Third quarter shows completion of plant turnaround, increased production guidance and cost reductions for MEG Energy
MEG Energy Corp. has reported its third quarter of 2020 operational and financial results, noting that the company has completed a key plant turnaround and maintained safety programs for its workers, among other highlights.
MEG continues to proactively respond to the safety and financial challenges associated with the COVID-19 pandemic and remains committed to ensuring the health and safety of all of its personnel and the safe and reliable operation of the Christina Lake facility.
"Our 75-day major scheduled plant turnaround was successfully completed in August with production coming back stronger than previously expected," said Derek Evans, President and Chief Executive Officer. "As we head into year end, we are increasing annual production guidance, decreasing annual G&A and non-energy operating cost guidance and expect to build free cash flow through the balance of the year with 80% of our WTI exposure on our fourth quarter sales hedged at approximately US$46 per barrel."
MEG remains well positioned from a financial liquidity perspective, benefiting not only from its significant 2020 hedge book and the term and structure of its outstanding indebtedness and credit facility, but also from the low decline and low cost structure of its high-quality Christina Lake asset.
Third quarter financial and operating highlights include:
- Adjusted funds flow of $27 million ($0.09 per share), impacted by lower sales volumes due to major planned turnaround activities;
- Quarterly production volumes of 71,516 barrels per day (bbls/d) at a steam-oil ratio (SOR) of 2.36, while completing major planned turnaround activities. Due to better than expected production levels during and post-turnaround, annual average production guidance has been revised higher to 81,000 - 82,000 bbls/d;
- Net operating costs of $6.05 per barrel, including record low non-energy operating costs of $3.96 per barrel and power sales which had the impact of offsetting 34% of per barrel energy operating costs, resulting in a net energy operating cost of $2.09 per barrel;
- Total capital investment of $36 million in the quarter was directed to sustaining capital and planned turnaround activities. Approximately 75% of MEG's $150 million 2020 capital budget has been invested to the end of the third quarter; and
- $49 million of cash-on-hand at September 30, 2020 with approximately 80% of WTI exposure on fourth quarter forecast sales hedged at average WTI price of US$45.76. MEG's $800 million modified covenant-lite revolver remains undrawn.
Blend Sales Pricing and North American Market Access
MEG realized an average AWB blend sales price of US$34.13 per barrel during the third quarter of 2020 compared to US$15.12 per barrel in the second quarter of 2020. The increase in average AWB blend sales price quarter over quarter was primarily a result of the average WTI price increasing by US$13.08 per barrel in addition to the average WTI:AWB differential at Edmonton narrowing by US$2.96 per barrel. MEG sold 62% of its sales volumes to the U.S. Gulf Coast ("USGC") in the third quarter of 2020 compared to 35% in the second quarter of 2020. The increase in sales to the USGC in the third quarter of 2020 is primarily a result of the Corporation's increased contracted transportation capacity on the Flanagan South and Seaway Pipeline systems ("FSP") effective July 1, 2020 from 50,000 bbls/d to 100,000 bbls/d.
Transportation and storage costs averaged US$10.07 per barrel of AWB blend sales in the third quarter of 2020 compared to US$5.92 per barrel of AWB blend sales in the second quarter of 2020. The increase in transportation and storage costs is primarily due to the fixed costs associated with increased FSP contracted capacity and lower apportionment on the Enbridge mainline. Also, the increased costs were allocated to 7% lower AWB blend sales volumes quarter over quarter. The additional transportation capacity afforded by higher FSP contracted capacity and lower apportionment was underutilized by MEG during the third quarter of 2020 due to the planned turnaround. Subject to the level of actual apportionment on the Enbridge mainline system, transportation costs are expected to average between US$7.50 and US$8.50per barrel of AWB blend sales through the remainder of 2020 and 2021.
MEG's AWB blend sales by rail was 13,189 bbls/d (all FOB Edmonton) in the third quarter of 2020, representing 14% of total blend sales, compared to 4,391 bbls/d (all FOB Edmonton) in the second quarter of 2020. The increase in barrels sold via rail quarter over quarter was a result of a balanced approach to rail cost mitigation efforts undertaken by the Corporation in the third quarter of 2020 given the relative economics of sales by contracted rail transportation compared to pipeline transportation costs.
Bitumen production averaged 71,516 bbls/d in the third quarter of 2020, compared to 75,687 bbls/d in the second quarter of 2020. Bitumen production in the third quarter of 2020 was impacted by major planned turnaround activities at the Phase 1 and 2 facilities, which began in early June 2020 and were completed mid-August 2020. The 2020 turnaround was extended in duration to 75 days and expanded in scope, relative to base budget, in order to minimize staff levels at site during COVID-19 and maximize utilization of MEG's internal resources thereby lowering overall cash costs. MEG also made the decision to advance turnaround activities from 2021 to significantly reduce the 2021 turnaround requirements.
Non-energy operating costs averaged $3.96 per barrel of bitumen sales in the third quarter of 2020 compared to $4.09 per barrel in the second quarter of 2020. Net energy operating costs averaged $2.09 per barrel in the third quarter of 2020 compared to $2.05 in the second quarter of 2020. During the nine months ended September 30, 2020, the Corporation was able to benefit from non-recurring cost reductions of approximately $13 million including the Canadian Emergency Wage Subsidy ("CEWS") program.
General & administrative expense ("G&A") was $10 million, or $1.50 per barrel of production, in the third quarter of 2020 compared to $9 million, or $1.29 per barrel of production, in the second quarter of 2020. Total aggregate G&A has remained relatively consistent quarter over quarter and included the impact of MEG's continuing efforts to drive efficiency into its cost structure through salary rollbacks, reductions in staffing levels and vendor concessions, as well as various government led initiatives, including CEWS. During the nine months ended September 30, 2020, the Corporation was able to benefit from non-recurring cost reductions of approximately $5 million including the CEWS program.
Adjusted Funds Flow and Net Loss
MEG's bitumen realization averaged $39.68 per barrel in the third quarter of 2020 compared to $10.18 per barrel in the second quarter of 2020. The increase in average bitumen realization quarter over quarter was driven by the higher WTI price and lower diluent cost. Also, a higher portion of sales volumes reached the USGC market, increasing the realized price earned.
Offsetting the increase in bitumen realization during the third quarter of 2020, compared to the second quarter of 2020, was a decrease in the realized commodity risk management gain of $31.91 per barrel, quarter over quarter, and an increase in transportation and storage costs of $6.78 per barrel, quarter over quarter. The decrease in the realized commodity risk management gain was driven by an increase in the WTI price compared to the WTI fixed price contracts in place. The increase in transportation and storage costs was due to the increased fixed costs associated with the increased transportation capacity on FSP. These changes contributed to the decrease in the Corporation's cash operating netback to $16.58 per barrel in the third quarter of 2020 compared to $25.84 per barrel in the second quarter of 2020. The decreased cash operating netback drove the decrease in the Corporation's adjusted funds flow from $89 million in the second quarter of 2020 to $27 million in the third quarter of 2020.
The Corporation recognized a net loss of $9 million in the third quarter of 2020 compared to a net loss of $80 million in the second quarter of 2020. The decrease in the net loss in the third quarter of 2020, compared to the second quarter of 2020, was primarily the result of a decreased unrealized loss on commodity risk management contracts partially offset by decreased cash operating netback and a decreased unrealized gain on foreign exchange.
MEG invested $36 million in the third quarter of 2020 compared to $20 million in the second quarter of 2020. Of the $36 million, $21 million was directed towards sustaining and maintenance activities with the remaining $15 million related to the 75-day planned turnaround at the Christina Lake Phase 1 and 2 facilities which was completed mid-August.
COVID-19 Global Pandemic
The Corporation continues to proactively respond to the safety and financial challenges associated with COVID-19 and remains committed to ensuring the health and safety of all its personnel and business partners, and the safe and reliable operation of the Christina Lakefacility. The screening procedures and protocols implemented by the Corporation's COVID-19 task force during the first quarter of 2020 currently remain in place to ensure continued safe and reliable operations. During the third quarter of 2020, the Corporation focused on a transition to resuming normal operations which included the majority of office staff returning to the Calgaryoffice and site personnel resuming normal operating schedules at the Christina Lake site. Management will continue to monitor this situation to determine what, if any, additional measures might need to be taken to ensure that the health and safety of its people remain a top priority.
Based on better than expected production performance during and post-turnaround, MEG is revising upward its full year 2020 average production from 78,000 - 80,000 bbls/d to 81,000 - 82,000 bbls/d. Compared to the original guidance of 94,000 - 97,000 bbls/d announced November 21, 2019, approximately half of the difference is due to the impact of the scheduled 75-day major turnaround at the Christina Lake Phase 1 and 2 facilities completed mid-August. The remainder of the difference results from a combination of previously disclosed weather-related production impacts in the first quarter of 2020, voluntary price-related production curtailments in the second quarter of 2020 and the impact of reduced well capital throughout 2020, which made up approximately 80% of the combined $100 million reduction in capital spending announced on March 10 and May 4 of 2020.
G&A expense is now targeted to be in the range of $45 - $47.5 million, or approximately $17.5 million lower than original guidance. Non-energy operating costs are now expected to be in the range of $130 - $135 million, or approximately $32.5 million lower than original guidance. Of the $50 million aggregate reduction in expected costs, approximately $22 million are a result of temporary cost reductions while the remaining $28 million in cost reductions are a result of a continued optimization of operations, reduction in staffing levels and rationalization of ongoing administrative costs.
MEG expects to release its 2021 capital budget in December. While the development of the 2021 capital budget remains in progress, it will be designed to be fully funded with internally generated funds. This is consistent with MEG's financial discipline in 2020, where the current year's capital program remains on track to be fully funded with internally generated funds.