MEG continues to proactively respond to the safety challenges associated with COVID-19 and remains committed to ensuring the health and safety of all its personnel and the safe and reliable operation of the Christina Lake facility.
“As we exit 2021, MEG is very well positioned from an operational and financial perspective to continue to deliver on its deleveraging and shareholder return strategy” said Derek Evans, President and Chief Executive Officer. “We expect to be in a position to initiate our share buyback program in the second quarter of 2022 which, combined with our ongoing debt reduction program, should drive continued shareholder value through 2022 and beyond.”
Highlights include:
- Adjusted funds flow of $799 million ($2.57 per share) and funds flow from operating activities of $753 million;
- Record bitumen production volumes for the fourth quarter and full year 2021 of 100,698 barrels per day (bbls/d) and 93,733 bbls/d, respectively;
- Operating expenses net of power revenue of $6.60 per barrel, including record low non–energy operating costs of $4.24 per barrel. Power revenue offset energy operating costs by 52%, resulting in energy operating costs net of power revenue of $2.36 per barrel;
- Total capital expenditures of $331 million in 2021, approximately 2% lower than budget, was primarily directed towards sustaining and maintenance activities, resulting in $468 million of free cash flow in 2021;
- Completed or announced the repayment of US$325 million (approximately $415 million) of outstanding indebtedness during 2021;
- Subsequent to year end, MEG issued a notice to redeem the remaining US$171 million (approximately $215 million) of MEG’s 6.50% senior secured second lien notes due January 2025. The redemption is expected to be completed on or about April 4, 2022; and
- Also subsequent to year end, MEG’s Board of Directors approved the filing of an application with the Toronto Stock Exchange (“TSX”) for a normal course issuer bid (“NCIB”) which once approved would allow MEG to buy back up to 10% of its public float, as defined by the TSX, over a one-year period.
Blend Sales Pricing
MEG realized an average AWB blend sales price of US$57.59 per barrel during 2021 compared to US$28.07 per barrel in 2020. The increase in average AWB blend sales price year over year was primarily a result of the average WTI price increasing by US$28.51 per barrel. MEG sold 42% of its sales volumes at the premium-priced U.S. Gulf Coast (“USGC”) in 2021 compared to 40% in 2020.
Transportation and storage expense net of transportation revenue averaged US$6.10 per barrel of AWB blend sales in 2021 compared to US$6.74 per barrel of AWB blend sales in 2020. The decrease was primarily due to the elimination of rail transportation in 2021 compared to 2020.
Operational Performance
Bitumen production averaged 93,733 bbls/d at a steam-oil ratio (“SOR”) of 2.43 in 2021, compared to 82,441 bbls/d at a SOR of 2.32 in 2020. Increased steam utilization, improved field reliability, completed and ongoing well optimization and recompletion work all contributed to strong field-wide production performance in 2021. This compares to reduced bitumen production in 2020 due to the major planned turnaround at the Phase 1 and 2 facilities, which began in June 2020 and was completed mid-August 2020, as well as voluntary price-related production curtailments in April and May 2020.
Non–energy operating costs averaged $4.24 per barrel of bitumen sales in 2021 compared to $4.38 per barrel in 2020. Non-energy operating costs per barrel decreased slightly due to fixed costs being spread over increased sales volumes. Energy operating costs, net of power revenue, averaged $2.36 per barrel in 2021 compared to $1.80 per barrel in 2020. This increase year over year resulted from stronger natural gas prices and increased internal power consumption as production increased, partially offset by the strengthening of the Alberta power market. Power revenue, which includes the impact of physical risk management contracts on power sales, offset energy operating costs by 52% during 2021 compared to 45% in 2020.
General & administrative expense (“G&A”) was relatively consistent year over year with $56 million, or $1.65 per barrel of production, in 2021 compared to $49 million, or $1.62 per barrel of production, in 2020.
Funds Flow from Operating Activities, Adjusted Funds Flow and Net Earnings (Loss)
The Corporation’s cash operating netback averaged $33.37 per barrel in 2021 compared to $19.22 per barrel in 2020. This increase in cash operating netback was primarily driven by the increase in average bitumen realization due to the higher WTI price, partially offset by realized commodity price risk management losses in 2021 compared to realized commodity price risk management gains in 2020. The increased cash operating netback was the main driver for the increase in the Corporation’s funds flow from operating activities and adjusted funds flow from $239 million and $275 million, respectively, in 2020 to $753 million and $799 million, respectively, in 2021.
The Corporation recognized net earnings of $283 million in 2021 compared to a net loss of $357 million in 2020. This increase in net earnings was primarily due to stronger global crude oil prices partially offset by a commodity price risk management loss. The net loss recognized during 2020 was impacted by the recognition of a $366 million exploration expense.
Capital Expenditures
Capital expenditures in 2021 totaled $331 million compared to $149 million in 2020. While capital invested in the year was primarily directed towards sustaining and maintenance activities, approximately 20% of total capital expenditures was directed toward incremental well capital necessary to allow the Corporation to fully utilize the Christina Lake central plant facility’s oil processing capacity of approximately 100,000 bbls/d, prior to any impact from scheduled maintenance activity or outages. As previously disclosed, the total investment for this optimization initiative is approximately $125 million with approximately $50 million remaining to be invested in the first half of 2022.
Debt Repayment
MEG announced today that the Corporation has issued a notice to redeem the remaining US$171 million (approximately $215 million) of MEG’s outstanding 6.50% senior secured second lien notes due January 2025 at a redemption price of 101.625%, plus accrued and unpaid interest to, but not including, the redemption date. The redemption is expected to be completed on or about April 4, 2022. Inclusive of the redemption, MEG will have redeemed in full the original US$750 million aggregate principal amount of the second lien notes.
Debt reduction over the last four years now totals approximately US$2 billion. Continued debt reduction remains a core focus of the Corporation.
Ongoing Debt Repayment and Intention to Initiate Capital Return to Shareholders
As MEG expects to soon reach its previously announced near-term net debt target of US$1.7 billion, MEG’s Board of Directors approved today the filing of an application with the TSX for a NCIB which, once approved by the TSX, will allow MEG to initiate a share buyback program to buy back over the next twelve months up to 10% of the Corporation’s public float, as defined by the TSX, up to a maximum of approximately 27.2 million common shares of MEG.
As previously announced, MEG intends to allocate approximately 25% of free cash flow generated to share buybacks with the remaining free cash flow applied to ongoing debt reduction until the Corporation’s net debt balance reaches US$1.2 billion. In the current commodity price environment, MEG expects to reach this US$1.2 billion net debt target in the third quarter of 2022.
Once the US$1.2 billion net debt target is reached the Corporation intends to increase the percentage of free cash flow allocated to share buybacks to approximately 50% with the remainder applied to further debt reduction.
Sustainability
In 2021, the Corporation advanced its Environmental, Social and Governance (“ESG”) objectives with the establishment of a mid-term target of 30% reduction in bitumen greenhouse gas (“GHG”) emissions (scope 1 and scope 2) from 2013 levels by 2030. This target is in addition to the Corporation’s previously established long-term target of reaching net zero GHG emissions (scope 1 and scope 2) by 2050. Also in 2021, the Corporation, along with four oil sands operators who collectively operate 90% of Canada’s oil sands production, formed the Oil Sands Pathways to Net Zero Alliance with the objective of working with the Federal and Alberta governments to achieve net zero GHG emissions from oil sands operations by 2050. This Alliance has grown to six companies operating approximately 95% of Canada’s oil sands production and is focused on building a major CO2 capture and storage trunkline, connecting oil sands facilities in the Fort McMurray, Christina Lake and Cold Lake regions of Alberta, to a CO2 sequestration hub near Cold Lake. This enabling infrastructure is a key element to achieving net zero GHG emissions by 2050.
The Corporation published its second ESG report in 2021 in an effort to provide consistent, relevant information that is useful to Shareholders and other Stakeholders to provide greater transparency on ESG and climate-related risks. The report is aligned with guidance from the Sustainability Accounting Standards Board and the recommendations of the Task Force on Climate-related Financial Disclosure. The ESG report also references the Global Reporting Initiative (“GRI”) and the United Nations Sustainable Development Goals.
The Corporation continues to advance ESG and progress on priority topics: Climate Change and GHG Emissions, Water and Wastewater Management, Health and Safety, and Indigenous Relations, led by a strong governance model, safe and reliable operations and a dedicated team as reflected across ESG metrics.
Conference Call
A conference call will be held to review MEG’s full year 2021 operating and financial results at 6:30 a.m. Mountain Time (8:30 a.m. Eastern Time) on Friday March 4th, 2022. To participate, please dial the North American toll-free number 1-888-390-0546, or the international call number 1-416-764-8688.
A recording of the call will be available by 12 noon Mountain Time (2 p.m. Eastern Time) on the same day at www.megenergy.com/investors/presentations-and-events.
Operational and Financial Highlights
Three months ended December 31 |
Year ended December 31 |
|||
($millions, except as indicated) |
2021 |
2020 |
2021 |
2020 |
Bitumen production – bbls/d |
100,698 |
91,030 |
93,733 |
82,441 |
Steam-oil ratio |
2.42 |
2.31 |
2.43 |
2.32 |
Bitumen sales – bbls/d |
98,894 |
95,731 |
92,138 |
82,722 |
Bitumen realization(1)– $/bbl |
71.06 |
38.64 |
62.47 |
27.23 |
Operating expenses net of power revenue – $/bbl |
8.2 |
6.98 |
6.6 |
6.18 |
Non-energy operating costs(2)– $/bbl |
4.56 |
4.7 |
4.24 |
4.38 |
Cash operating netback(1)– $/bbl |
37.87 |
18.66 |
33.37 |
19.22 |
General & administrative expense – |
1.58 |
1.65 |
1.65 |
1.62 |
$/bbl of bitumen production volumes |
||||
Funds flow from operating activities |
260 |
81 |
753 |
239 |
Adjusted funds flow(3) |
266 |
84 |
799 |
275 |
Per share, diluted |
0.85 |
0.27 |
2.57 |
0.9 |
Revenue |
1,307 |
786 |
4,321 |
2,292 |
Net earnings (loss) |
177 |
16 |
283 |
(357) |
Per share, diluted |
0.57 |
0.05 |
0.91 |
(1.18) |
Capital expenditures |
106 |
40 |
331 |
149 |
Net debt – C$(3) |
2,401 |
2,798 |
2,401 |
2,798 |
Net debt – US$(3) |
1,897 |
2,194 |
1,897 |
2,194 |
(1) |
Non-GAAP financial measure – please refer to the Advisory section of this news release. |
(2) |
Supplementary financial measure – please refer to the Advisory section of this news release. |
(3) |
Capital management measure – please refer to the Advisory section of this news release. |
ADVISORY
Basis of Presentation
MEG prepares its financial statements in accordance with International Financial Reporting Standards (“IFRS”) and presents financial results in Canadian dollars ($ or C$), which is the Corporation’s functional currency.
Non-GAAP and Other Financial Measures
Certain financial measures in this news release are non-GAAP financial measures or ratios, supplementary financial measures and capital management measures. These measures are not defined by IFRS and, therefore, may not be comparable to similar measures provided by other companies. These non-GAAP and other financial measures should not be considered in isolation or as an alternative for measures of performance prepared in accordance with IFRS.
Adjusted Funds Flow and Free Cash Flow
Adjusted funds flow and free cash flow are capital management measures and are defined in the Corporation’s annual financial statements. Adjusted funds flow and free cash flow are presented to assist management and investors in analyzing operating performance and cash flow generating ability. Funds flow from operating activities is an IFRS measure in the Corporation’s consolidated statement of cash flow. Adjusted funds flow is calculated as funds flow from operating activities excluding items not considered part of ordinary continuing operating results. By excluding changes in non-recurring adjustments from cash flows, the adjusted funds flow measure provides a meaningful metric for management and investors by establishing a clear link between the Corporation’s cash flows and the cash operating netback. Free cash flow is presented to assist management and investors in analyzing performance by the Corporation as a measure of financial liquidity and the capacity of the business to repay debt. Free cash flow is calculated as adjusted funds flow less capital expenditures.
The following table reconciles funds flow from operating activities to adjusted funds flow to free cash flow:
Three months ended |
Year ended |
|||||||
($millions) |
2021 |
2020 |
2021 |
2020 |
||||
Net cash provided by (used in) operating activities |
$ |
242 |
$ |
115 |
$ |
690 |
$ |
302 |
Net change in non-cash operating working capital items |
18 |
(34) |
63 |
(63) |
||||
Funds flow from operating activities |
260 |
81 |
753 |
239 |
||||
Adjustments: |
||||||||
Payments on onerous contract |
6 |
— |
25 |
— |
||||
Settlement expense(1) |
— |
— |
21 |
— |
||||
Contract cancellation |
— |
— |
— |
33 |
||||
Net change in other liabilities(2) |
— |
3 |
— |
3 |
||||
Adjusted funds flow |
266 |
84 |
799 |
275 |
||||
Capital expenditures |
(106) |
(38) |
(331) |
(149) |
||||
Free cash flow |
$ |
160 |
$ |
46 |
$ |
468 |
$ |
126 |
(1) |
During 2021, the Corporation reached an agreement to settle the litigation matter commenced in 2014 relating to legacy issues involving a unit train transloading facility in Alberta. Under the agreement, the Corporation paid the sum of $21 million in full and final settlement of the claim and the claim has been discontinued. |
(2) |
Includes the change in liability associated with the termination of a long-term transportation contract that was previously expensed. |
Net Debt
Net debt is a capital management measure and is defined in the Corporation’s annual financial statements. Net debt is an important measure used by management to analyze leverage and liquidity. Net debt is calculated as long-term debt plus current portion of long-term debt less cash and cash equivalents.
The following table reconciles the Corporation’s current and long-term debt to net debt:
Cash Operating Netback
As at December 31 |
2021 |
2020 |
||
Long-term debt
|
$ |
2,477 |
$ |
2,912 |
Current portion of long-term debt |
285 |
— |
||
Cash and cash equivalents |
(361) |
(114) |
||
Net debt – C$ |
$ |
2,401 |
$ |
2,798 |
Net debt – US$ |
$ |
1,897 |
$ |
2,194 |
Cash operating netback is a non-GAAP financial measure, or ratio when expressed on a per barrel basis. Its terms are not defined by IFRS and, therefore, may not be comparable to similar measures provided by other companies. This non-GAAP financial measure should not be considered in isolation or as an alternative for measures of performance prepared in accordance with IFRS.
Cash operating netback is a financial measure widely used in the oil and gas industry as a supplemental measure of a company’s efficiency and its ability to generate cash flow for debt repayment, capital expenditures, or other uses. The per barrel calculation of cash operating netback is based on bitumen sales volume.
Total revenues, is an IFRS measure in the Corporation’s consolidated statement of earnings (loss) and comprehensive income (loss), which is the most directly comparable primary financial statement measure to cash operating netback. A reconciliation from total revenues to cash operating netback has been provided below:
Three months ended December 31 |
Year ended December 31 |
|||||||
($millions, except as indicated) |
2021 |
2020 |
2021 |
2020 |
||||
Total revenues |
$ |
1,307 |
$ |
786 |
$ |
4,321 |
$ |
2,292 |
Diluent & transportation expense |
(532) |
(362) |
(1,748) |
(1,210) |
||||
Purchased product |
(241) |
(197) |
(828) |
(613) |
||||
Operating expenses |
(98) |
(74) |
(309) |
(232) |
||||
Curtailment |
— |
— |
— |
2 |
||||
Cash operating netback before realized commodity risk management |
436 |
153 |
1,436 |
239 |
||||
Realized gain (loss) on commodity risk management |
(91) |
11 |
(314) |
343 |
||||
Cash operating netback |
$ |
345 |
$ |
164 |
$ |
1,122 |
$ |
582 |
Blend Sales and Bitumen Realization
Blend sales and bitumen realization are non-GAAP financial measures, or ratios when expressed on a per barrel basis, and are used as a measure of the Corporation’s marketing strategy by isolating petroleum revenue and costs associated with its produced and purchased products and excludes royalties. Their terms are not defined by IFRS and, therefore, may not be comparable to similar measures provided by other companies. These non-GAAP financial measures should not be considered in isolation or as an alternative for measures of performance prepared in accordance with IFRS. Blend sales per barrel are based on blend sales volumes and bitumen realization per barrel is based on bitumen sales volumes.
Petroleum revenue, net of royalties, is an IFRS measure in the Corporation’s consolidated statement of earnings (loss) and comprehensive income (loss), which is the most directly comparable primary financial statement measure to blend sales and bitumen realization. A reconciliation from petroleum revenue, net of royalties to blend sales and bitumen realization has been provided below:
Three months ended December 31 |
Year ended December 31 |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
($millions, except as indicated) |
$/bbl |
$/bbl |
$/bbl |
$/bbl |
||||||||||||
Petroleum revenue, net of royalties |
$ |
1,280 |
$ |
770 |
$ |
4,222 |
$ |
2,235 |
||||||||
Royalties |
32 |
2 |
76 |
9 |
||||||||||||
Petroleum revenue |
1,312 |
772 |
4,298 |
2,244 |
||||||||||||
Purchased product |
(241) |
(197) |
(828) |
(613) |
||||||||||||
Blend sales |
1,071 |
$ |
82.43 |
575 |
$ |
45.75 |
3,470 |
$ |
72.20 |
1,631 |
$ |
37.65 |
||||
Diluent expense |
(425) |
(11.37) |
(235) |
(7.11) |
(1,369) |
(9.73) |
(807) |
(10.42) |
||||||||
Bitumen realization |
$ |
646 |
$ |
71.06 |
$ |
340 |
$ |
38.64 |
$ |
2,101 |
$ |
62.47 |
$ |
824 |
$ |
27.23 |
Transportation and Storage Expense net of Transportation Revenue
Transportation and storage expense net of transportation revenue is a non-GAAP financial measure, or ratio when expressed on a per barrel basis. Its terms are not defined by IFRS and, therefore, may not be comparable to similar measures provided by other companies. This non-GAAP financial measure should not be considered in isolation or as an alternative for measures of performance prepared in accordance with IFRS. Per barrel amounts are based on bitumen sales volumes.
It is used as a measure of the Corporation’s marketing strategy by focusing on maximizing the realized AWB sales price after transportation and storage expense by utilizing its network of pipeline and storage facilities to optimize market access. Per barrel amounts are based on bitumen sales volumes.
Diluent and transportation expense, is an IFRS measure in the Corporation’s consolidated statement of earnings (loss) and comprehensive income (loss), which is the most directly comparable primary financial statement measure to transportation and storage expense. A reconciliation from diluent and transportation expense to transportation and storage expense has been provided below.
Other revenue, is an IFRS measure in the Corporation’s consolidated statement of earnings (loss) and comprehensive income (loss), which is the most directly comparable primary financial statement measure to transportation revenue. A reconciliation from other revenue to transportation revenue has been provided below.
Three months ended December 31 |
Year ended December 31 |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
($millions, except as indicated) |
$/bbl |
$/bbl |
$/bbl |
$/bbl |
||||||||||||
Diluent and transportation expense |
$ |
(532) |
$ |
(362) |
$ |
(1,748) |
$ |
(1,210) |
||||||||
Less diluent expense |
425 |
235 |
1,369 |
807 |
||||||||||||
Transportation and storage expense |
$ |
(107) |
$ |
(11.77) |
$ |
(127) |
$ |
(14.46) |
$ |
(379) |
$ (11.28) |
$ |
(403) |
$ |
(13.32) |
|
Other revenue |
$ |
27 |
$ |
16 |
$ |
99 |
$ |
57 |
||||||||
Less power revenue |
(23) |
(13) |
(87) |
(45) |
||||||||||||
Transportation revenue |
$ |
4 |
$ |
0.38 |
$ |
3 |
$ |
0.35 |
$ |
12 |
$ 0.35 |
$ |
12 |
$ |
0.40 |
|
Transportation and storage expense net of transportation revenue |
$ |
(103) |
$ |
(11.39) |
$ |
(124) |
$ |
(14.11) |
$ |
(367) |
$ (10.93) |
$ |
(391) |
$ |
(12.92) |
Operating Expenses net of Power Revenue
Operating expenses net of power revenue is a non-GAAP financial measure, or ratio when expressed on a per barrel basis. Its terms are not defined by IFRS and, therefore, may not be comparable to similar measures provided by other companies. This non-GAAP financial measure should not be considered in isolation or as an alternative for measures of performance prepared in accordance with IFRS. Per barrel amounts are based on bitumen sales volumes.
It is used as a measure of the Corporation’s cost to operate its facilities at the Christina Lake project after factoring in the benefits from selling excess power to offset energy costs.
Non-energy operating costs and energy operating costs are supplementary financial measures as they represent portions of operating expenses. Non-energy operating costs relate to production-related operating activities and energy operating costs reflect the cost of natural gas used as fuel to generate steam and power. Per barrel amounts are based on bitumen sales volumes.
Operating expenses is an IFRS measure in the Corporation’s consolidated statement of earnings (loss) and comprehensive income (loss). Other revenue, is an IFRS measure in the Corporation’s consolidated statement of earnings (loss) and comprehensive income (loss), which is the most directly comparable primary financial statement measure to power revenue. A reconciliation from other revenue to power revenue has been provided below.
Three months ended December 31 |
Year ended December 31 |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
($millions, except as indicated) |
$/bbl |
$/bbl |
$/bbl |
$/bbl |
||||||||||||
Non-energy operating costs |
$ |
(42) |
$ |
(4.56) |
$ |
(33) |
$ |
(4.70) |
$ |
(143) |
$ |
(4.24) |
$ |
(133) |
$ |
(4.38) |
Energy operating costs |
(56) |
(6.22) |
(41) |
(3.73) |
(166) |
(4.94) |
(99) |
(3.29) |
||||||||
Operating expenses |
$ |
(98) |
$ |
(10.78) |
$ |
(74) |
$ |
(8.43) |
$ |
(309) |
$ |
(9.18) |
$ |
(232) |
$ |
(7.67) |
Other revenue |
$ |
27 |
$ |
16 |
$ |
99 |
$ |
57 |
||||||||
Less transportation revenue |
(4) |
(3) |
(12) |
(12) |
||||||||||||
Power revenue |
$ |
23 |
$ |
2.58 |
$ |
13 |
$ |
1.45 |
$ |
87 |
$ |
2.58 |
$ |
45 |
$ |
1.49 |
Operating expenses net of power revenue |
$ |
(75) |
$ |
(8.20) |
$ |
(61) |
$ |
(6.98) |
$ |
(222) |
$ |
(6.60) |
$ |
(187) |
$ |
(6.18) |