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 globally.

Key Highlights 

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

• Reducing the cost: The company expects an aggregate reduction in costs of approximately CAD 50 million, approximately CAD22 million from temporary cost reductions while the remaining CAD28 million in cost reductions will be from the optimization of operations, reduction in staffing levels and rationalization of ongoing administrative costs. G&A expense is now targeted to be in the range of CAD 45 – CAD 47.5 million, which is approximately CAD 17.5 million lower than original guidance. Non-energy operating costs are now expected to be in the range of CAD 130 – CAD 135 million, which is ~CAD 32.5 million lower than original guidance.

Source: Company

• Capital Program to be funded from internal funds: MEG expects to release its 2021 capital budget in December. While the development of the 2021 capital budget remains in progress, it will be designed to be fully funded with internally generated funds. This is consistent with MEG’s financial discipline in 2020, where the current year’s capital program remains on track to be fully funded with internally generated funds. 

• Hedging:For 4Q 2020 the company has hedged approximately 80% of forecasted bitumen production at an average price of USD45.76 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 USD46.25 per barrel. 

• Liquidity: At the end of Q3 2020, the group had CAD785 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.

Financial overview of Q3 2020 (Fig. in CAD millions, except per share data)

Source: Company 

• The Company posted total revenue of CAD 533 million, as compared to CAD 958 million recorded in the previous corresponding period (pcp). This fall in revenue was due to lower blend sales price, which was driven by the decline in global crude oil price.

• In Q3 2020, the Company generated adjusted funds flow of CAD 27 million, compared to CAD 192 million for the same period in 2019. The decline was primarily due to lower cash operating netback of CAD 16.58 per barrel in the quarter compared to CAD 32.44 per barrel in pcp.

• A net loss of CAD 9 million was reported by the company in Q3 2020 compared to CAD 24 million during the same period a yar ago, primarily due to a decrease in cash operating netback.  

Risk associated with investment 

The performance of the company is 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

(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 it production guidance upward. Therefore, based on the above rationale and valuation, we have given a “Speculative Buy” rating at the closing price of CAD 2.50 on November 2, 2020. We have considered Cenovus Energy Inc, Tourmaline Oil Corp, etc. as the peer group for the comparison.

MEG daily technical chart. Source: Refinitiv (Thomson Reuters)

Secure Energy Services Inc

Secure Energy Services Inc (TSX: SES) provides treatments and disposal services to the oil and gas industry which constitutes midstream services, environmental services, systems and products for drilling, production and completion fluids, and other specialized services and products.

Key Highlights

• Higher cash flow: The Company generated cash flows from operating activities of CAD 38.5 million in Q3 2020, an increase of 7% on a Y-o-Y basis.
• Modest increase in drilling activities: Based on current macroeconomic conditions and commodity prices, the company expects a modest increase in drilling and completion activity in the coming quarter and FY 2021 from current levels, as producers seek to add production to offset natural declines to maintain flat production levels to hold cash flow levels.
• Benefits from cost-cutting: The company expects an annualized savings to Adjusted EBITDA of more than CAD 40 million, because of reductions made by the group in fixed cost structure in Q2 2020.
• Dividend Income:Despite the challenging environment, the company maintained its dividend payment. This shows the group's financial strength. The company declared a dividend of CAD 0075 to its common shareholders.
• Recorded Relative Price Strength: Shares of SES reported a relative outperformance over the past one month and 5-day trading sessions. The group’s shares were up ~12% in a month over period and outperformed the benchmark index by 16%. At the same time, the stock outperformed the sector peers by ~16%. In the last five trading sessions, its shares are up by approximately 5%, outperforming the index by ~8% and sector peers by 8.5%.

Financial Overview of the Q3 2020

Source: Company Filing

• The Company declared its quarterly numbers and reported a decline in the top-line. Revenues stood at CAD 452 million as compared to CAD 727 million compared on a Y-o-Y basis.
• Midstream Infrastructure segment revenue (excluding oil purchase and resale) in Q3 2020, decreased by 40% from the comparative period of 2019 to CAD 44.8 million, this was attributed to lower processing and disposal volumes at the Company’s midstream infrastructure facilities due to reduced drilling and completion activity across the WCSB and North Dakota since March 2020.
• Oil purchase and resale revenue for Q3 2020, decreased 40% from the 2019 comparative period to CAD 348.7 million. The reason behind the fall in revenues under this segment was the decrease in Canadian light oil benchmark pricing by 29% during the quarter.

• The Company posted an Adjusted EBITDA of CAD 37 .0 million in Q3 2020, a decline of 14% on Y-o-Y basis. The decline was driven by the decreased level of production and contracted volumes during a period of reduced drilling and completion activity levels. 
• In Q3 2020, net loss attributable to shareholders widened to CAD 4.6 million from CAD 0.6 million in pcp.

Risk associated with Investment

The company is exposed to the volatility in the oil demand and oil prices. An extended lower crude oil prices would weigh on the group’s performances. Further, the company is exposed to next wave of coronavirus outbreak, as it can lead to a slump in oil demand.    

Valuation Methodology (Illustrative): Price to Cash Flow

(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. For the remainder of 2020 and throughout 2021, the company would focus on maintaining the financial resiliency by maximizing cash flows and paying down debt with discretionary free cash flow. By doing so, the Corporation will remain well-positioned to respond to the market's needs when activity levels are going to increase. Therefore, based on the above rationale and valuation, we have given a "Speculative Buy" rating at the closing price of CAD 1.48 on November 02, 2020. We have considered CES Energy Solutions Corp, Mullen Group Ltd, Inter Pipeline Ltd, etc. as the peer group for the comparison.

1-Year Price Chart (as on November 02, 2020, after the market close). Source: Refinitiv (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.