MEG Energy Corp. (TSX: MEG) is a Canada-based company which is engaged in situ oil sands development and production from Christina Lake Project.

Key Updates:

• Lengthy Cash conversion period: In FY21, the company reported a higher cash conversion period of 49.5 days, which is significantly higher than the industry median of 3.2 days. This remains a key challenge for the company as it denotes that the company is take ample time to convert its investments to cash flows when compared to the industry median.

• Weak Margin Profile: The company is struggling with higher input costs, which has put pressure on its margins. In FY21, the company’s EBITDA margin and operating margin stood at 31.4% and 13.6%, respectively, as compared to the industry median of 44% and 26.3%, respectively. Moreover, the company reported a lower net margin of 6.5% in FY21, as compared to the industry median of 11.4%.

• Management Update: On March 16, 2022, the company announced the retirement of Eric L. Toews from the post of Chief Financial Officer with effect from September 01, 2022.

• Improved production volumes: In Q4FY21, the company reported a higher production 100,698 bbls/day, grew from 91,030/bbls/day in pcp, supported by strong demand dynamics across the sector.

Stock Recommendation:

The company reported its D/E of 0.80x in FY21, as compared to the industry median of 0.57x, which indicates lower financial flexibility. Moreover, long-term debt in terms of total capital stood at 39.8% in FY21, higher than the industry median of 27.3%, which indicates higher balance sheet risk. The stock of MEG is available at price to cash flow multiples of 3.2x on NTM basis, as compared to the industry (Energy) median of 2.0x. Considering the aforesaid facts, we recommend a ‘Watch’ stance on the stock of MEG at the last closing price of CAD 18.94 on April 21, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on April 21, 2021). Source: REFINITIV, Analysis by Kalkine Group

Investors can evaluate the stock based on the support and resistance levels provided in the report in case of keen interest taking into consideration the risk-reward scenario.

Disclaimer

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