Canadian oil sands company MEG Energy revised its full-year 2020 average production guidance upward based on better-than-expected performance after a planned turnaround at its Christina Lake Phase 1 and 2 facilities, completed in August, its top executive said Oct. 27.
The company now expects production of 81,000-82,000 b/d of oil, up 2.5%-4% compared to a prior estimate of 78,000-80,000 b/d.
MEG produced 71,516 b/d in the third quarter. The Christina Lake turnaround, completed in August, lasted 75 days.
MEG is using all means to manage prudently through the ongoing industry downturn caused by low oil prices related to the coronavirus pandemic, CEO Derek Evans said in webcast remarks during the company's third-quarter conference call.
"As we head into year-end, we're increasing annual production guidance, decreasing annual [general and administrative expenses] ... and expect to build free cash flow through the balance of the year with 80% of our fourth-quarter WTI sales exposure hedged at approximately USD $46/barrel," Evans said.
Between its hedges and the financial liquidity built into its credit facility terms, the company has low decline and low-cost production from Christina Lake, he said.
New technology at Christina Lake
Costs at the oil sands facility could be lower going forward based on new technology that Evans said has "significant potential" to reduce diluent requirements.
"That equipment is being commissioned as we speak," he said. "And we hope that over the next couple of months, we're going to ... see whether the bench scale testing that was done showed a significant reduction in the requirement of diluent to meet pipeline viscosity actually is borne out in the field."
The company realized an average AWB blend sales price of $34.13/b in Q3, compared to $15.12/b three months earlier, Evans said.
MEG also sold 62% of its sales volumes to the US Gulf Coast in Q3, compared with 35% in Q2, with the quarter-to-quarter increase attributable to the company's increased contracted transportation capacity on Flanagan South and Seaway pipeline systems starting July 1, and increasing to 100,000 b/d from 50,000 b/d.
As consolidation continues to build within the upstream sector, with the most recent $2.9 billion acquisition of Husky Energy by Cenovus announced Oct. 25, MEG's priorities are more mundane, Evans said. The company intends to protect its business from a vulnerable position to oil price volatility, which he added is the "stated driver" of recent transactions.
Otherwise, "we're going to just continue doing what we've been doing for the last 10 years," Evans said, suggesting he did not see consolidation for MEG on the immediate horizon.
He noted that after Cenovus-Husky closes in early 2021, MEG will be the only pure-play steam-assisted gravity drainage producer of scale.
While in the last few trading days the WCS-WTI differential has widened to about $11/b, overall it has pulled in to around the $10/b level since August when it was a couple of dollars higher.
'Constructive' on forward WSC volatility
In addition, the company remains "constructive" on WCS volatility going forward, said Evans.
For one thing, Enbridge Line 3 expansion continues to move forward, with the line expected in service during H2 2021, while the Trans-Mountain Expansion pipeline project should start up in 2022, he noted.
MEG has 20,000 b/d of blend capacity on TME, as well as 100,000 b/d of capacity on Flanagan South Seaway.
Also, the Alberta government's recent elimination of production curtailments is "further evidence of the positive momentum" for light-heavy differentials and WCS pricing, Evans said.
"We believe the WTI-WCS differential is actually in the process of shrinking as more pipeline capacity becomes available," he said. "And we're very encouraged about ... what that does for the long-term prospects for somebody like ourselves – a pure-play WCS player."
The company anticipates releasing its 2021 capital budget in early December, which will be designed to fully fund its financial needs with internal cash flows.
Investment bank Tudor Pickering Holt estimates the company breaks even on a C$250 million sustaining budget at $42/b WTI on a $14/b WCS differential.
Evans said MEG's WTI breakeven oil price is in the mid-$40s/b, naming $45/b as a rough figure.
"At strip [prices], we see the company generating around $15 million of free cash flow in Q4 2020, leading to full year 2020 estimated free cash flow about $100 million," Phil Skolnick, an analyst with Eight Capital Research said in an Oct. 27 investor note. "We believe [that] speaks volumes to how much work has been done to improve the cost structure of the company."
