MEG Energy announces second quarter 2024 financial and operating results and declares inaugural quarterly cash dividend

CALGARY, AB,July 25, 2024 – MEG Energy Corp. (TSX: MEG) (“MEG” or the “Corporation”) reported its second quarter 2024 operational and financial results. The Board of Directors also declared a quarterly cash dividend of $0.10 per share payable on October 15, 2024 to shareholders of record at the close of business on September 17, 2024. All dividends paid by MEG are designated as eligible dividends for Canadian federal income tax purposes.

“We are proud to declare MEG’s inaugural dividend,” said Darlene Gates, President and CEO of MEG Energy. “This achievement not only reflects our robust financial health but also highlights MEG’s maturation as a senior Canadian oil producer. Our US$600 million net debt target will be achieved in the third quarter of 2024 and capital returns to shareholders will rise to 100% of free cash flow through continued share buybacks and a quarterly base dividend.”

“We continued to see strong production volumes in the first half of the year and expect volume growth through the remainder of the year as new wells come online. The start-up of the Trans Mountain Expansion (“TMX”) Pipeline during the quarter is an industry milestone which we expect will reduce long-standing transportation bottlenecks, leading to narrower and less volatile Canadian light:heavy oil differentials and improved netbacks and profitability.”

Second quarter 2024 highlights include:

• On July 25, 2024 the Corporation’s Board of Directors declared an inaugural quarterly cash dividend of $0.10 per share, payable on October 15, 2024 to shareholders of record on September 17, 2024;
• The TMX Pipeline had a successful start-up in May 2024 and MEG began shipping AWB to Canada’s West Coast under its 20,000 barrels per day (“bbls/d”) contracted capacity arrangement which has led to narrower light:heavy oil differentials, improved netbacks and lower anticipated future differential volatility;
• Funds flow from operating activities (“FFO”) and adjusted funds flow (“AFF”) of $354 million, or $1.30 per share. Year-to-date FFO and AFF totaled $683 million, or $2.49 per share;
• Free cash flow (“FCF”) of $231 million, after funding $123 million of capital expenditures. Year-to-date FCF totaled $448 million after $235 million of capital expenditures;
• Debt repayment of US$53 million (approximately $73 million) during the second quarter of 2024 and $158 million (approximately $215 million) year-to-date;
• Net debt declined to US$634 million (approximately $868 million) as at June 30, 2024;
• Shareholder capital returns totaling $68 million through the repurchase and cancellation of 2.2 million shares at a weighted-average price of $30.39 per share. Year-to-date share repurchases totaled 7.0 million shares, at a weighted-average price of $28.05 per share, returning $195 million to shareholders;
• Average bitumen production of 100,531 bbls/d at a 2.44 steam-oil ratio (“SOR”). Year-to-date bitumen production averaged 102,309 bbls/d;
• Bitumen realization after net transportation and storage expense of $73.84 per barrel and $66.55 per barrel year-to-date;
• Operating expenses net of power revenue of $6.62 per barrel. Power revenue offset 54% of energy operating costs, resulting in energy operating costs net of power revenue of $0.99 per barrel and non-energy operating costs of $5.63 per barrel. Year-to-date operating expenses net of power revenue were $6.49 per barrel, including energy operating costs net of power revenue of $1.10 per barrel and non-energy operating costs of $5.39 per barrel;
• The Corporation’s 2024 operating and capital guidance remains unchanged; and
• On July 2, 2024, MEG announced the appointment of Michael McAllister to its Board of Directors, effective July 1, 2024.

Financial Results

FFO and AFF increased to $354 million in the second quarter of 2024 from in the comparable 2023 period driven mainly by a higher cash operating netback per barrel, increased sales volumes and lower interest expense due to reduced debt levels. Cash operating netback rose $4.76 per barrel to $47.14 per barrel in the second quarter of 2024, mainly reflecting a higher bitumen realization after net transportation and storage expense partially offset by higher royalties.

Bitumen realization after net transportation and storage expense rose to $73.84 per barrel in the second quarter of 2024, from $57.64 per barrel in the same period of 2023, driven by a higher average WTI benchmark price, narrower WTI:AWB differentials, lower diluent expense and reduced net transportation and storage expense, partially offset by a lower contribution to overall price realization from USGC sales and marketing optimization activities.

With the start-up of the TMX Pipeline, the Corporation began shipping AWB to Canada’s West Coast under its 20,000 bbls/d contracted transportation capacity arrangement. As a result of the expansion, pipeline egress from Western Canada is unconstrained and light:heavy oil differentials have narrowed with anticipated lower volatility relative to historic levels.

FCF increased to $231 million in second quarter of 2024, from $129 million in the comparable 2023 quarter, reflecting higher AFF and lower capital expenditures.

Capital expenditures declined to $123 million in the second quarter of 2024 from $149 million in the same period of 2023, reflecting a decrease in the scope and timing of planned turnaround activities. The Corporation performed a major turnaround at the Christina Lake Facility in the second quarter of 2023 while turnaround activities in 2024 are reduced and spread more evenly throughout the year. This decrease was partially offset by higher planned well development and associated infrastructure spending together with the onset of investment in moderate capacity growth projects.

Net earnings remained flat at $136 million across the second quarters of 2024 and 2023 as higher AFF in the second quarter of 2024 was offset by an unrealized foreign exchange loss on long-term debt, higher depletion and depreciation expense and increased deferred tax expense.

Operating Results

Bitumen production in the second quarter of 2024 rose 17%, to 100,531 bbls/d at a 2.44 SOR, from 85,974 bbls/d at a 2.25 SOR in the comparable 2023 period. The production volume increase primarily reflects the impact of a major planned turnaround at the Christina Lake Facility during the second quarter of 2023, whereas turnaround activities in 2024 are reduced and spread more evenly throughout the year. The higher SOR in the second quarter of 2024 primarily reflects the planned timing of injecting steam in new well starts.

Non‐energy operating costs averaged $5.63 per barrel of bitumen sales in the second quarter of 2024 representing a 1% decrease from the same quarter of 2023 reflecting higher bitumen sales volumes in the second quarter of 2024 offset by an expected rise in labour costs, more maintenance activity and an increase in treating chemical volumes to support higher production.

Energy operating costs net of power revenue of $0.99 per barrel in the second quarter of 2024 were consistent with $0.97 per barrel in the comparable 2023 period, as a decline in the realized power price largely offset a weaker AECO natural gas price. Revenue from the sale of excess power generated by the Corporation’s cogeneration facilities offset 54% and 75% of energy operating costs in the second quarters of 2024 and 2023, respectively.

Debt Redemption and Share Repurchases

The $231 million of second quarter 2024 FCF was used to redeem debt, return capital to shareholders and fund working capital requirements. The Corporation redeemed US$53 million (approximately $73 million) of outstanding 7.125% senior unsecured notes at a redemption price of 101.8% and returned $68 million to MEG shareholders through the repurchase and cancellation of 2.2 million shares at a weighted-average price of $30.39 per share.

The $448 million of FCF in the first half of 2024 was used to redeem debt, return capital to shareholders and fund working capital requirements. The Corporation redeemed US$158 million (approximately $215 million) of outstanding 7.125% senior unsecured notes at a redemption price of 101.8% and returned $195 million to MEG shareholders through the repurchase and cancellation of 7.0 million shares at a weighted-average price of $28.05 per share.

Capital Allocation Strategy

Approximately 50% of FCF was allocated to debt redemption in the first half of 2024 with the remainder applied to share repurchases. The Corporation exited the second quarter of 2024 with net debt of US$634 million (approximately $868 million) and when the Corporation reaches its US$600 million net debt target, which is anticipated to occur in the third quarter of 2024, 100% of FCF will be returned to shareholders. The balance sheet strength and liquidity profile supports enhanced distributions to shareholders with a continued emphasis on share repurchases.

On July 25, 2024, MEG’s Board of Directors approved the initiation of a base dividend program under which the Corporation intends to pay a cash dividend each quarter, subject to Board of Directors’ approval. MEG’s new base dividend program recognizes its high-quality 50-year 2P reserve life, low production decline, and long-term sustaining break-even price structure below US$50/bbl WTI. MEG has matured into a leading pure play in situ thermal oil producer, focused on delivering FCF and sustainable shareholder cash distributions.

An inaugural cash dividend of $0.10 per share has been declared for payment on October 15, 2024 to shareholders of record on September 17, 2024. This dividend equates to an approximate 1.5% annual yield at MEG’s current share price, a level that is positioned to grow through disciplined capital allocation.

Declaration of dividends is at the sole discretion of the Board of Directors and will continue to be evaluated on a quarterly basis. Future declarations will be dependent on, among other things, the prevailing business environment, MEG’s financial and operating results and financial condition, the need for funds to finance ongoing operations or growth and other business conditions which the Corporation’s Board of Directors considers relevant.

New Member joins MEG Board of Directors

Earlier this month, we were pleased to welcome Michael McAllister to MEG’s Board of Directors. His extensive operations and development expertise will be of significant benefit to MEG as we execute on our strategic initiatives. Mr. McAllister, P.Eng., has 40 years of energy industry experience, holding several executive roles with North American oil and gas companies. He spent 20 years at Ovintiv Inc. (formerly Encana Corporation) where, prior to his retirement in 2020, he served as President and he was responsible for the company’s operations, exploration, land, marketing, midstream and corporate services. He also served as the company’s Executive Vice President and Chief Operating Officer and played a pivotal role leading the company’s transformation to a top-tier, liquids-focused North American producer. Prior to that, Mr. McAllister held various technical and leadership roles for Texaco Canada and Imperial Oil Resources.

Mr. McAllister currently serves as a Director of ARC Resources Ltd. and Mediterra Energy Corporation, and he was previously a Governor with the Canadian Association of Petroleum Producers.

Sustainability and Pathways

MEG, along with its Pathways Alliance peers, continues to progress pre-work on the proposed foundational carbon capture and storage (“CCS”) project, which will transport CO₂ via pipeline from multiple oil sands facilities to be stored safely and permanently underground in the Cold Lake region of Alberta. Regulatory applications were filed to the Alberta Energy Regulator on March 22, 2024, seeking approvals for the CO₂ transportation network and storage hub. The Pathways Alliance continues to advance detailed evaluations of the proposed carbon storage hub and is working to obtain a carbon sequestration agreement from the Alberta Government. In addition, the Pathways Alliance continues to advance engineering work, environmental field programs to minimize the project’s environmental disturbance, and consultations with Indigenous and local communities along the proposed CO₂ transportation and storage network corridor. The Pathways Alliance continues to work collaboratively with both the federal and Alberta Governments on the necessary policy and co-financing frameworks required to move the project forward. The federal government passed Bill C-59, which received Royal Assent on June 20, 2024 and implemented an investment tax credit (“ITC”) for CCS projects for all sectors across Canada. In addition, the Alberta Government announced an Alberta Carbon Capture Incentive Program (“ACCIP”), which aims to help hard-to-abate industries by providing a grant of 12% for new eligible CCS capital costs. ACCIP is being designed to align with the federal CCS ITC and will be finalized after the federal government legislates its CCS ITC and related operating supports, such as contracts for difference. The Pathways Alliance is evaluating these proposals.

Bill C-59 also implemented amendments to the Competition Act related to public statements made by an entity regarding actions taken to protect or restore the environment or mitigate the effects of climate change. The amendments create significant uncertainty as to how Canadian companies may publicly communicate about their environmental and climate performance, and progress and impose significant financial penalties for noncompliance. The Canadian Competition Bureau has indicated that guidance regarding the amendments will be provided but it has not been released to date. As a result, MEG has temporarily removed certain voluntary public disclosures from its website and other social media and is temporarily suspending its 2030 and 2050 GHG emissions¹ targets until such time as clarity is provided by the Canadian Competition Bureau regarding the application and interpretation of the new amendments. MEG remains fully committed to environmental and climate performance and the work it is doing to reduce GHG emissions and will continue to advance its initiatives notwithstanding the cautionary steps it has taken with respect to its environmental disclosure and climate-related targets.

Adjusted Funds Flow Sensitivity

MEG’s production is comprised entirely of crude oil and AFF is highly correlated with crude oil benchmark prices and light-heavy oil differentials. The following table provides an annual sensitivity estimate to the most significant market variables.

Variable	Range	2024 AFF Sensitivity(1)(2) – C$mm
WCS Differential (US$/bbl)	+/- US$1.00/bbl	+/- C$47mm
WTI (US$/bbl)	+/- US$1.00/bbl	+/- C$31mm
Bitumen Production (bbls/d)	+/- 1,000 bbls/d	+/- C$16mm
Condensate (US$/bbl)	+/- US$1.00/bbl	+/- C$14mm
Exchange Rate (C$/US$)	+/- $0.01	+/- C$10mm
Non-Energy Opex (C$/bbl)	+/- C$0.25/bbl	+/- C$6mm
AECO Gas(3) (C$/GJ)	+/- C$0.50/GJ	+/- C$6mm

(1)	Each sensitivity is independent of changes to other variables.
(2)	Assumes mid point of 2024 production guidance, US$75.00/bbl WTI, US$16.25/bbl WTI:WCS Edmonton discount, US$1.50/bbl WCS:AWB Edmonton discount, US$7.75/bbl WTI:AWB Gulf Coast discount, C$1.35/US$ F/X rate, condensate purchased at 100% of WTI and one bbl of bitumen per 1.42 bbls of blend sales (1.42 blend ratio).
(3)	Assumes 1.4 GJ/bbl of bitumen, 65% of 160 MW of power generation sold externally and a 25.0 GJ/MWh heat rate.

________________________
1	Scope 1 and 2 GHG Emissions

Conference Call

A conference call will be held to review MEG’s second quarter 2024 operating and financial results at 6:30 a.m. Mountain Time (8:30 a.m. Eastern Time) on July 26, 2024. To participate, please dial the North American toll-free number 1-888-390-0546, or the international call number 1-416-764-8688.

A recording of the call will be available by 12 p.m. Mountain Time (2 p.m. Eastern Time) on the same day at https://www.megenergy.com/investors/presentations-events/.

ADVISORY

Basis of Presentation

MEG prepares its financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS Accounting Standards”) and presents financial results in Canadian dollars ($ or C$), which is the Corporation’s functional currency.

Non-GAAP and Other Financial Measures

Certain financial measures in this news release are non-GAAP financial measures or ratios, supplementary financial measures and capital management measures. These measures are not defined by IFRS and, therefore, may not be comparable to similar measures provided by other companies. These non-GAAP and other financial measures should not be considered in isolation or as an alternative for measures of performance prepared in accordance with IFRS.

Adjusted Funds Flow and Free Cash Flow

Adjusted funds flow and free cash flow are capital management measures and are defined in the Corporation’s consolidated financial statements. Adjusted funds flow and free cash flow are presented to assist management and investors in analyzing operating performance and cash flow generating ability. Funds flow from operating activities is an IFRS measure in the Corporation’s consolidated statement of cash flow. Adjusted funds flow is calculated as funds flow from operating activities excluding items not considered part of ordinary continuing operating results. By excluding non-recurring adjustments, the adjusted funds flow measure provides a meaningful metric for management and investors by establishing a clear link between the Corporation’s cash flows and cash operating netback. Free cash flow is presented to assist management and investors in analyzing performance by the Corporation as a measure of financial liquidity and the capacity of the business to repay debt and return capital to shareholders. Free cash flow is calculated as adjusted funds flow less capital expenditures.

Read More

NT4