MEG Energy Corp.

Good morning. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the MEG Energy's 2024 Q2 Resolve conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, followed by the two. Thank you. Mrs. Darlene Gates, CEO, you may begin your conference.

Thank you, Joelle. Good morning, everyone, and thank you for joining us to review Meg Energy's second quarter 2024 financial and operating results. With me on this call this morning are Ryan Kubik, our Chief Financial Officer, Lai-Yu Zdebski, our Senior Vice President of Legal and Corporate Development, and Eric Olson, our Senior Vice President of Marketing. I'd like to remind our listeners that this call contains forward-looking information. Please refer to the advisories in our disclosure documents filed on CDAR and our website. I'll keep my remarks brief today. For further detail on our second quarter results, please refer to yesterday's press release. I'd like to begin today by providing an update on our wildfire situation. Last week, we proactively evacuated non-essential personnel from the site, and continue to operate our Christina Lake facility with a reduced and essential workforce. To date, the wildfire has not directly impacted our facility and production remains steady. I'm pleased to share that we have started to return evacuated workers to site as of today. I want to express my appreciation for our dedicated team for their ongoing efforts in ensuring safe and continuous operation of Christina Lake. They also exemplified collaboration with our industry partners and communities. I want to recognize Alberta Forestry and Parks for their selfless support in ensuring the safety of our people and communities. Thank you for everything that they are doing to help keep us all safe and their ongoing efforts. Moving on to business results. I'm proud of Meg's strong safety, operating and financial performance in the second quarter of 2024. which demonstrates the team's continuous focus on operational excellence. These business results mean that Meg expects to reach its US $600 million net debt target in the third quarter, and I'm pleased to announce that Meg's board of directors has approved an inaugural quarterly cash dividend of $0.10 per share. This announcement is the culmination of a robust multi-year debt repayment and capital allocation strategy. and highlights MEG's maturation as a senior Canadian oil producer. Further to our longstanding commitment, shareholder returns will rise to 100% of free cash flow with an emphasis on continued share buybacks and a quarterly base dividend. 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. The dividend will be payable on October 15, 2024 to shareholders of record at the close of business on September 17, 2024. Meg recorded $354 million of adjusted funds flow in the second quarter, and after funding $123 million in capital expenditures, we generated $231 million of free cash flow. That free cash flow facilitated the repayment of US $53 million in senior notes and allowed for the repurchase of 68 million or 2.2 million mixed shares. Year to date, we have repaid U.S. $158 million of debt and repurchased 7 million shares, totaling $195 million of share repurchases. Net debt as of June 30th was U.S. $634 million. Another milestone in the second quarter was the startup of the Trans Mountain Expansion Pipeline. MAG began shipping on our 20,000 barrel per day contracted capacity of Canada's West Coast to Canada's West Coast, and our first cargo left the dock in June. This was an important milestone, which removed long-standing Western Canadian transportation constraints, which we believe will lead to narrower and less volatile Canadian heavy oil differentials improving Meg's net backs and profitability. This was evident in the tightening of the WCF to WTI differential of US $5.70 per barrel in Q2 relative to the first quarter of 2024. Our second quarter average bitumen realization after net transportation and storage expense of $74 per barrel represents a 28% increase over the same period in 2023. On our operating front, bitumen production for the quarter averaged approximately 100,500 barrels per day, representing a 17% increase over the second quarter of 2023. This improved performance was driven by continued strong results from our recent PsyD pads and reduced turnaround scope. We converted the first group of wells from our newest pad to production late in the quarter, and they are ramping up in line with expectations. Our second quarter steam-to-oil ratio of 2.44 reflects planned circulation of steam to these new wells. As we move into the second half of 2024, we anticipate higher production volumes with the addition of these new wells coming on. This, coupled with the startup of a second pad late in the year, positions us for a strong exit to 2024. Operating expenses net of power revenue in the second quarter averaged an industry-leading $6.62 per barrel. We continue to benefit from low natural gas prices and power revenues, offsetting 54% of energy operating costs during the quarter. This results in $0.99 per barrel of energy operating costs net of power revenues. Capital investments in the quarter totaled $123 million primarily directed towards drilling activity on site deep pads and our short cycle redevelopment and infill program. Engineering and design work on our facility expansion plan continues to progress with a final investment decision expected later in the year. On our 2024 capital and operating guidance, it remains unchanged. Now to a brief update on the Oil Tanks Pathways Alliance. Regulatory applications to the Alberta Energy Regulator seeking approvals for pathways CO2 transportation network and storage hubs are continuing, and the front-end engineering and design on the proposed 400-kilometer CO2 transportation line is now more than 75% complete. Formal consultation and engagement with Indigenous groups along with the proposed CO2 transportation corridor and storage network continues. And the Pathways Alliance continues to work actively with both the federal and Alberta governments on the necessary policy and co-financing frameworks required to move the project forward. Lastly, I'd like to welcome Mike McAllister to make Board of Directors effective July 1st. Mr. McAllister brings over 40 years of energy industry experience, having helped several executives and technical... overseeing operations, development, marketing, and corporate services. His experience and expertise will be of significant benefit to our board as we execute our strategic initiative. 2024 has been a milestone year for Meg as we reach the culmination of our balance sheet improvement strategy and the TMX startup diversifies market access and offers the potential for improved netbacks on all our productions. With our commitment to returning 100% to free cash flow to shareholders, introduction of a base dividend, and our transition to self-funded moderate organic growth production, MAG has solidified its position as a leading pure plate oil investment. On behalf of MAG's board of directors and our management team, I want to thank you for your continued support. With that, I'll turn it back over to Joelle to begin the Q&A.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press star, followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Greg Party with RBC. Your line is now open.

Thanks. Good morning. Thanks for the rundown, Darlene, and good move on the dividend. A couple of questions, but maybe the biggest one is, I realize it's still early, but how are you thinking about just the cadence of your capital investment? Obviously, not so much this year, but more as we get into 2025 and 2026.

Thanks, Greg. Good morning. When we look at the 25 and 2026, as you know, with a strong operating performance, a strong financial performance, as we look ahead now, it's going to be focusing ourselves on moderate growth, 3% to 5% per year. Our team is evaluating those opportunities that we have right now. I would call them modesty bottlenecking growth. They're very capitally efficient. Most of those projects are projects that we have experience with. And the team is really refining those projects of how to integrate them and deliver the most capital efficient program. As I look ahead at the numbers, of course, we haven't finalized any of these numbers. But I don't see any year exceeding, you know, they should range between 550 to 650 would be sort of that capital cadence over the next several years. to deliver that moderate growth program that the team is proposing.

Okay. Okay. Thanks for that. And I'm going to shift gears entirely. If we roll back the clock, like this time last year, WCS spreads were, I don't know, you know, $10 or so, $10, $11, and some of that obviously impacted by outages on wildfires earlier in the season in 2023. Have the spreads surprised you guys a little bit as to how wide they are? But more importantly, I'm interested in what you think the path might be around spreads, particularly as we get into the autumn timeframe.

Thanks, Greg. It's Eric. Looking at the differentials, let's say Q3, differentials have widened slightly on available inventory and a number of unplanned outages. In PADS 2, PADS 3 in Mexico, We'll still see the typical widening, the seasonal widening in the winter, but our view remains unchanged that Edmonton differentials will largely range in that minus 10 to minus 15 range.

Okay. Terrific. Thanks very much.

Welcome. Your next question comes from Menno Holshoff with TD Cowan. Your line is now open.

Good morning, everyone. And thanks for taking my questions. Maybe I'll just start with one on the game plan for the base dividend, which has been set fairly conservatively. And I understand this is a really volatile business, but is the plan or the hope maybe to ratably grow the dividend? And how important is that to the board?

Hey, Mano, it's Ryan. I'm You are right. We did intentionally set that base dividend at the low end of the spectrum. We don't feel we're here to compete on dividend yield against peers or other industries, quite frankly. So the plan is to add value through a base dividend. And we know that that accrues over time as you pay that base dividend, keep it stable and grow it over time. And so that is the plan. We are still emphasizing our commitment to deliver 100% free cash flow returns to shareholders, and that's going to be largely concentrated on share buybacks at the moment. But with the base dividend at a relatively low level, we do expect that we can grow that dividend over time as we grow production through the projects that Darlene was just mentioning, and as we buy back our shares over time. So the plan would be to you know, grow it over time. And we have set a level that we think we could sustain through the cycle, the oil price cycle, that is.

Terrific. Thanks for that, Ryan. And then my second question is on turnarounds. My understanding is that 2024 is a light turnaround year with activity relatively evenly spread across the year. As we look into 2025 and 2026, Should we assume turnarounds are going to look more like they have historically, or do you see the potential to do those more efficiently as well?

Yeah, Neil, thanks for that question. I know a lot of people are asking about the turnaround. And technically, this should have been a major turnaround year. And the team did some exceptional work looking at our performance of our assets, and testing and challenging some of those capital efficiency opportunities. With our team, they had identified that we could minimize the turnaround scope this year, and that's part of what I mentioned as helping us with our production performance, because it's not only just cost, but it also impacts production, as you know. As we look ahead, the continued work that the team has done to optimize the turnarounds is currently the schedule would be every three years we do a major turnaround, and then in the for two of our facilities or two of our plants. And then on the third year, it's a lighter scope. That's kind of the sequence today. What I'm seeing the team evaluating right now is moving that frequency to every four years. That decision hasn't been taken at this time, but I suspect based on the work that they're doing, that looks promising. So more to come by year end. We'll roll that out by Q4, give you more insights on the work that the team has progressed. but expecting them to either way deliver some improvements on turnaround efficiency.

Thanks, Darlene. I'll turn it back.

Your next question comes from Neil Meddock with Goldman Sachs. Your line is now up.

Yeah, good morning, Darlene and team, and hope everybody stays safe from your team up there. My first question is just really on these economic growth projects. And you're in flight here on that third processing train, the skim tank, and then the steam optionality tie-in. Can you talk about how those are developing? And the biggest part of it, of course, is the third processing train. So if you could spend a little more time on that piece, it would be great.

Sure can. This is, you know, as we look at our strategy and hitting these major milestones and introducing new ourselves moving towards 100% free cash flow. Our focus continues on shareholder value and returns. And as we evaluated our strategy, looking at our resource, it really starts with the delineation program over the last two years has been identifying our resource to the southeast, but also now to the northwest looks extremely promising. Our focus will be on capital-efficient programming and self-funded So that has been the challenge that was given to the team. As I looked at that, you know over the last year the team has brought production up to the full capacity of the facility, both on processing and on steam. As they look ahead to grow the production, moderate growth, how can we most efficiently do that? We've got a program in place that delivers programs around 20,000 to 25,000 per flow of barrels. And that includes an integration of both installing additional processing capacity, that's our ability to increase our fluid handling, and the front-end engineering design is in progress right now and should be complete in the second half of this year. That will allow us to make decisions integrated with upgrading our steam system to allow access to both the northwest and the southeast. We bring those two programs together. Directionally, they look like they're sitting between that 20 and 25,000 per flowing barrel. As they brought those two projects forward, there was also an identification for some efficient project execution strategy to optimize costs and labors as we brought those projects together. And that's why you're hearing us integrate those two. The third one you mentioned and asked about was the skim tank. And that's really about pacing your equipment delivery and how to create value over your investment period. With the turnaround, we can bring that tank in to optimize our turnaround and help with some of the scheduling and efficiency of the startup of the plant. And so the skim tank was something that the team identified that while it's needed as part of the third processing chain, we could optimize turnarounds with the addition of accelerating that into the program. And that's why that came into the 2024 capital.

Okay. Thanks, Darlene. And the follow-up is just to Greg's question on the differential. I think some investors we speak to have been surprised. It has traded wider, despite we are in a seasonally tighter period for the demand for WCS, given refiners are running hard. And then you get into Q4, and you tend to get maintenance, and you get the blend ratios and all that stuff. So the Is there something that we could be missing here, the fact that TMX went so over budget, you know, that it is bleeding into the differential and maybe the new mid-cycle isn't 10 to 15, it's a little bit wider? Just wanted to push back and get your perspective on that.

Thanks for the question. This is Eric again. The near-term issues that you're seeing, again, refineries are running hard. They're not necessarily the refineries that are running heavy crudes. So I had mentioned some of the unplanned outages we've seen in PADS 2 and PADS 3 that's impacted heavy crude demand. So you're seeing that impact in the differentials. With some of the reliability issues with refineries in Mexico, what that has meant is more availability of Mexican crude in the U.S. Gulf Coast. That's put additional pressure on availability and differentials as well. So that's what you're seeing in the near term. The longer term dynamic as inventories are drawn, there's a fair bit of inventory built around the startup of TMX as well as one of the big pad two refiners earlier in the year that was down for an extended period of time. There was a lot of heavy crude inventory that was built at that time. Those inventories are drawing and have been drawing pretty heavily for the past couple of months. We'll be reaching operational minimums inventory-wise here in 3Q. And again, my expectation is you'll see a little bit of the seasonal widening as you get into the winter. The nice thing is with TMX online, the volatility that you've seen in the past are now protected with that from an unconstrained egress perspective. So as you roll into the coming year, the benefit of TMX lower inventories, you'll see the differentials in that $10 to $15 range that we've been talking about.

Thanks, Steve. Appreciate more color.

You're welcome. Your next question comes from John Royal with J.P. Morgan. Your line is now up.

Hi. Good morning. Thanks for taking my question. So you mentioned some modest growth through the bottlenecks, obviously, in addition to the third processing train. And you gave some good color on Neil's question, but can you talk about what the ultimate capability is of the asset and how large you think it can get to over the long term relative to the 125 post the third train?

Thanks, John. Great question. What comes along with this is the ability of capacity, right? The plant right now is at full capacity. And so without introducing these opportunities, we're not able to grow the production. So that's the first place is very efficient. How do we create the capacity? The processing side with the steam allows us to take it from about, I would say somewhere between 125,000 to 135,000 in production. That allows the team now, when you're thinking about capital efficiency, we'll pace the paths that come in to fill that capacity of the plant. And that's how we'll manage, again, if we're in a volatile environment, how we pace the growth, and why we give the range 3 to 5%. We'll manage that based on the macro environment that we're in to return the best returns to our shareholders. So about 125 to 135. To go beyond that, we still have the ability to continue to optimize the facility. The resource looks outstanding. The delineation program through the last two years continues to demonstrate that the northwest of our resource looks even better than some of the southeast that we've been pursuing. And so we have a long runway ahead for opportunities. And now it's really just pace growth as we move that forward. To go beyond 135, then some additional optimization will be required in the facility. And I think we can optimize our way back up to about 145 to 150.

Great. Thank you. And then just to follow up on the wildfires, I think you mentioned bringing people back following the wildfire. So is it safe to say the near-term risk has completely come and gone? And then has enough of the surrounding area been burned off such that there's lower risk around the next wildfire, should there be one?

So, you know, this is, you know, what you count on, Meg, is our operations team out at the site, you know, and the collaboration that they have done with Alberta Forestry and Parks. We have installed over the years through a lot of work is fire breaks is what I call them. To be frank, the fire was all around one of our disposal wells. The breaks worked extremely effective. The team managed it very well. And so they're able to demonstrate that the mitigations that they put in place are effective. I will never tell you that we're out of the woods. I think we're going to see the fires here for a while. But I'm confident, as you can see, I wouldn't bring the team back if we weren't confident in the safety of our people. And several of the communities, a couple of the communities have also been mobilized back to the community. So we are seeing the progress that Alberta Forestry and Parks is making. And I expect that we will continue to monitor these throughout the summer because of lightning strikes and those kind of things that are just present in our world that we're in today.

Thank you. Your next question comes from Dennis Fong with CIBC.

Hi, good morning, and thanks for taking my questions. question. As you march through these de-bottlenecking operations, it sounds like oil processing capacity after this third processing train isn't as much going to be the limitation of the facility and rather steam gen. So as you step into what you just highlighted as maybe a higher quality reservoir towards the The driving down that number should then potentially be able to increase production given your existing steam capacity or the expanded steam capacity. Is that a way to potentially optimize the field and kind of pull the most out of your CPF without actually having to install additional steam capacity after kind of these sets of projects have been completed to, we'll call it, outperform that 135 number that you just stated?

Sorry, Dennis, it was a little broken up, but if I don't get your answer correct, just shoot me back another question. So I think what you're asking is, can we optimize further? So yeah, absolutely. Your steam is what you're using to deploy out your best resource. If you have higher saturation, better resource, then your steam is more effective. And so if we have the ability in the northwest, looks like it's better resource, the steam will have lower steam to oil ratios, and therefore you don't need to bring on as additional steam to increase your production.

Great. And then I guess the pseudo follow-up to that would be just around oil processing capacity. Once this third processing train is complete, what do you think the facility itself could potentially do? Obviously, understanding that there's a steam constraint that may limit the actual total production level from the field.

Yeah, Dennis, that's the work that the team is doing right now is we do the engineering work and the optimization of these projects. The team is looking at those optimizations of what the processing capability can do. We expect that with the existing design, as they've laid it out, gets us to that 125 to 135, and we'll require some optimization work to go above the 135 as it sits today. But again... The team is doing that work as we speak, and we'll probably continue to provide updates as we get that refined in.

Great, great. And then my second question, just on the marketing side of things. and really appreciate all the color and context that you've provided already. Just as TMX throughput stabilizes towards kind of the normal operating levels, how has maybe the ability to gain access to certain markets, both through the West Coast and the U.S. Gulf Coast, for your marketing operations maybe changed or evolved as you've been able to kind of test the markets and gain realizations in either of those two areas? sales points and how might that shift going into the future, especially given the current dynamics on heavy oil?

No, thanks for the question. This is Eric. The access to tidewater has been great. With TMX coming into service, we're pleased to see how well that new infrastructure has been operating. There were questions about that initially, but Trans Mountain has performed extremely well. Between the assets that we have with TMX, the access to the Gulf Coast and the assets that we have there, the international reach has been great. We continue to access new international customers and continue to grow the sales portfolio. My expectation is we'll continue to see significant value from the international markets

Great. Thanks. I appreciate the call. I'll turn it back.

Thank you. Your next question comes from Mike Warner with Yahoo. Your line is now open.

Hi. I just wanted to say congratulations to the team on a standout first quarter. My question is, as you transition to 100% free cash flow to shareholders in Q3, do you foresee down the line Q4 2024, Q1 2025, the necessity to do a significant issuer bid to take up some share buybacks, or do you see that just continuing on through an NCIB? Thanks very much.

Thanks for the question. I guess we will continue to use the NCIB. That's the most effective way to buy back shares, but there is a limit on the NCIB program, so your question really revolves mostly around what oil price we're going to see and how much revenue we generate as a result of that. So we will continue to pay the base dividend, you know, subject to board approval, obviously, but depending on conditions at the time. That will use up some of the free cash flow that we're generating. We'll emphasize the NCIB program. That is capped at 10% of our shares. So in a good world, we buy back 10% of our shares and we have excess cash left over. At that point in time, you would have to consider to return 100% of free cash flow, you would have to consider an SIB program, which is a little bit more opportunistic. Those are larger bids and you would build cash in advance of those SIB bids.

kind of programs but we have seen peers use those programs and it would be something we would consider if necessary but first you use up your ncib great thanks ladies and gentlemen as a reminder should you have a question please press star followed by the one your next question comes from patrick o'rourke with atb capital market your line is now open

Oh, hey, guys. Thanks for the update, and congratulations on the inaugural dividend there. I just maybe wanted to ask sort of a bit of a follow-up on Dennis' question, maybe a little bit of nuance here. But given you have some pretty significant experience marketing in the Gulf, and now you're marketing on the West Coast, I'm kind of curious what, from a pricing dynamics perspective, the demand for those barrels, once you get them to the end of TMX, looks like from a discounting to WTI perspective and how you've seen sort of the refinery complex, particularly in Pad 5, be able to sort of absorb what's a bit of a different and maybe slightly more nuanced crude slate coming down to them than they may have seen before and, you know, how they're reacting to that.

Thanks for the question. This is Eric. As we look at the sales from Trans Mountain, some of the early netbacks as we think about where the barrels are landing, we've got the committed capacity that's moving probably half of the barrels are moving into the US West Coast, the other half moving into Eastern Asia, largely China. What we've seen from a dynamic perspective is the heavy high tans are largely going to Asia at this point, with light crudes and low tan mostly pointed to the U.S. West Coast. One of the opportunities that's out there in front of us is for the PADFOT, the West Coast refiners, to build more familiarity with processing heavy high tan products. We know those kind of early runs are taking place with the West Coast refiners, and my expectation is we'll see more of a demand pull for heavy high tans into the West Coast as well. So we're very encouraged by what we see to date and continue to see the opportunity for upside as our product moves into the West Coast.

Okay, and then... Just with respect to the buyback here, when I look at the way you've done it on a monthly or on a quarterly basis, there is some lumpiness to it that is in line with some of the free cash flow profiles. Just wondering that as you hit the $600 million, you got a ton of flexibility on the balance sheet. Is there any desire to move to something that's sort of rateable on an annualized basis and remove some of the lumpiness to the way that you guys buy back shares in the market here?

You know, on the buyback, we are very programmatic about how we do it. I think you'll continue to see us do that. The movement in the amount that gets bought back is really driven by the free cash flow that we're generating, oil prices, volumes, etc., and our needs for cash to pay bills, et cetera. And so it is very programmatic. We'll continue to just look at what cash is sitting in the bank account at the end of the month. We'll hold back what we need to run the business, and then the rest goes to buying back stock and paying our dividend. And so that's the approach. We do just try to hit the volume-weighted average price as we buy back and be programmatic rather than opportunistic in those buybacks. So you'll continue to see that approach going forward.

Okay, thanks.

Your next question comes from John Royal with JP Morgan. Your line is now open.

Hi, thanks for coming back to me. I just had a very quick housekeeping follow-up for Ryan. I think you have about $100 million remaining on the 2027 bonds. Is the intention to get this down to zero before you flip to 100% returns of capital?

Hey, John. Yeah, good question. That is exactly the intent. We'll hit our net debt target in Q3, probably mid-Q3. And then further to that, we'll continue to buy back those 2027 bonds and give ourselves a nice liquidity runway out to 2029. That would be our next bond maturity. So take out that full $100 million of 2027s. We expect that's going to occur in Q3 as well. And then we'll dial up to the 100% free cash flow returns.

Thank you very much.

There are no further questions at this time. I will now turn the call over to Darlene Gates for closing remarks.

Thank you, Joelle. And thank you to everybody that joined us this morning for our Q2 results conference call. We look forward to updating you again when we release our Q2 results in November. I hope everyone has a great day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.