Morningstar | Raising MEG Energy's FVE, but Stock Remains in 3-Star Territory
No-moat MEG Energy reported second-quarter production of 71.3 thousand barrels of oil per day, which was below our expectations. We previously lowered our second-quarter production forecast due to planned maintenance at Christina Lake. However, the maintenance took more production off-line during the quarter than we anticipated. Despite the lower-than-expected production, MEG increased its annual production target to 87-90 mbbl/d from its previous target of 85-88 mbbl/d. Our full-year forecast of 88.9 mbbl/d is unchanged, but we did increase our production forecast for the back half of the year. Furthermore, Christina Lake averaged over 98 mbbl/d for July, and MEG expects 2018 exit production to average over 100 mbbl/d.MEG also reported near-record-low operating costs of CAD 5.47 per barrel, which included higher-than-expected power sales. Excluding power sales, operating costs were roughly in line with our expectations. The company also lowered its full-year nonenergy operating cost guidance to CAD 4.50-CAD 5.00 per barrel from the previous range of CAD 4.75-CAD 5.25.
We are raising our fair value estimate on MEG Energy to CAD 7 from CAD 6 on our increased near-term commodity price forecasts and our forecast for slightly lower costs than we had previously expected. Despite our increased estimate, the stock remains 25% above our fair value estimate. The West Texas Intermediate benchmark is now more than 15% above our midcycle estimate, due to surprisingly sluggish shale growth and above-average near-term supply disruptions. But these are temporary barriers, in our view. At this time, we recommend that investors remain on the sidelines. Furthermore, we are maintaining our no-moat rating.
For a detailed look into the Canadian crude and pipeline trends, please refer to our September Energy Observer, "Don't Overlook Oil Sands: Falling Costs and More Infrastructure Will Make Canadian Production Globally Competitive."
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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