Strathcona Resources Ltd.

My name is Ina and I will be your conference operator today. I would like to welcome everyone to the first quarter 2025 conference call of StratConner Resources Limited. 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. For attendees on the conference call that would like to ask a question, please press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star then the number two. I now introduce Angie Lau, Treasurer of Strathcona, to open the conference and introduce the speakers. Please go ahead.

Welcome to the Q1 2025 conference call with Strathcona Resources Limited. Over the past two days, Strathcona released its first quarter 2025 results, reached definitive agreements to sell substantially all of its Montney business, and disclosed an investment in Meg Energy, along with an intention to make an offer for the balance of its shares it doesn't currently own. We encourage our investors to visit Strathcona's website and review the disclosure materials in detail. On today's call, we have from our management team, Adam Watrous, Executive Chairman, Connor Watrous, Chief Financial Officer, Connie DeChancho, Chief Commercial Officer, Dale Babiak, Chief Operating Officer, Kim Chu, President, Strathcona Cold Lake, Seamus Murphy, President, Strathcona Lloydminster Conventional, Brian Tracy, President, Strathcona Lloydminster Thermal. Please note that all commentary made by today's speakers are subject to the same advisories regarding, among other things, forward-looking information and non-GAAP measures, as can be found in our earnings and M&A press releases and our other disclosure materials. Listeners and participants are urged to refer to and review those advisories and materials carefully. In particular, any comments made regarding the asset dispositions, including completion and timing for completion of these dispositions, Commencement of the formal offer to Meg shareholders and timing of such offer, as well as any related financings and any expectations about the pro forma results or resulting capital structure of Strathcona are based on our current expectations regarding our business and combined business and are, in part, based on Meg's available public data. While we believe our current assumptions and expectations to be reasonable, actual results could differ materially from those discussed today, and listeners should not place any undue reliance on any such statements. Please note that no offer to purchase MEG shares has been made by Strathcona at this time, and any such offer will be made in Strathcona's sole discretion pursuant to a formal offer to purchase and take over bids circular of Strathcona. Please refer to the press release of Strathcona relating to its intention to make an offer for further information. With that, in keeping with our practice, we will take all of our materials as read, and we would now like to jump straight to questions.

Thank you.

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star four by the one on your telephone keypad. You will hear a prompt that your hand has been raised, and should you wish to cancel your request, please press star four by the two. If you are using a speakerphone, please lift the handset before pressing any keys.

One moment, please, for your first question. Once again, that is star and one to ask a question. One moment, please. Once again, that is star and one to ask a question. What are we supposed to do?

Your first question comes from the line of Justin Ho from RBC Capital Markets. Please go ahead.

Thanks. Yeah, it's Justin Hill on the line for Greg. I'm just wondering if you can just, you know, give us a little bit more detail around the strategic rationale you're thinking going to this positioning away from the Montney and kind of doubling down here on thermal and the oil sands.

Sure. This is Adam Watrous speaking. I'll try and give you a perspective. Well, maybe I'll give you the first I'm trying to be incremental to what maybe some material we've provided. Maybe on a macro basis, we remain very constructive on long-term oil demand, and we remain pessimistic on long-term oil supply. I've been fairly public on being pessimistic bearish on incremental U.S. oil supply. That doesn't mean we're negative on natural gas, and I quickly would say that I think that the three buyers of our former Montney business are going to be very successful with their purchases, and all three buyers are very sophisticated buyers and the assets fit them like hand in glove. So I think they're going to be very successful with what we have sold them. Having said that, generally speaking, we're more constructive on long-term oil than the natural gas. So that's maybe as a starting point. The second, and that helps maybe explain the investor of the Montney business. The second thing is why we're making the proposal to make shareholders is we think that these are extremely complementary businesses. When I mean extremely, I am actually not aware of two businesses of any scale in North America that share this level of complementary nature. These are doppelgangers, brothers from another mother, twins, identical twins. And why that ends up being particularly important is that our ability to then be able to maximize operational synergies from them, we think will be comparatively straightforward. I can talk a little bit more about that again. But it's also, it's essentially, it is getting more of what we already have, which is long life flow decline, high free cash flow oil. And when we think about the business that we're building, the business will

be what we believe is going to be the only investment grade, long life, low decline, high free cash flow oil company that does not have mines or refineries in North America.

So if someone's interested in a lower risk, long life, low decline, high free cash flow oil business of scale, In North America, we think that this is going to be the business to own. And if you look on page five of the deck that was posted on our website last night, you'll see that the combination, who's us within Canada, 219,000 barrels a day, the fifth largest oil producer in Canada. I think more relevantly, if you look at it in North America, on a reserve basis, net of royalty, that's U.S. convention deducting royalties. So for comparability purposes, our peers are Diamondback, Occidental, EFD's got a fair amount of natural gas, but Diamondback Occidental. And those businesses are very fine businesses, but have very short reserve life indexes, meaning they have several multiples are production and the same reserves. So we think that if a company is looking for what will be a senior producer, with a very long life, we think we're going to be very uniquely positioned in the North American landscape. The second rationale that I could maybe try to give a little bit more color on is the accretion. So there's a lot of very sophisticated and knowledgeable analysts on the call today. But this is how M&A usually works. How M&A usually works is a bigger company takes over a smaller company. And the bigger company trades at a bigger multiple than the smaller company. So the smaller company trades at, say, five times cash flow, and the bigger company trades at seven times cash flow. And what the bigger company does is they pay the smaller company a premium, say, 10% premium. And they say, okay, so They're going to be buying it for five, a five and a half times multiple. And so the selling straight rose as well. I got a premium. I got 10% more than I thought. That's a good thing for me. And the bigger company, the straight that sometimes gets accretion. That's essentially a large percentage of how M&A works in Australia. All sectors, not just this sector. Now, what's super unusual about this is that in this case, the company that is effectively being acquired trades at a bit of a premium to the buyer, the buyer being Strathcona, essentially the target being May. And So that's really unusual. Now, why we think that's the case is we're compared to a new company, has a comparatively limited flow, all things that I don't understand affects price. Of course, price is what you pay, value is what you get. Now, what that leads to is this super unusual dynamic, and that is If you're a meg shareholder, you get two things. The first thing is you get a premium, which you would have obviously seen based on yesterday's close. Our proposal indicates a 9.3% premium. So that's a good thing. But they also get per share accretion on a variety of different metrics. Very rare. usually you get a premium, and then you're actually, on a per share basis, you've got some dilution.

So you get both things.

Now, at the same time, what's also super unusual is Strathcona also gets accretion on almost all metrics. So what is the Jedi mind trick? How does that happen? Well, there's two reasons why Strathcona also gets accretion. is number one, we're putting a little bit of cash in the deal. And as you get leverage, you can get accretion. You can trade at a discount relative to the target. And the second reason is the operating synergies. So the pro forma, the combined business is going to have incremental cash flow. And as you would have seen in the The material we provide, I think that's going to be 175 million annual synergies, 50 from overhead, which we think that Meg is extremely heavily staffed, given the size and operations of their business. The interest savings, because the combined business will have about $4.5 billion in debt, but will be investment grade, which will lead to a lower overall interest rate, hence the interest rate savings. And the third is the operating synergies, which we think at $75 million in capital, $25 million in operating costs. And just to give you a sense on the scale of the business, the full form of business is going to be drilling about a quarter of all of the SAG-D wells in Western Canada. Our ability to be able to get volume discounts from our suppliers is great. We also think that we're going to be able to share best practices, which will increase capital efficiency. We've seen that very directly in our SAGD business in South Carolina, where our different SAGD assets, what we learn from one, we can apply to another. And we also think that we're going to be more effective at controlling costs. 75% of management's compensation is tied to controlling capital costs and F&D to make it 10%. So we think we're going to have very meaningful synergies. So for those three reasons, FITS like hand in glove, the two most similar companies, we believe of this scale in North America, Uniquely, both companies get synergies and there's going to be an accretion and there'll be large operational synergies. That was essentially the strategic rationale for the proposal.

Great. Thanks for that.

That was very thorough. Just one follow-up. I think a part of these transactions that might be flying under the radar a bit is the rail terminal acquisition. Could you walk through your thinking around that and how that kind of ties into your strategic outlook, whether as a standalone or pro forma entity?

Sure. I think I'll have Connor answer that.

Sure. So, you know, a big part of our strategy from day one, as we have thought about investing more capital in the business, is first, obviously, a focus on value. And second, on how is the best way to manage risk And obviously a big risk for an oil and gas heavy oil business like ours is the WCS differential. And so what we think we've been able to do by buying the largest crude by rail terminal in Western Canada is buy a asset which has cash flows which are going to be in inversely correlated to the cash flows in our oil and gas upstream business. And so while the asset is making about $12 million of free cash flow today, or call it a mid-20s free cash flow yield on the $45 million price that we paid, we think that in the event pipelines get full again and diffs start to get wider, that those cash flows are going to start to go up pretty fast, which will be a nice hedge to the cash flows from our upstream business.

That's great. Thank you very much.

Thank you once again. Should you have a question, please press star four by the one on your telephone keyboard. There are no further questions at this time. I would now hand the call back to Mr. Adam Waterhouse for any closing remarks.

I'd like to thank everyone for calling in today. Hopefully, what we've provided online, we've tried to make it extremely comprehensive, not only regarding what we have done in terms of exiting the Montney business, but a good view on why we've made the proposal to make. So, hopefully that's helpful, and we appreciate everyone tuning in.

Thank you, and this concludes today's call. Thank you for participating. You may all disconnect.