles into the business. So I think there maybe some room but the way we tried to manage for the downturns in commodity prices that we've seen is with a very, very aggressive hedging program. And when you see that 70% of first half production hedged at 70% and a price of $59.15, we've got the ability to ride out some of the volatility that we're seeing in WTI price. So we'll continue to look at driving efficiencies into the capital side of the business. But I'm not a big fan of whipsawing the capital in the business that’s poor planning on the financial side of the business if we're reducing and then increasing our capital in response to short-term volatility in commodity prices.
Thank you. The next question comes from Manish Gupta from Credit Suisse.
Derek, in the past you have indicated that you are looking at ways to reduce the amount of diluents to use rather than investing in a DRU. Can you talk a little bit about that?
We have three sort of areas that we continue to look at in terms of diluents reduction, probably the single biggest one and the one that we're hoping that will be on stream with a permanent application is our butane blending facility. So minimizing or taking out some of the condensate that we're using to blend and really bring into the mix butane, we think that this could have annualized savings to the organization of somewhere in the neighborhood of $20 million a year.
We continue to look at the concept of partial up or not partial upgrading but partial blending of condensate in our product. So instead of blending up the full pipeline spec, could we blend up to half of pipeline spec and use rail for that product in railcars and move it to refineries in the United States. And the final sort of bitumen or sort of condensate reduction initiatives that we have is a black box technology. This has arrived at our site that we’re quite excited about. It could have quite a bit of impact. So this would be a technology that is set up to fundamentally, has been bench scale tested but is set up to reduce the amount of condensate by the low pressure, low temperature catalytic reaction.
I have one quick follow-up. Your net operating cost for the quarter was 5.87, which was slightly higher versus the last quarter. Was this the only a function of higher energy cost and how should we model this number for 1Q 2020?
It's definitely a function of higher energy cost. I think our operating costs will vary with energy and the energy component. That's why we really try and just speak to the non-energy piece. I think you should expect that Q1 will have higher gas prices and therefore slightly higher prices.
Thank you. The next question is from Benny Wong from Morgan Stanley. Please go ahead.
Just wanted to follow up on the hedging question. Obviously, you guys are very active in that part of the strategy there. Just can you remind us if there's any parameters or guiding principles of your strategy on the hedges? Is there a max amount of hedging that you would do in your volumes?
The strategy really is twofold. One is consistent with what we’ve done in the past we look to hedge our sustaining capital. So that's what we definitely did probably the middle last year, we completed that for 2020. And then the other thing we look at is opportunistically protecting debt repayment, because obviously as Derek said that's the key one that we're focused on in the medium term. So we'll look to do that with WTI and we did that. Obviously, as Derek mentioned, we're 70% hedged on for the first half and 55% for the full-year, for the full year so you'll see a few more of that obviously not in this environment. But as we move forward, you’ll see us sort of hedge the front end months in excess of that 50%. But we also focus on where our volatility exposure is, which is in pad 2. So when we think about hedging differential, we don't hedge through our Edmonton exposure.
And just my follow up is you guys have done a tremendous amount of work in reducing your costs. Just wanted to see if you guys see more opportunity to further reduce your non energy op costs even lower relative to your guidance this year going forward?
Benny, I’m going to ask Chi-Tak Yee to take that one.
In terms of the non-NGL the last component that’s fixed that people ask that’s going to cost. And if you look at our last several years, we kind of reached a steady state in terms of the absolute component of it. And I think there's opportunities and the bottom aspect to further drive it lower, obviously we look at incremental reduction from this point on but those would be relatively minor in that sense.
And just finally, just a final question, ESG is clearly something that investors are increasingly focused on, Derek just curious to see and get a sense of your conversations with investors and what that’s like. Do you think the market recognizes the technological advancements you guys made or has discussions really predominantly be occupied by focus on leverage and egress?
Obviously, the leverage and debt reduction is a big part of our story. And you've heard us continue to make sure that the message that we leave people with today is that we're going to continue to focus on that. The egress piece interestingly enough is one that we find new investors that that message isn't getting out. We've got 33% of our production that’s going on of Flannigan South and Seaway and we're going to go to two-thirds of our production in the second half of 2020. And that has pretty big impact in terms of our annualized cash flow as we move forward.
So people are maybe a little bit more preoccupied with Line 3 and TMX, whereas we are delivering in the second half of 2020, a substantial increase in our egress. So maybe that's my bad for not stressing that enough and making sure that people know that we have -- we're not waiting on pipelining egress. We actually have realizable pipeline incremental, significantly incrementally beneficial pipeline egress is going to show up here in the second half of 2020.
The third aspect ESG, we are working harder on this to try and explain just exactly the trajectory that we've been on really since the company started. One of the reasons so excited to join MEG was that tremendous innovative nature of the company and the work that we've been doing on reducing greenhouse gas intensities and different technologies that we could bring to the table to positively impact those. So we'll be doing a better job of trying to connect to that innovation to be in 10 cities and to the ESG. But we are definitely seeing a much higher level of interest in ESG and quite frankly we welcome that.
Thank you [Operator Instructions]. The next question is comes from Phil Gresh at JP Morgan.
So my question is on transportation. What's the actual volume you expect in 2020 for pipe to the Gulf Coast given mainline apportionment? And then relatively how should we think about the evolution of overall transportation costs per barrel as more pipe comes on?
John I’m going to let Eric take that one.
The answer to your first questions is in the backend of, it depends on what's your view on apportionment is. If you assume say a 40% of apportionment for 2020, we expect through rail and pipe to get about 55% of our volumes down to the Gulf Coast that’s what apportionment. And from a transportation cost perspective, you'll see it go up largely due to the fact that we're going for 50,000 barrels a day of capacity at Flannigan to 100,000 barrels a day of capacity. So you'll see that in the back end of 2020.
And on the cost as well, the cost per barrel?
The cost on Flannigan is about $7.50, $8 a barrel.
Thank you. There are no further questions at this time. You may proceed.
Well, operator, thank you. And just like to thank everybody that has joined us on the call this morning. And remind that should you have any questions or follow up request, please don't hesitate to reach out to us. We're more than happy to talk to you about the results, and get you answers in an appropriate fashion. And thank you all and have a great day.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.