MEG Energy falls despite almost tenfold increase in cash flow

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Sometimes making almost 10 times more money than the previous year is still not enough.

This appeared to be the case for MEG Energy on Tuesday, as shares of the oil sands producer fell as much as 3.7% or $ 0.42 per share at noon on the Toronto Stock Exchange despite the company announcing a dramatic increase in its cash flow.

MEG raked in $ 239 million in adjusted cash flow in its third quarter, which is almost a ten-fold increase from the $ 26 million generated in the same three months of 2020.

However, the windfall would have been even greater had it not been for the substantial amount of production that MEG had locked in at previously agreed prices late last year in a process known as hedging. The company incurred $ 66 million in total coverage losses in its third quarter, effectively leaving money on the table.

Almost a third of its production expected in the fourth quarter, or 29,000 barrels per day, is also locked in hedging contracts averaging US $ 46.15 per barrel. This price represents a roughly 36 percent discount from where Western Canada Select (WCS) crude oil was trading (US $ 62.76 / bbl) on Tuesday shortly before noon Eastern Time.

Analysts, meanwhile, largely supported the company’s hedging strategy given MEG’s high leverage.

“If we go back to this period last year, MEG’s net debt would have been [roughly $3 billion]George Huang, who covers the shares of Raymond James, said by e-mail. important operating lever for the company, I think it is fair to characterize the strategy as prudent. ”

A year ago, MEG had a net debt to residual funds from operations ratio of more than eight times, Huang said, meaning the company owed more than $ 8 in debt for every dollar generated in cash.

“This hedge served to lock in part of the investment program needed to sustain the business for 2021 and protect against large fluctuations in cash flow,” he said.

Desjardins analyst Justin Bouchard echoed Huang’s point of view in a note to clients on Tuesday, writing that “at the time, we thought [hedging] was the right decision for MEG. The company still faces headwinds for its fourth quarter results because of its hedging contracts, Bouchard wrote, “but it’s done.”

“After one more quarter, MEG will be free and unharmed from [oil price] coverage, positioning it to maximize [free cash flow]He wrote, concluding that this is “certainly good news”.

MEG has also increased its production forecast for the full year for the third time since the start of 2021, with average daily production now estimated at at least 92,500 barrels. The company is expected to largely allocate this additional revenue to debt reduction, with National Bank Financial’s Travis Wood estimating that the total amount owed by MEG would drop to $ 1.7 billion by the end of 2022.

“It is important to note that MEG has sufficient liquidity through an unused credit facility of $ 800 million and a no-obligation maturity structure until 2025,” Wood said in a note to clients Monday evening. , where he raised his target price on the company’s stock from one dollar to $ 15 per share.

According to Huang at Raymond James, because “hedging should be seen as a means of protecting the balance sheet, [then] As the net debt on the balance sheet decreases, the need to hedge forward cash flows decreases.


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