Can MEG Energy’s Capital Expenditure Plan Survive Oil Uncertainty?

MEG Energy’s 2019 Capital Guidance

  • Oil sands company MEG Energy (TSX: [stock_market_widget type=”inline” template=”generic” color=”default” assets=”MEG.TO” markup=”{symbol} {currency_symbol}{price} ({change_pct})” api=”yf”]) recently updated its 2019 capital expenditure plan. Management has decided that the company will be more disciplined this year as it defends itself against unfavourable oil market conditions.
  • MEG has outlined a base capital budget of $200 million (C$275 million) for the year. That’s a substantial cut compared to its earlier 2019 capital expenditure plan of C$500 million, announced in October last year. However, MEG has kept aside a discretionary capital budget of $75 million that could be sanctioned after mid-2019, though that will depend on the oil market conditions at the time.
  • MEG will fully fund its 2019 capital plan from its operating cash flow. The company further said that it will spend $115 million of its 2019 capital budget on sustaining and maintaining its existing assets. The majority of this spending will go toward the completion and tie-in of MEG’s sustaining wells. The company will spend $40 million on growth projects this year to support future production growth.

Production Estimates

  • MEG is capable of achieving 100,000 barrels per day (bpd) of production this year. However, the company will keep its production levels in the 90,000-92,000 bpd range in light of the Alberta government’s mandated production cut. Canadian oil producers have been directed to slash a total of 325,000 bpd of production until the supply glut goes down, after which the cuts will go down to 95,000 bpd per day.
  • The discretionary capital expenditure budget that MEG has set aside will be spent on the Phase 2B Brownfield Expansion project, where the company has been forced to lower spending in light of the oil supply glut. This will allow the company to achieve its target of 113,000 bpd of production by 2020.
  • The 2019 production forecast is slightly ahead of the 2018 production guidance of 87,000-90,000 bpd.

Cost Guidance

  • The production limits in 2019 are going to negatively impact MEG’s cost profile. The company’s non-energy operating costs are expected to range between $4.75-$5.25 per barrel. That’s higher than 2018’s revised non-energy operating cost guidance of $4.50-$5.00 per barrel.
  • MEG also pointed out that its non-energy operating cost would have ranged between $4.40-$4.90 per barrel had there been no production limits.

MEG Energy’s Capital Plan Looks Smart

  • MEG Energy is doing the right thing by being disciplined in its approach to capital spending. Oil prices have been tumbling since October 2018 as output from top global producers has increased, while the demand environment has softened thanks to macroeconomic uncertainty. This has created excess inventory in the end market, forcing oil producers to be conservative with both their money and their production plans.
  • The good news for MEG is oil prices have started recovering since the end of December. This recovery occurred because OPEC and its allies, such as Russia, committed to slashing production by 1.2 million bpd in early December.
  • MEG, therefore, can choose to bring its additional capital plan into play later this year if the oil price momentum continues. In fact, the Alberta government has now decided to restore 75,000 bpd of its proposed 325,000 bpd production cut, so there’s a good chance that MEG will have the opportunity to increase production and take advantage of resurgent oil pricing going forward.
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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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