Scotia Capital In a separate report released Wednesday, Scotia Capital's Mr. Bouvier upgraded MEG Energy Corp.to “sector outperform” from “sector perform” with the expectation of “strong” free cash flow per share growth.
“Given the solidified balance sheet, enhanced shareholder return profile and plans for robust and capital efficient growth we continue to like the story,” he said. “The recent underperformance in share price gives us the opportunity to upgrade the stock.”
The analyst thinks the Calgary-based company’s balance sheet is “fixe” and thinks shareholder returns are set to “ramp up.”
“MEG will hit its long-term debt target of US$600-million in Q3/24,” he said. “After years of having above average financial leverage the company’s balance sheet is now much more manageable improving the overall sustainability of the company.”
“With the debt target being reached in Q3/24, MEG is set to allocate 100 per cent of its FCF to shareholder returns. The company has instituted a quarterly base dividend of $0.10/sh with a current yield of 1.6 per cent. All of the FCF, beyond the dividend, is expected to be used for share buy backs.”
In justifying his rating revision, Mr. Bouvier also predicted “growth also on the table” for MEG.
“The company plans to continue growing its production and FCF. MEG has two projects it is considering for approval later this year: 1) A 3rd processing train that could add 15 mbbl/d of capacity for $300-milllion of capex ($20,000/bbl/d); and 2) Adding steam generation that could add 10 mbbl/d of capacity for $250-million ($25,000/bbl/d),” he said. “Both of these projects should pave the way for about a 4-per-cent production CAGR over the next several years. More importantly, we expect the growth to be capital efficient at about $20-$25,000/bbl/d.”
“The tax man is coming, but we still foresee above average FCFPS growth. Although MEG will eventually need to pay cash taxes (we estimate in late 2027 or early 2028 at $70 WTI), which will hurt available FCF, the company’s above average production growth profile and focus on SBB are likely to result in MEG showing strong FCFPS growth over the next few years (ie: 9 per cent at $70 WTI).”
Suggesting MEG may be a takeout candidate, Mr. Bouvier reiterated his $35 target for its shares. The average is $33.96.
“Although we don’t view a transaction as imminent, MEG continues to be a ‘clean’ story with one producing high quality asset. In addition, MEG offers synergies to potential acquirors such as: 1) Tax pools; 2) Higher cost debt (which can be refinanced lower); 3) Operational synergies as well as several production growth opportunities (both at Christina Lake and Surmont),” he said.