Strathcona Resources has launched a hostile bid on MEG. MEG has started a strategic review process for alternative future scenarios.
Summary
MEG reported weak Q2 results. Production was very low due to a major shutdown of facilities and due to wildfires. Production can recover in Q3. The MEG 2025 production outlook looks unrealistic high. The balance sheet is very solid. MEG is a profitable company. Q2 profits were low, but profits can recover in Q3/Q4. The 2025 PE is medium/high. Returns in 2025 are decent and can increase after 2026.
We may see the outcome of the strategic review, the Strathcona bid (and may be some other bids) around 15th September.
In my 84 oil and gas company ranking MEG sits in the top 10 at a high 11th position.
Production
• MEG production grew in the past from 93.6 K BoE/d (2019) to 102.2 K BoE/d (2024). Growth was limited (9%) as the steam facilities were expanded. Production increases were solely due to efficiency improvements in the SOR.
• MEG has ample reserves (1,581 M BoE = 31 years of 2025 production), which allow substantial oil future production growth.
• Q2 production (63.5 K BoE/d) was far below Q1 (103.2 K BoE/d) due to major annual maintenance activities and wildfires. I had expected a fall in production (to 85 K BoE/d), but not to the extent reported. MEG had not provided a Q2 outlook.
• Surprising MEG reiterated its 2025 outlook of 95-105 K BoE/d.
• To meet the bottom end of the range, Q3/Q4 production would have to be 107 K BoE/d and to meet the mid-range of the outlook a Q3/Q4 production of 117 K BoE/d would be required.
• With no new steam facilities, I do not know where such production increases would have to come from. I think the MEG 2025 outlook is overoptimistic.
• I expect production in Q3/Q4 to recover to previous levels of 104 BoE/d, leading to 2025 production of 93.7 K BoE/d.
• MEG has started a Facility Expansion project, which will increase production with 25 K BoE/d. The project facilities will be complete in 2026. As the reservoir will need time to warm up before the first benefits in production become visible, the first production effects can be expected seen by early/mid-2027.
• Production from 2027 onwards could be up to 125 K BoE/d. This can be sustained for a long period). MEG may decide in the future on further expansion projects. This is not included in my model. I will keep this as an upside.
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Balance sheet
• MEG has a solid balance sheet.
• Q2 equity ratio (=equity/balance sheet total) was a high 68.1%, slightly up from the 68.0% in Q1
• Q2 long-term debt (C$ 812 M) reduced with C$ 45 M compared to Q1 (C$ 857 M).
• Q2 debt/EBITDA ratio on an annual basis with the low production was1.1, but can recover in Q4 to a low 0.6.
• The balance sheet is sound and allows for generous shareholder returns.
Profitability
• MEG is a profitable company.
• Q2 eps (C$ 0.26 ) was down versus Q1 (C$ 0.82) due to the low production. I had expected an eps of C$ 0.44.
• Realized bitumen prices were slightly lower than expected and operational costs were higher than expected.
• For 2025, with WTI at $ 65/bbl, I expect an eps of C$ 1.92 The PE is a high x.
• In 2029, with the higher production from the expansion project, the eps can increase to C$ x (PE drops to a medium x).
• MEG profits are robust under low oil prices.
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• Shareholder returns are decent.
• MEG has indicated it wants to returns 100% of the FCF to shareholders.
• MEG increased in Q3 the quarterly dividend from C$ 0.10 to C$ 0.11. It is odd to see a dividend increase after a weak quarter with a negative FCF (-C$ 75 M). I think the increase is political motivated, trying to fend of shareholder interest in the Strathcona bid.
• The dividend is C$ 0.42 on an annual basis. This is equivalent to a return rate of 1.5%.
• MEG bought back shares for C$ 159 M in Q1 and for only C$ 9 M in Q2. I expect another C$ 110 M of share buybacks in H2.
• Shareholder returns in 2025 should equate to a decent 5.0%.
• Starting 2027 returns can increase to 8-10%.
- MEG - returns.jpg (23.41 KiB) Viewed 73 times
Conclusions
MEG reported weak Q2 results. Production was very low due to a major shutdown of facilities and due to wildfires. Production can recover in Q3. The MEG 2025 production outlook looks unrealistic high. The balance sheet is very solid. MEG is a profitable company. Q2 profits were low, but profits can recover in Q3/Q4. The 2025 PE is medium/high. Returns in 2025 are decent and can increase after 2026.
We may see the outcome of the strategic review, the Strathcona bid (and may be some other bids) around 15th September.
In my 84 oil and gas company ranking MEG sits in the top 10 at a high 11th position.