- Quarterly production volumes of 81,780 barrels per day (bpd) contributing to record annual production of 81,245 bpd;
- Record-low per barrel net operating costs for the full year of 2016 and record-low per barrel non-energy operating costs for the full year and the quarter;
- 2016 capital spending of $137 million, lower than previous guidance of $140 million announced in October 2016 and the original budget of $328 million, while still maintaining production guidance for the full year;
- Year-end cash and cash equivalents of $156 million.
- MEG is positioned to expand its eMSAGP technology, the first step in a series of high-return projects to boost production while lowering the company’s cash costs and environmental footprint.
- Subsequent to the fourth quarter, MEG Energy announced the closing of a comprehensive refinancing which has contributed to a strengthened balance sheet, and will enable an increase in production and a reduction in costs per barrel.
MEG’s fourth quarter 2016 production was 81,780 bpd, compared to 83,514 bpd for the fourth quarter of 2015. Full-year 2016 production was a record 81,245 bpd, meeting targets and reflecting the ongoing efficiency gains associated with MEG’s patented eMSAGP reservoir technology.
MEG established record-low per barrel net operating costs and non-energy operating costs for the full year of 2016. Net operating costs were recorded at $8.24 per barrel in the fourth quarter of 2016 with net annual operating costs of $7.99 per barrel. At $4.99 per barrel, fourth quarter non-energy operating costs supported record-low annual non-energy operating costs of $5.62 per barrel, which were well below the bottom end of the company’s 2016 revised guidance and 14% lower than in 2015. Lower operating costs on both a quarterly and annual basis are primarily due to efficiency gains and a continued focus on cost management.
On January 27, 2017, MEG announced the closing of its comprehensive refinancing plan, which was first announced on January 11, 2017, and comprised of four financing transactions including the raising of $518 million in equity. The transactions have contributed to a strengthened balance sheet, and will enable an increase in production and a reduction in costs per barrel.
“The last few months have been extremely important for MEG. We have extended the runway of our debt under favorable terms, retaining the covenant lite structure. The success of our equity raise opens the door for us to refocus on growth with a fully-funded capital program driven by our technological advances and capital efficiency gains,” said Bill McCaffrey, President and Chief Executive Officer. “With the expansion of our eMSAGP technology to our Phase 2B wells, we expect to exit 2017 at 86,000 to 89,000 bpd, with further production increases through 2018 into 2019.”
MEG’s eMSAGP expansion and upcoming Phase 2B brownfield expansion will be the first of a series of high-return projects expected to increase production, decrease cash costs and further the sustainability of the company’s balance sheet. “Over the next several years, we plan to grow our production to 210,000 bpd through the addition of more of these high return, short cycle 10,000 to 20,000 bpd brownfield projects,” McCaffrey said.
MEG recorded adjusted funds flow of $40.0 million for the fourth quarter of 2016 compared to adjusted funds flow of $(44.1) million for the same period in 2015. Adjusted funds flow is directly correlated to the increase in U.S. crude oil benchmark pricing during the fourth quarter of 2016, which resulted in higher blend sales revenue. Adjusted funds flow was $(61.6) million for 2016 compared to adjusted funds flow of $49.5 million for 2015.
The company recorded a fourth quarter 2016 operating loss of $72 million compared to an operating loss of $140 million for the same period in 2015. The difference in operating earnings reflects the same factors impacting adjusted funds flow.
Capital Investment and Financial Liquidity
Total cash capital investment during the fourth quarter of 2016 was $63.1 million, as compared to $54.5 million for the same period in 2015. Total cash capital investment during 2016 totalled $137.2 million as compared to $257.2 million for 2015. Capital investment in 2016 was primarily directed towards sustaining capital activities.
At the end of the fourth quarter, MEG had $156 million of cash and cash equivalents on hand. This cash on hand, together with net proceeds from MEG’s $518 million equity issuance completed subsequent to year end and 2017 funds flow, is expected to fund MEG’s previously announced $590 million capital budget in 2017. MEG has entered into a series of hedges designed to protect its capital program against downward movements in crude oil prices. MEG’s five-year covenant-lite US$1.4 billion credit facility remains undrawn.
“We believe that the production growth expected from the first two of a series of brownfield expansions will drive our debt to EBITDA metric into the 3x to 4x range, assuming a similar operating and price environment to what we are seeing currently,” McCaffrey said. “In addition, the transactions give us the added flexibility to pursue additional deleveraging alternatives which would improve our debt metrics further.”
Operational and Financial Highlights
The following table summarizes selected operational and financial information of the Corporation for the periods noted. All dollar amounts are stated in Canadian dollars ($ or C$) unless otherwise noted.
|($ millions, except as indicated)||2016||2015||Q4||Q3||Q2||Q1||Q4||Q3||Q2||Q1|
|Bitumen production – bbls/d||81,245||80,025||81,780||83,404||83,127||76,640||83,514||82,768||71,376||82,398|
|Bitumen realization – $/bbl||27.79||30.63||36.17||30.98||30.93||11.43||23.17||31.03||44.54||25.82|
|Net operating costs – $/bbl(1)||7.99||9.39||8.24||7.76||7.43||8.53||8.52||9.10||9.43||10.49|
|Non-energy operating costs – $/bbl||5.62||6.54||4.99||5.32||5.81||6.45||5.66||5.98||7.01||7.57|
|Cash operating netback – $/bbl(2)||13.13||15.72||21.73||16.74||16.09||(3.71)||9.05||16.41||29.64||9.83|
|Adjusted funds flow(3)||(62)||49||40||23||7||(131)||(44)||24||99||(30)|
|Per share, diluted(3)||(0.27)||0.22||0.18||0.10||0.03||(0.58)||(0.20)||0.11||0.44||(0.13)|
|Per share, diluted(3)||(2.01)||(1.67)||(0.32)||(0.39)||(0.43)||(0.88)||(0.62)||(0.39)||(0.10)||(0.56)|
|Net earnings (loss)(5)||(429)||(1,170)||(305)||(109)||(146)||131||(297)||(428)||63||(508)|
|Per share, basic||(1.90)||(5.21)||(1.34)||(0.48)||(0.65)||0.58||(1.32)||(1.90)||0.28||(2.27)|
|Per share, diluted||(1.90)||(5.21)||(1.34)||(0.48)||(0.65)||0.58||(1.32)||(1.90)||0.28||(2.27)|
|Total cash capital investment(6)||137||257||63||19||20||35||54||32||90||80|
|Cash and cash equivalents||156||408||156||103||153||125||408||351||438||471|
|(1)||Net operating costs include energy and non-energy operating costs, reduced by power revenue.|
|(2)||Cash operating netback is calculated by deducting the related diluent expense, transportation, operating expenses, royalties and realized commodity risk management gains (losses) from proprietary blend revenues and power revenues, on a per barrel of bitumen sales volume basis.|
|(3)||Adjusted funds flow, Operating earnings (loss) and the related per share amounts do not have standardized meanings prescribed by IFRS and therefore may not be comparable to similar measures used by other companies. For the three months and years ended December 31, 2016 and December 31, 2015, the non-GAAP measure of adjusted funds flow is reconciled to net cash provided by (used in) operating activities and the non-GAAP measure of operating loss is reconciled to net loss in accordance with IFRS under the heading “NON-GAAP MEASURES” and discussed further in the “ADVISORY” section.|
|(4)||The total of Petroleum revenue, net of royalties and Other revenue as presented on the Interim Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).|
|(5)||Includes a net unrealized foreign exchange loss of $119.6 million and a net unrealized foreign exchange gain of $148.2 million on the Corporation’s U.S. dollar denominated debt and U.S. dollar denominated cash and cash equivalents for the three months and year ended December 31, 2016, respectively. The net losses for the three months and year ended December 31, 2015 include net unrealized foreign exchange losses of $159.0 million and $785.3 million, respectively.|
|(6)||Defined as total capital investment excluding dispositions, capitalized interest, capitalized cash-settled stock-based compensation and non-cash items.|
|(7)||On December 8, 2016, Fitch Ratings (“Fitch”) assigned the Corporation a first-time Long-Term Issuer Default Rating of B, and assigned a rating of BB to the Corporation’s covenant-lite revolving credit facility and term loan and a rating of B to the Corporation’s Senior Unsecured Notes. On January 12, 2017, Fitch assigned a BB rating to the Corporation’s new second lien secured notes (see the “Capital Resources” section of the MD&A contained in MEG’s Fourth Quarter 2016 Report to Shareholders). Fitch’s rating outlook is negative. On January 12, 2017, Standard & Poor’s Ratings Services (“S&P”) assigned a BB+ rating to the Corporation’s new second lien secured notes. On January 12, 2017, Moody’s Investors Service (“Moody’s”) upgraded the Corporation’s Corporate Family Rating to B3 from Caa2, the Probability of Default Rating to B3-PD from Caa2-PD and the Corporation’s Senior Unsecured Notes rating to Caa2 from Caa3. Moody’s Speculative Grade Liquidity Rating was raised to SGL-1 from SGL-2. Moody’s also assigned a rating of Ba3 to the Corporation’s covenant-lite revolving credit facility and refinanced term loan and a rating of Caa1 to the new second lien secured notes. Moody’s rating outlook was changed to stable from negative.|