MEG Energy Corp.

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 Highlights:

• Encouraging FY21 guidance: The company expects its FY21 Bitumen production to remain between 91,000 – 93,000 bbls/day, higher than 82,441 bbls/day in FY20. Non-energy operating costs are expected in between CAD 4.40 – CAD 4.60 / bbl. The growth is driven by better-than-expected reservoir performance, short-cycle investments and high uptime. Moreover, the company has reduced its non-energy opex and G&A guidance primarily due to a result of higher production, specific temporary costs savings during H1FY21. Notably, general & administrative costs are expected in between CAD 1.65 – 1.75 / bbl.
• Growth in funds flows and cash flows: The group reported strong operational performance in H1FY21, which led to higher funds flow from operations of CAD 281 million in H1FY21, as compared o CAD 138 million in pcp. Notably, free cash flow jumped to CAD 153 million, from CAD 90 million in pcp. The above was supported by net earnings of CAD 51 million in H1FY21, as compared to a loss of CAD 364 million in pcp.

Q2FY21 Income Statement Highlights:

• MEG impresses with its quarterly result, wherein the company posted revenue of CAD 1,009 million, soared from CAD 307 million in pcp. The quarter witnessed solid revenue growth from the petroleum segment, supported by elevated crude oil prices of USD 66.07/bbl, as compared to USD 27.85/bbl in pcp.
• The quarter was marked by an increase in diluent and transportation, higher operating expenses and a surge in both purchased product costs and Commodity risk management loss. Earnings before income taxes stood at CAD 83 million, as compared to a loss of CAD 142 million in pcp.
• The company turned profitable and posted net earnings of CAD 68 million, as compared to a net loss of CAD 80 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The performance of the company is directly correlated with the international crude oil prices, and volatility in the prices would lower down the average selling price and would hurt the revenue.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company is expecting full utilization of its oil processing capacity at Christina Lake Facility from H2FY22 onwards, which is a key positive and supports future operations. At the end of H1FY21, the company reported ~8% y-o-y decline in total borrowings at CAD 3,100 million, which is a key positive and would lead to lower interest costs and improved profitability. We have valued the stock using the Price to CF-based relative valuation method and have arrived at a single-digit upside (in percentage terms). Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 7.58 on August 23, 2021.

One-Year Technical Price Chart (as on August 23, 2021). Source: REFINITIV, Analysis by Kalkine Group

Enerplus Corp

Enerplus Corp (TSX: ERF) produces and develops crude oil and natural gas assets in Canada and the United States. The majority of oil production is derived from the Williston and Waterfloods basins, with the Marcellus providing a significant portion of natural gas production.

Key Highlights:

• Revival in performance: The company reported a strong revival in its operations and reported increase in Average Daily Production of 103,576 BOE/day in H1FY21, higher than 92,784 BOE/day in pcp. The company reported an increase in production of all its products, namely Crude Oil and Natural Gas segments. Notably, due to the increase in demand dynamics, the company reported strong growth in the commodity price, which is a key positive. Notably, the company reported the average selling price of crude oil at CAD 72.90 million, significantly higher than CAD 41.59 million in pcp. Natural Gas Liquids per barrel stood higher at CAD 28.06 per barrel in H1FY21, as compared to CAD 6.16 per barrel in pcp.
• Upcoming opportunity remains bullish: The group is marking its presence across ~38,000 net acres in NW Weld County and would be focusing on enhancing well economics through further drilling & completion optimization. In the initial drilling activities, the company reported positive results from its operations, which indicates improved business prospects in the coming quarters. The above region offers cost-friendly offerings through leasing and farm-in activity.
• Surge in Dividend payment: Despite the sluggish economic scenario, the company has increased its dividend payment to CAD 20.627 million, as compared to CAD 13.337 million in pcp. The above is impressive, as most of the companies are lowering or suspecting dividend payments to retain liquidity.

Q2FY21 Highlights:

• ERF impresses with its quarterly result, wherein the company posted revenue of CAD 210.655 million, surged from CAD 111.174 million in pcp. The growth was primarily driven by higher average selling prices of CAD 76.67/bbl v/s CAD 30.55/bbl in pcp. Moreover, higher production of 115,35 BOE/day, as compared to 87,360 BOE/day in pcp, also supported the company’s topline.
• The quarter was marked by an increase in operating expenses and production taxes. Additionally, Depletion, depreciation and accretion stood higher at CAD 93.908 million compared to CAD 79.885 million in pcp. The company reported a loss before income taxes of CAD 66.549 million, as compared to a loss of CAD 722.673 million in pcp. The difference was primarily due to higher Goodwill impairment and Asset impairment expense.
• The company reported a lower net loss of CAD 59.664 million, as compared to CAD 609.323 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Reports)

Risks:  The company is exploring new ventures, and lower than expected results from the operations might dampen future performances of the company.

Stock Recommendation:

For FY21, the company expects total production in between 112-115 mboe/day, while liquid production is expected in between 69.5-71.5 mboe/day. Operating expense and Transportation expense at ~CAD 8.25/boe and ~CAD 3.85/boe, respectively. On the valuation front, the stock is available at an EV to EBITDA multiple of 2.5x on an NTM basis compared to the industry median of 5.2x. Hence considering the above rationale, we give a ‘Hold’ rating on the stock at the closing price of CAD 6.79 on August 23, 2021.

One-Year Technical Price Chart (as on August 23, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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