MEG Energy’s Strong Results Don’t Make It a Buy Just Yet

MEG Energy (MEG.TO) stock has been beaten down badly this year, but the company is finally showing some resilience in a weak oil pricing environment. The Canadian oil sands company managed to reduce its second-quarter loss on the back of a jump in sales and barrels produced. But will it be able to sustain this momentum in the coming days given the weak macroeconomic environment that is capable of hurting oil prices further? Let’s find out.

Higher production worked for MEG last quarter

MEG Energy primarily produces bitumen crude, which is a low grade of crude oil. The company produced 97,288 barrels per day of the commodity during the second quarter, which was a nice jump over the year-ago period’s output of 71,325 barrels per day.

MEG also benefited from an increase in the price of bitumen. The company realized an average access western blend (AWB) price of $51.72 per barrel as compared to the year-ago period’s pricing of $44.40 per barrel.

MEG attributes the stronger pricing to an improvement in the West Texas Intermediate crude oil price, as well as the narrowing of the WTI-AWB differential. Thanks to the increase in production and better realized prices, MEG Energy’s bitumen realization went up to $62.23 per barrel as compared to $47.33 per barrel in the year-ago period.

The company’s operating cash back also increased to an average of $37.88 per barrel, nearly double of what it was in the year-ago period. Not surprisingly, MEG’s adjusted funds flow increased to $227 million in the second quarter as compared to just $18 million in the prior-year quarter.

MEG’s net loss also shrunk by nearly a third to $64 million during the quarter, down from $179 million in the year-ago quarter. In all, the company delivered a solid quarterly report as WTI oil prices averaged higher during the quarter. But MEG might not enjoy that tailwind in the coming days.

The future looks uncertain

MEG Energy benefited from higher WTI prices in the second quarter of the year. More specifically, WTI crude oil prices averaged nearly $64 per barrel during the month of April, almost $61 per barrel in May, and $54.7 per barrel in June.

However, the price of WTI crude is averaging lower this quarter. For July, WTI crude averaged just over $57 per barrel. This month, WTI crude is trading at a lower level than last month. As such, don’t be surprised to see MEG Energy’s financial performance take a hit in the coming quarters thanks to the crude oil price weakness.

This is probably the reason why investors haven’t bid the stock up despite the company’s impressive second quarter performance. The market is pricing in potential weakness at MEG Energy that will arise from lower crude oil prices in the coming days. As such, it makes sense for investors to stay away from the stock until and unless there is a sustained recovery in the oil pricing environment, or else its results might continue to be inconsistent.

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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