MEG Energy Corp

TSX:MEG

Good morning. My name is Vincent, and I'll be your conference operator today. At this time, I would like to welcome everyone to the MEG Energy's 2025 Q1 Results Conference Call. [Operator Instructions] Thank you. Ms. Darlene Gates, CEO, you may begin your conference. Thank you, Vincent.

Good morning, everyone, and thank you for joining us to review MEG Energy's First Quarter 2025 Financial and Operating results. I'm joined this morning by members of our senior management team, Ryan Kubik, our Chief Financial Officer; Tom Gear, our Senior Vice President of Oil Sands; Erik Alson, our Senior Vice President of Marketing; and Lyle Yuzdepski, our Senior Vice President of Corporate Development and Legal.

I'll begin the call with opening remarks and an update on our first quarter business performance, and then I'll hand it over to Ryan for a discussion of our financial results. I'll conclude with comments on the business environment and our outlook for the remainder of 2025 before taking your questions. MEG had a strong start to 2025. Our strategy of sustainably growing capital returns has led to a 24% increase in funds from operations per share in the first quarter. After funding capital expenditures, strong bitumen production and pricing, we generated $223 million of free cash flow during the quarter, allowing us to deliver $185 million of capital to our shareholders. The work we've done over the past few years establishes a strong financial foundation and lays the groundwork for the next phase of production growth.

MEG remains in an enviable position to deliver substantial growth in free cash flow per share even through uncertain commodity price environment. With oil prices under pressure, we remain focused on maintaining flexibility and discipline. Our low breakeven price ensures we are well positioned, and we have the ability to adjust spending as needed. We'll continue to balance capital allocation between prudent investments in our business, share buybacks and dividends to deliver long-term value to shareholders throughout the commodity price cycle. In the first quarter, Edmonton WTI to WCS differentials tightened to $12.67 per barrel from $19.31 in the first quarter of 2024. This represents a 34% improvement.

Our realized bitumen price benefited from our strategy of diverse market access and tight differentials in all of MEG's market areas, which reflect continued strength in global heavy crude demand. Production was 103,224 barrels per day, consistent with our guidance and delivered at a steam-to-oil ratio of 2.28. Production increased 3% versus the prior quarter, driven by the successful ramp-up of our newest well pad. Strong performance from this new pad contributed to a 5% reduction in steam-to-oil ratio compared to the prior quarter, again, validating both our high-quality resource and enhanced well designs. Work on our facility expansion project also continued in the first quarter.

Engineering and procurement work are well underway and early construction activities have been kicked off in the field. The project delivers attractive internal rates of return across a range of commodity price scenarios, underscoring its robustness even in today's volatile market conditions. It also provides us with the necessary flexibility and optionality to manage our operating and spending plans in a dynamic market environment. Looking ahead, our 2025 production, capital and operating guidance remains unchanged. We are currently focused on our second quarter turnaround, which commenced April 24, and I'm pleased to share the team has communicated is going well and remains in line with our expectations.

Prior to ramp down, April month-to-date production averaged over 107,000 barrels per day, which highlights the continued performance of our latest well pads and positions us to deliver on a strong second half of 2025. I am very proud of our team and the work they do every day to deliver our operations and project activities safely and efficiently.

With that, I'll turn the call over to Ryan to provide more details on our financial results.

Thanks, Darlene. MEG's first quarter operating expenses net of power revenue continue to be strong at $7.90 per barrel, including nonenergy operating costs of $5.84 per barrel. Process training costs increased as expected with the start-up of our most recent well pad and nonenergy operating costs will decline into our guidance range as production rises following our Q2 turnaround. Capital expenditures in the first quarter increased to $157 million from $112 million in Q1 of last year, primarily reflecting facility infrastructure costs and investments in our facility expansion project.

In Q1, we generated $380 million of funds from operations, an increase of 15% from the first quarter of 2024. This cash flow provides the ability to sustain our business while maintaining a strong balance sheet and paying a sustainable dividend and buying back shares. Thanks to those disciplined share buybacks, we delivered a 24% increase in funds from operations per share as we reduced the weighted average number of shares outstanding. This approach shows the benefits of leveraging our operating results by returning cash to shareholders. And this quarter, we continued with that strategy.

Free cash flow after all sustaining and growth investments was $223 million. And during the quarter, we returned $185 million to shareholders with $159 million in buybacks and $26 million in dividends. Those share repurchases equate to approximately 3% of our outstanding balance at the start of the year. Our commitment to shareholder returns continues and MEG's Board of Directors has declared our next quarterly dividend of $0.10 per share for payment on July 15, 2025.

Thanks. And with that, I'm going to turn the call back over to Darlene for closing comments.

Thank you, Ryan. I'll leave my remarks with some final comments. OPEC+ production management decisions and geopolitical tensions are driving market volatility, creating uncertainty and exerting downward pressure on oil prices. We've successfully navigated these cycles before, possess the expertise to manage them effectively and will maintain our disciplined focus on the variables within our control. Our premium asset quality, naturally low decline rates, industry-leading operational efficiency deliver a competitive breakeven price. It also strategically positions us to withstand commodity price fluctuations.

Importantly, global demand for reliable, affordable energy remains strong, and the long-term fundamentals for Canadian heavy oil continue to demonstrate resilience. Should market conditions necessitate, we will adjust spending as needed, prioritizing long-term value while ensuring operational and financial resilience.

Before we open it up for questions, I want to thank the entire team again for their hard work. I also want to express my gratitude to our shareholders for your continued support and confidence in our ability to navigate the current business environment and create long-term value.

With that, I'll turn the call back over to Vincent to begin the Q&A.

[Operator Instructions] Your first question comes from Greg Pardy with RBC Capital.

Darlene, I was hoping maybe we could just dig into that a little bit more. I mean I was going to ask you, how do you think about agility and prudence? And then maybe just specifically related to that, I mean, I think you have plenty of off-ramps with respect to the multiyear facility expansion. But I'm just wondering, any color there and thoughts would be appreciated.

Greg, thanks for the questions. Catch me if I miss anything that in your -- in your questions here. Let's start with your first one about agility and prudence at MEG. Very important question for us, and we're spending a lot of time ensuring people understand the plan. Take us back to the strategy when we rolled the strategy out for MEG back at the business update. We communicated at that time is designed to be flexible in a dynamic market environment. Today, you don't roll out projects without stress testing them under various price environments. That has strategically positioned us to know how to handle the project in various environments. We built optionality into the capital program, and that's enabled agility in the lower price environment and to protect our balance sheet strength.

The prudent part is about we can pace the facility expansion project as needed, that's prioritizing long-term value, bringing us back to that focus and that fundamental. We also will not borrow, we continue to reinforce. We will not borrow to fund the facility expansion project. Putting all this back right back to the analysis that we did back in November, we can fully fund this project and our dividend over the next 3 years at USD 53 per barrel WTI and $13 diffs. That gives us a lot of resiliency and clearly allows us to manage and navigate our balance sheet. How did we get here? Again, it's just the fundamentals of all the hard work over the last several years.

Strong balance sheet, it's derisked the current differentials in the [indiscernible] as you look at the business fundamentals, even in a $50 per barrel WTI environment, we can maintain the 2025 dividends, maintain our capital program and execute meaningful additional share buybacks, right? So when you put that all together, we feel very confident in our communication right now to continue forward. Now having said that, if we need to have communicated, if we have to, we can adjust. And I think that's where you're going with the off-ramps, what are those available to us. And that's that optionality that's built into this expansion project. So if you focus on 2025, we're really in a stage of detailed engineering and execution right now.

Mostly, you're focused on a little bit of field construction with the steam generator, and that starts to happen in August or third quarter of this year, okay? So your construction component really doesn't happen until the third quarter and fabrication does not really begin until the fourth quarter with the modules and on the third processing. So that allows us the flexibility to continue to monitor the market give us off-ramps enough and pace the program based on what we're experiencing in the external market. With that, we have that ability to make those choices of whether to continue with the steam generator first and try to get that executed with some pacing on the processing train or pace both of them. And again, we'll manage that as we do beyond that.

Okay. No, that's a very thorough answer. And hopefully, I only asked one question, but the follow-up here was just on the ops side. So I mean, the only thing that stood out in your numbers was maybe just a little higher nonenergy OpEx. I'm curious as to how much of that is temporary and really related to the additional well pads that are coming on. And then the unplanned maintenance you flagged in the report, was that just simply a function of cold weather, and that's it for me.

Thanks, Greg. We'll let you have this one. Nonenergy operating costs in the first quarter, as you mentioned, was really expected increase because of the new pad. So yes, no different message than that. That will equalize out through the year as we increase our production with our fixed cost structure. So we expect that to be equalized and as I mentioned, will be within guidance on OpEx. Cold weather was not an impact for us. It was a onetime event in February with a motor that failed. So no impact from the cold weather. The team has been, again, put an intense focus on that management in the January and February period from learnings of past years, and they executed exceptionally through the cold weather period. So very proud of them.

I'll hand it over to Tom, if he has anything additional he wants to add in there from what I shared.

Yes. No, for sure. Thank you, Darlene. Really with the OpEx, as Darlene mentioned, it's very much expected as we bring on new pads and new wells and those fluctuate through each year. And yes, really exceptional response of the operation and the people through a cold weather period that we experienced. But as mentioned, the teams have been doing a lot of work around ensuring we do appropriate winterization and definitely in response to knowing it will get cold snaps through that period.

Your next question comes from John Royall with MEG Energy. Next question with Neil Mehta with Goldman Sachs.

Just wanted to follow up on some of Greg's questions around capital allocation. Fits in the prioritization. In the November summary, you talked about maybe 40% of your cash flow being available for buybacks. But given the $53 WTI breakeven, obviously, there's a little bit less flexibility there. So how do you think about whether you're willing to take on a little bit of debt to fund the buyback and how that fits in terms of the priority stack, especially given the discounted valuation that your stock trades at?

Thanks, Neil, for the question. I'll start with just a couple of comments there and then pass it over to Ryan. I'll just start with the foundation. We will not borrow. Our intent and our strategy does not include borrowing to buy share buybacks during this environment. It's a good question. It's something that, again, we continue to evaluate. But again, not -- our strategy is not to increase our debt.

I'll hand it over to Ryan to go into a bit more of the detail on our strategy to give him some sound signs.

Yes. I mean, fundamentally, we certainly want to -- it's taken us a long time to get the balance sheet to where it is today. And we certainly want to preserve that balance sheet, keep our strong, resilient business going here, especially in this challenging commodity price environment. So Darlene hit it, we don't intend to borrow to fund any share buybacks. We will continue to return 100% of that free cash flow to shareholders. Foundation of that is a small dividend we're paying with a real emphasis on buying back stock. And we do continue to expect, even though you're seeing lower free cash flow today, you are seeing lower share prices.

So we do expect to buy back a significant portion of the shares outstanding this year even under today's lower commodity prices. And offsetting that commodity price, obviously, we're seeing a little bit weaker Canadian dollar. And we are seeing some strength in the WCS differential, which offsets the WTI impact, Neil, that maybe you're thinking about.

Yes. And maybe just, Neil, before we jump to the next question, I think just to finish that one off, even at a $50 per barrel WTI environment, we still have a strong meaningful addition of share buybacks in the second half of 2025, even at that price environment.

Okay. And actually, the follow-up is on WCS differentials. I know last quarter, we were all asking you how are you going to navigate a blowout in the dips. And today, we're looking here at differentials that have been averaging 9 or 10 under in PADD 2. Just curious on your thoughts on the path from here on WCS and your marketing strategy to ensure that you're capturing that relative strength, at least at WCS?

Thanks, Neil. It's Erik. With unconstrained egress, we continue to see WCS differentials in the $9 to $14 range. As you mentioned, we're seeing tight differentials now currently sitting in that $9 range for the May and June time frame with the second half of the year looking very supportive at roughly $12. Heavy seller crude supply remains tight and global demand remains strong. With that, as we think about our -- the markets that we serve, we'll continue to be agile in terms of how we place barrels in the markets with the best netbacks. But really, as we look across our marketing areas right now, I'd say all the differentials in those areas remain tight and very constructive.

Next question comes from Dennis Fong with CIBC.

My first one is really just related to the production operations here. Within the press release, you've discussed a little bit about the derivation of lower SOR reflecting kind of improved reservoir quality as well as optimized well design. Can you talk towards kind of the evolution of the well design and how you think you're able to capture barrels more efficiently and lower SORs?

Dennis, we've talked about this consistently about the completion design of our pads and ensuring that our steam is getting out effectively and out to the resource. As the team has continued to optimize that design, the effectiveness of the steam has continued to improve. And so heating the reservoir, if you put it in simple language, heating the reservoir more effectively and efficiently and allowing increased turnaround start-up of our pads, so they're able to start the pads up because they've heated up the reservoir more efficiently and effectively. That allows us to get a higher peak rate when we start up the pad. And then, of course, then that performance of the lower steam-to-oil ratio comes as a result of that.

The second component is around the resource and the development plans that the team has focused on. They're targeting through their delineation program using technology, using their insights and intel from their delineation programs to help prioritize the placement of wells, the prioritization of pads and where to develop the resource. And you're seeing that transition from both the Southeast of the reservoir to also the Northwest. We've spent time in our business update helping people understand what we're so excited about as we look forward to the next development of our pads. The first pad that we just mentioned that started up this -- it was delayed from last year from the wildfires that started up this year.

Again, just exemplifying the work that the team has been doing by hitting it from very different angles from both the resource development through the technology, the completion and drilling design to then the production into the asset. And when you put that all together, you're seeing industry-leading performance on this latest pad. And we're excited, again, the delineation program from this year looks really promising and the future looks good.

Great. I appreciate that color. Turning my focus towards turnarounds. I know in the business update, your team discussed the potentially extending time between turnarounds, especially as you implement the Christina Lake growth plan as well. Can you talk about some of the smaller things that you're doing to maybe optimize turnaround duration and become a little bit more efficient in terms of downtime as well as pace of work and maybe turnaround scope as well and just how that relates back to costs and kind of, again, managing uptime from Christina Lake?

Thanks, Dennis, for the question. This is Tom here. Yes, there's been a lot of work being done by the teams to both be more planful in these turnarounds, more preparation is key in these things to be able to then optimize the scope to risk manage what gets done each turnaround. I think that's been the single largest focus on the asset right now is -- we know how to do these. It's a question of being able to make sure it's the right scope at the right time. And that's key for the teams as they progress through this. And also looking at how we do that work, there's times when it's actually not the best to do it in a turnaround window and how you can optimize that outside of turnaround.

So I'd say there's been a key focus on being able to rightsize these turnarounds. And at the same time, the work being done in this turnaround specifically is towards that strategy we talked about in the business update, which is being able to assure being -- extending the turnaround every 4 years. And so those are a lot of the key pieces. And then on top of all that, when you talk about what are they doing to deal with the scope and improve within there's use of technology. And technology is everyone is getting an angle on what can we do to increase the speed and efficiency of executing those turnarounds through a number of technologies on inspection and any repairs that come up. So those are the 3 key buckets.

There are no further questions. Please continue.

Thank you, Vincent, and thank you to everybody that joined us this morning for our first quarter results conference call. We are excited about the strong start to 2025 and look forward to updating you on our operational performance and return of capital program when we release our second quarter results in July. Take care, everyone, and have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.