Should You Buy MEG Energy After Its Latest Results?

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Weak oil prices have dealt a blow to MEG Energy [stock_market_widget type="inline" template="generic" color="default" assets="MEG" markup="(TSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] as the massive decline in the company’s stock price over the past year shows. The oil producer has been forced to cut its 2019 spending in light of the oil price uncertainty, a move that hadn’t gone down well with investors when it was announced earlier this year.

MEG gave investors more reasons to worry about when it released its results for the fourth quarter and full year 2018. The company’s loss widened substantially year over year thanks to a decline in realized prices, erasing any chances of a comeback. Let’s take a look at how MEG performed last quarter and what investors can expect from the company this year.

A Terrible Quarter

The Calgary-based company’s fourth-quarter production of bitumen, a low-grade variety of crude oil, dropped from 90,228 barrels per day in the year-ago period to 87,582 bpd last quarter. So, MEG’s production didn’t drop by much on a year over year basis, but the realized price per barrel of bitumen fell from C$48.30 in the prior-year quarter to just C$13.90 this time.

This massive decline in the price of bitumen squeezed MEG’s operating netback big time despite a reduction in costs. The company reported an operating netback of just C$5.73 per barrel for the fourth quarter of 2018, down significantly from the year-ago period’s figure of C$33.83 per barrel.

The massive decline in the price of bitumen squeezed MEG’s operating netback big time despite a reduction in costs.

As a result, the company swung to an operating loss of C$118 million from a profit of C$44 million in the year-ago quarter as revenue fell nearly a third to C$520 million. MEG’s adjusted funds flow also fell into the red despite the company’s efforts to reduce capital expenses last quarter.

In all, the lower realized price of bitumen turned out to be a big headwind for MEG Energy. But will things improve in 2019 or are they going to get worse? Let’s find out.

The Way Ahead for MEG

The oil price decline in recent months has forced MEG to be more disciplined regarding its 2019 outlook. It plans to spend just C$200 million on capital expenses this year as compared to last year’s outlay of C$619 million as it aims to fully fund its capex from the operating cash flow. But despite this massive capex cut, MEG believes that it can hit 100,000 barrels per day of production this year.

However, the company will restrict its production to a range of 90,000-92,000 bpd to meet the Alberta government’s mandatory production cuts, which would still be an improvement over last year’s production of 87,731 bpd. So MEG will be doing alright this year from an operational point of view, but the company’s fortunes will be decided by the direction taken by the price of bitumen.

It looks like analysts don’t expect much of a turnaround in MEG’s financial fortunes this year, with total revenue expected to drop 10% this year. By comparison, the company’s 2018 revenue was up more than 10% as compared to the prior year. So there’s a chance that things could get worse for MEG Energy going forward, which is why investors need to exercise caution and wait for solid signs of a turnaround before betting on this stock.

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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