MEG Energy Corp. has reported full-year 2018 results. 
 
"While 2018 saw strong operational successes, the challenging commodity price environment, particularly during the fourth quarter, hindered bitumen realizations and adjusted funds flow for the company. Notwithstanding commodity price volatility and significant organizational changes, MEG's solid foundation remains intact. Our world class 100,000 barrels per day operations tied to an exceptional resource base, our dedicated workforce, and our well-structured balance sheet, enables us to move forward with a renewed business focus," says Derek Evans, President and Chief Executive Officer. "In the current commodity price environment, financial discipline and balance sheet protection takes precedence over production growth. MEG's 2019 base capital investment plan of $200 million signals our commitment to living within our means, while retaining the flexibility to pursue debt reduction and advance profitable development in line with market conditions to realize long-term sustainable returns going forward. Based on current strip pricing, we expect our Net Debt to LTM EBITDA to come into the range of 3.50x to 3.75x by the end of 2019."

Operational and financial highlights in 2018 include:

• The appointment of Derek Evans to Chief Executive Officer in August 2018;
• Closing of the sale of MEG's 50% interest in the Access Pipeline and its 100% interest in the Stonefell Terminal for cash proceeds of $1.52 billion and other consideration of $90 million, and the repayment of $1.2 billion of the Corporation's senior secured term loan in the first quarter of 2018; 
• Record bitumen production volumes of 87,731 barrels per day (bbls/d) and a record low steam-oil-ratio (SOR) of 2.19, compared to 2.30 in 2017;
• Record low per barrel net operating costs of $5.09 per barrel, including low non-energy operating costs of $4.62 per barrel, compared to guidance of $4.50 to $5.00 per barrel; 
• Total cash capital investment of $619 million, $51 million below the revised guidance, primarily focused on advancing the Phase 2B brownfield expansion and the successful application of MEG's proprietary reservoir enhancement technology eMSAGP on Phase 2B, increasing overall production capacity from 80,000 to 100,000 bbls/d;
• Adjusted funds flow of $180 million or $0.60 per share, impacted by the significant widening of the WTI:WCS differential during the fourth quarter; and
• Year-end cash and cash equivalents of $318 million, which along with expected adjusted funds flow, will more than enable MEG to fully fund its 2019 capital program.

"In response to the challenging, short-term volatility in commodity prices during the fourth quarter, the company preserved its liquidity by restricting the number of barrels it sold into an unprofitable market environment. We accomplished this by moving forward a portion of our 2019 turnaround into November, voluntarily reducing production during the month of December, and ramping up the use of rail to sell our product into higher-priced markets," says Derek Evans. "Since January, in conjunction with the provincially mandated curtailments for the industry and the increase in overall crude by rail exports, commodity prices have improved significantly, and our barrels have returned to profitability. Our objective of generating free cash flow in 2019 remains intact."  

Bitumen production in the fourth quarter of 2018 averaged 87,582 bbls/d as a result of the Corporation's direct response to mitigate the effects of the significant widening of the WTI:WCS differential by voluntarily curtailing production. 2018 Bitumen production averaged 87,731 bbls/d compared to 80,774 bbls/d in 2017. The increase in average production volumes for the year ended December 31, 2018 was primarily due to the efficiency gains achieved from eMSAGP at the Christina Lake Project. 

Net operating costs for the fourth quarter of 2018 averaged $4.55 per barrel, supported by near-record low non-energy operating costs of $4.25 per barrel. The Corporation realized record low net operating costs of $5.09 per barrel in 2018, 26% below the record of $6.84 per barrel achieved in the prior year. The decrease in net operating costs was primarily the result of a per barrel decrease in energy operating costs and an increase in per barrel power revenue. Non-energy operating costs averaged $4.62 per barrel for each of the years ended December 31, 2018, and 2017.

Capital Investment 

Total cash capital investment in 2018 totaled $619 million, compared to $503 million in 2017 and the previously revised guidance of $670 million announced in August 2018. Capital investment in 2018 was primarily directed towards completing the rollout of eMSAGP on Christina Lake Phase 2B, advancement of the Corporation's Phase 2B Brownfield expansion and sustaining and maintenance activities.

Outlook

Announced in January, MEG's 2019 capital investment plan includes a base capital budget of $200 million, designed to sustain production capability at 100,000 bbls/d and advance growth projects beyond 2019.  While MEG has the ability to average 100,000 bbls/d of production, the Corporation's 2019 production guidance of 90,000 to 92,000 bbls/d reflects the impact of the Alberta Government's mandated production curtailment, with the assumption that it eases throughout the year. Subject to market conditions, the Corporation has the option to layer in discretionary capital spend of $75 million in 2H19 to support highly economic production growth to 113,000 bbls/d by early 2021. 

General and administrative (G&A) expense averaged $2.58 per barrel in 2018, a 12% decrease from $2.94 per barrel in 2017. To align with lower levels of capital spending and to further optimize operational efficiencies, the Corporation made the difficult decision to reduce its staffing levels in February. Based on the current production guidance, MEG anticipates 2019 G&A costs of $1.95 to $2.05 per barrel.  

Unsuccessful Take-Over Offer from Husky

On October 2, 2018, Husky Energy Inc. made an unsolicited offer directly to MEG shareholders to acquire all of the issued and outstanding common shares of the Corporation.  At expiry on January 16, 2019, the offer did not meet minimum tender conditions and Husky chose not to extend its offer. 

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