MEG Energy Corp

MEG Energy Corp (TSX: MEG) is a Canada-based oil sands company focused on recovering bitumen from the oil sands by means other than surface mining in the southern Athabasca region of Alberta. MEG transports and sells its thermal oil production to refiners throughout North America and internationally.

Key highlights

• Raised guidance on production: The company revised its full-year 2020 average production guidance upward from 78,000 – 80,000 bbls/d to 81,000 – 82,000 bbls/d.

• Driving costs reduction measures:The company expects an aggregate decrease in costs of CAD 50 million. Out of this, approximately CAD 22 million from temporary cost reductions while the remaining CAD 28 million from the optimization of operations, reduction in staffing levels and rationalization of ongoing administrative costs. Non-Energy operating costs are now expected to be in a range of CAD 130-CAD 135 million, along with this, the group will be bringing down their G&A expense in the range of CAD 45 - CAD 47.5 million.

Source: Company

• Hedged the production:For 4Q 2020, the company has hedged approximately 80% of forecasted bitumen production at an average price of USD 45.76 per barrel under WTI fixed price hedges, and for FY 2021, to date, the company has hedged their 25% of forecasted bitumen production at an average price of USD 46.25 per barrel.

• Ample Liquidity: MEG generated CAD 85 million of free cash flow in the nine months ended September 30, 2020 and exited the third quarter of 2020 with CAD 49 million of cash on hand. In Q3 2020, the group had CAD 785 million of unutilized capacity under the CAD 800 million revolving credit facility and CAD 85 million of unutilized capacity under the CAD 500 million letter of credit facility. The company’s current liquidity position seems sufficient enough to meet the near-term requirement. 

Financial overview of Q3 2020 (in millions of Canadian dollars, except per share amounts)

Source: Company

• The Company posted total revenue of CAD 533 million in Q3 2020, decreased by 44% as against CAD 958 million in the previous corresponding period. The fall in revenue was due to lower blend sales price, driven by the decline in global crude oil, along the 75-day turnaround process, which got completed in mid-August.

• In Q3 2020, the Company generated adjusted funds flow of CAD 27 million, compared to CAD 192 million in Q3 2019. This 86% decrease was primarily due to lower cash operating netback of CAD 16.58 per barrel in this quarter compared to CAD 32.44 per barrel in Q3 2019.

• A net loss of CAD 9 million was reported by the Company in Q3 2020, compared to a net profit of CAD 24 million in Q3 2019, primarily due to low revenue and decrease in cash operating netback.  

Risk associated with investment

As the company is in exploration business of oil and gas, therefore its revenues are correlated to the oil prices. Any volatility in oil prices is likely to affect the group’s performance. Other factors which could impact their financial performance include low demand for oil and gas, and financial risk on behalf of the company’s hedged positions. 

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The first half of 2020 had extremely adverse movements in commodity prices coupled with uncertainty regarding near-term crude oil supply and demand, while the third quarter of 2020 saw an improvement in the stability of the global oil market. During Q3 2020, the Company continued to take definitive action to enhance its financial position including protecting liquidity with a robust commodity price risk management program, operational flexibility in capital program execution and improving cost efficiencies across the business. The Company also revised the full-year 2020 production guidance upward from 78,000 – 80,000 bbls/d to 81,000 – 82,000 bbls/d. Therefore, based on the above rationale and valuation, we have given a ‘Speculative Buy’ rating at the closing price of CAD 3.75 on December 3, 202. We have considered Cenovus Energy Inc, Tourmaline Oil Corp, Ovintiv Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Itafos

Itafos (TSXV: IFOS) is a pure-play phosphate and specialty fertilizer platform with an attractive portfolio of strategic businesses and projects located in key fertilizer markets, including North America, South America, and Africa.

Key highlights:

• Disruption in sulfuric acid supply:The group’s Conda unit had experienced significant disruption in sulfuric acid supply from Rio Tinto’s Kennecott mine. Conda fulfils around 40% of the sulfuric acid requirements from volumes produced internally and rest 60% from a combination of volumes received from Rio Tinto’s Kennecott mine under a long-term supply agreement and volumes procured from other third-party suppliers. This disruption played a considerable role in bringing down the revenue numbers, and now the group is taking measures to mitigate potentially adverse effects of the interruption in sulfuric acid supply to Conda from Rio Tinto’s Kennecott mine.
• EBITDA Optimization in the process: The Company has initiated activities related to optimizing Conda’s EBITDA generation capability. The company entered into a third-party tolling agreement for a proprietary micronutrient enhanced dry product as an additional product in the new line of micronutrient enhanced dry products and completed an initial production run.
• Mine Life Extension: For the three months ended September 30, 2020, the Company advanced activities related to extending Conda’s mine life through permitting and development of H1/NDR, including advancing reclamation cap and cover alternatives analysis and updates to the Groundwater Fate and Transport Model associated with EIS requirements.

Financial highlights of Q3 2020

Source: Company

• In Q3 2020, revenues were down by 42% to USD 47.6 million, as against USD 81.7 million in the previous corresponding period. The decrease in revenue was mainly because of lower production and sales volumes due to a disruption in sulfuric acid supply from its primary supplier at Conda unit.
• The company posted an operating loss of USD 6 million in Q3 2020, as against USD 14.3 million in Q3 2019. The volume of operating loss came down due to low operating expenses as the company aggressively implemented corporate-wide cost savings and deferral of spending initiatives.
• Net loss posted by the group in the reported quarter stood at USD 13.7 million, as against USD 20.7 million in the previous corresponding period mainly due to reasons stated above.

Risk associated with investment

The company is exposed to many risk factors which alone or in a cumulative manner can affect the company’s operations and financial health. Some of the risks include the supply of raw materials and demand for finished goods, realizations prices of finished products, exchange rates, inflation, interest rates, etc. The group’s operations are mainly dependent on the supplies from Rio Tinto; any future disruption can play a massive role in the adverse financial performance of the group.

Valuation Methodology (Illustrative): EV to Sales

All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The disruption in sulfuric acid supply played a considerable role in bringing down the revenue numbers, and now the group is taking measures to mitigate potentially adverse effects of the disruption in sulfuric acid supply to Conda from Rio Tinto’s Kennecott mine. We feel the step taken by the management is positive as they are bringing down their dependency from the single player regarding the critical raw material. Further, the group has also initiated steps to boost their EBITDA, through the additional product in the new line of micronutrient enhanced dry products. Therefore, based on the above rationales and valuation, we have given a ‘Speculative Buy’ rating at the closing price of CAD 0.35 on December 3, 2020. We have considered Intrepid Potash Inc, CVR Partners LP, etc. as the peer group for the comparison. 

Source: Refinitiv (Thomson Reuters)

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