Significantly Undervalued: MEG Energy Corp. (TSX: MEG) focuses on sustainable in situ thermal oil production.  The company transports and sells Access Western Blend ("AWB" or "blend") to refiners in North America and internationally.

Outlook: For the H1FY20, MEG expects production of 76,000 bbls/day while non-energy operating cost is expected within the range of CAD 140 million to CAD150 million. For FY20, the company revised its capital expenditures guidance to CAD 150 million, down from CAD 200 million. Full-year G&A expense guidance is reduced 16% from earlier guidance and is expected within the range of CAD 52.5 to CAD 55 million.

Q1FY20 Financial Highlights: MEG declared its quarterly results, wherein, the Group reported a significant decline in revenue of CAD 665 million, as compared to CAD 919 million in pcp. The decline was due to the sharp fall in the crude oil prices.  The Company’s bitumen averaged realization stood at CAD 19.45 per barrel as compared to CAD 46.86 per barrel in the previous quarter. Total Bitumen production averaged 91,557 bbls/day during the quarter, down from 94,566 bbls/day in the Q4FY19 due to extreme cold weather conditions coupled with a planned halt in maintenance activities and lower operational performance due to COVID 19 crisis in March 2020. Due to the lower realization and slowdown in operational activities, the Company’s adjusted funds flow took a hit and plunged to CAD 78 million from CAD 157 million in the previous quarter (Q4FY19). The Company registered a 6% q-o-q decline in net operating costs which averaged CAD 5.51 per barrel while non-energy operating costs averaged at CAD 4.57 per barrel, as compared to CAD 4.49 per barrel in the fourth quarter of FY19. Net loss widened to CAD 266 million, from CAD 52 million in the previous corresponding period.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The MEG stock corrected ~48% in the last one year due to the sharp decline in the international crude oil prices. Due to the COVID-19 pandemic, the industry witnessed a major fall in crude oil demand across the globe with oil producers are lingering with excess inventory resulting in price deterioration of crude oil and other petroleum products. We expect weak macro environment and lower price realization to continue to remain a drag. However, MEG seems to have ample liquidity to weather the COVID-19 crisis with no immediate debt maturities, which is encouraging. Despite the recent recovery in the stock, it still down by about 60% so far this year. With most of the negatives priced in the stock, MEG appears to be a strong recovery play. MEG stock is likely to recover as economic conditions improve and oil prices rise. The stock is currently trading at a forward EV/Sales multiple of 1.7x against the industry average (Oil and Gas) of 2.5x. However, given the recent price volatility in MEG’s stock prices, we recommend a ‘Speculative Buy’ on the stock at the closing market price of CAD 2.91 on May 4, 2020.

MEG One-Year Daily Price Chart (Source: Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.