Morningstar | MEG Energy’s Upside Is Hampered by Its Extreme Uncertainty
After taking a fresh look at no-moat MEG Energy’s fourth-quarter results we are lowering our fair value estimate to CAD 6.50 from CAD 7 driven by our lower forecasts for the company’s near-term price realizations. The stock is trading at a 20% discount to our fair value estimate, but it remains in 3-star territory due to its extreme uncertainty. At this time, we recommend that investors remain on the sidelines.As a reminder, MEG reported fourth-quarter bitumen realizations of CAD 13.90 per barrel, down 70% from the third quarter and below our expectations. We expected rail shipments to have a more positive impact on the company’s bitumen pricing since heavy oil has been selling at higher prices in the U.S. Gulf Coast. However, only half of the company’s 14.7 mbbl/d rail shipments went to the Gulf Coast. The company expects rail shipments to increase to 20 mbbl/d during the first quarter and to 30 mbbl/d during the third quarter of the year. MEG believes that bitumen realizations are on the rise with the increased rail shipments coupled with the heavy oil discount averaging $11 per barrel in the first quarter to date.
MEG reported fourth-quarter production of 87.6 mbbl/d, which was below our expectations. The decreased production was driven by higher-than-expected voluntary production curtailments at Christina Lake in an attempt to mitigate the historic widening of the heavy oil discount. Turning to 2019, MEG expects full-year production in the range of 90-92 mbbl/d, which we believe is achievable. However, the company has the capability to ramp up to 100 mbbl/d if conditions warrant. With the delay in Line 3 and peers bringing on expansion projects, we think its unlikely that the market will support additional supply.
On a positive note, MEG reduced its non-energy costs to CAD 4.25/bbl, which was down 3% sequentially and near its all-time quarterly low. The company continues to lower its costs with the application of its eMSAGP technology.
For a deeper look into the Canadian crude market and the investment implications, please refer to our January 2019 Energy Observer, "Pipeline Expansions Are Canada's Lifelines."
MEG Energy is engaged in a steam assisted gravity drainage oil sands development at its 80 section Christina Lake Regional Project. As of Dec 31 2010, Co. had total proved bitumen reserves of 605.9 gross thousand barrels (470.5 net thousand barrels).
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