Morningstar | Strong Quarter for 3-Star MEG Energy; Outlook Remains Unchanged
No-moat MEG Energy rebounded nicely from the fourth quarter. The company reported first-quarter funds flow from operations of CAD 151 million, which was above our expectations. The outperformance was driven by higher-than-expected bitumen realizations of CAD 50 per barrel, up from CAD 14/bbl in the fourth quarter. The increased realizations were driven by better market access to the U.S. Gulf Coast and a higher demand for heavy crude in that region. However, the increased realizations were partially offset by higher-than-expected operating and transportation costs. Operating costs were negatively impacted by the lower production associated with Alberta’s curtailments and came in at CAD 6.17/bbl compared with CAD 4.55/bbl during the fourth quarter. Transportation expenses increased to 11.27/bbl from 10.28/bbl sequentially as a result of shipping more production to the more attractively priced U.S. Gulf Coast market.MEG reported first-quarter production of 87.11 mbbl/d, which was below our expectations. The decreased production was driven by a higher-than-expected impact of Alberta’s mandatory production cuts. MEG maintained its full-year production in the range of 90-92 mbbl/d, which we believe is achievable and in line with our forecasts. 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 it's unlikely that the market will support additional supply.
Despite the better-than-expected cash flow, we are reiterating our long-term outlook for the company. We expect price realizations to decline as more supply is brought into the market and IMO 2020 is implemented. Accordingly, we are maintaining our CAD 6.50 fair value estimate and no-moat rating. The stock is trading at a 12% 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.
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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