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MEG announces capital investment plan, targets 113,000 bpd in 2020

MEG announces capital investment plan, targets 113,000 bpd in 2020

Company info

600 – 3 Avenue SW
Calgary, AB
CA, T2P 0G5

Website:
megenergy.com

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MEG Energy Corp. has announced 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; and 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. 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. 

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. 

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. 

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. 

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