Why MEG Energy Stock Can Make a Comeback

MEG Energy [stock_market_widget type="inline" template="generic" color="default" assets="MEG.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] had a bad start to the year as the stock plunged in January thanks to a weak set of quarterly results. But then things started looking up for MEG until they released the first-quarter 2019 results last month, which derailed its rally.

Let’s see how MEG performed in the recently-released quarter and what lies in store for the company going forward.

A Closer Look at the Results

First quarter revenue of C$919 million was a nice improvement over the prior-year period’s figure of C$721 million.

MEG Energy’s first-quarter bitumen production averaged 87,113 barrels per day, which was a drop of 7% from the prior-year period, thanks to the Alberta government’s mandated production cuts.

However, the company’s revenue of C$919 million for the first quarter was a nice improvement over the prior-year period’s figure of C$721 million. This impressive increase in MEG’s top line was a result of a substantial uptick in the company’s average realized price.

MEG’s sales price during the quarter averaged $44.40 per barrel, up substantially as compared to the $28.57 per barrel price during the year-ago quarter. What’s more, the company’s bitumen realization during the quarter averaged $50.21 per barrel as compared to $35.46 per barrel in the prior-year period.

The company’s performance was helped to some extent by the Alberta government’s mandated production cuts, but it had negative effects in other areas.

For instance, MEG Energy’s transportation costs averaged $8.48 per barrel in the first quarter of 2019. This was a significant jump from the prior-year period’s figure of $4.73 per barrel. MEG Energy blames this increase on the incremental costs associated with transportation by rail.

However, the increase in the average prices was enough to offset the higher costs, allowing MEG Energy to achieve adjusted funds flow of C$151 million during the quarter. For comparison, the company’s adjusted funds flow during the year-ago period stood at C$83 million.

So, MEG Energy delivered impressive results last quarter, but the market seems to be ignoring that.

Can MEG Keep up the Momentum?

MEG Energy will be making a capital investment of C$200 million this year with the aim of hitting a production capacity of 100,000 barrels per day. However, due to the impact of Alberta’s production cuts, MEG has issued guidance of 90,000 to 92,000 barrels per day for 2019.

But the good news for MEG Energy is that the Alberta government is slowly lifting its restrictions on oil production. As reported by Reuters:

The Canadian oil-producing province of Alberta will increase crude production limits by 25,000 barrels per day in May and a further 25,000 bpd in June, the government said on Monday.

As a result, MEG Energy could probably boost production in the coming quarters, leading to better financial performance. Not surprisingly, the company is expected to swing to a profit this year after incurring a massive loss in 2018.

With an increase in production and better pricing, MEG Energy will be able to deliver stronger growth and probably deliver more upside. Consequently, it would be a good idea for investors to take advantage of the stock’s drop to build their long positions.

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 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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