MEG Energy Corp T.MEG

TD Raises Target

[retiredcf]

ROC & PROD'N TO ACCELERATE; ANTICIPATING LATE-NOV. MULTI-YEAR BUSINESS UPDATE

THE TD COWEN INSIGHT

Q3/24 results featured a strong quarter of op. execution and delivery of RoC commitments, although headline results were right in line. The transition to 100% return of FCF in Oct. (up from 50%) and additional prod'n (new well pad online in Dec.) should drive an acceleration of most KPIs into year-end, pointing to a strong finish. MEG remains our top-pick. CC at 8:30 a.m. ET (1-888-510-2154).

Impact: NEUTRAL

Deleveraging now in the rear-view mirror; RoC and (modest) prod'n growth in focus:

MEG exited Q3 with US$478mm ND, down ~25% from US$634mm exiting Q2. Recall, in Oct., it transitioned to 100% return of FCF through buybacks plus base dividends, with strong potential for rateable dividend growth, in our view.

MEG returned 49% of Q3 FCF through buybacks, in-line with its 50% Q3 target. YTD, it has returned 45% of FCF. We expect a material acceleration in share repurchases through year-end given the migration to 100% RoC through buybacks plus base dividends. Note that an inaugural $0.10/sh dividend was paid on Oct 15.

Expectations for the 2025 outlook: We model annual prod'n of 105mbbl/d with capex of $650mm ($450mm sustaining). This assumes that MEG sanctions the 15mbbl/d Christina Lake expansion via a third processing train by year-end. Our estimates are relatively in line with current (recent) Street consensus at 105mbbl/d and $640mm.

We expect the 15mbbl/d expansion to be completed at a competitive $20,000/bbl/d- $25,000/bbl/d capital efficiency ($300-$375mm total capex).

We believe MEG has a late-Nov. multi-year Business Update planned, and we expect it to reiterate a $650mm/annum mid-term capex ceiling, in addition to laying out potential growth plans and turnaround optimization efforts over the next three-five years (but more likely five, in our view).

Another operationally consistent quarter in the books: Q3 prod'n of ~103mbbl/d was in-line with consensus/TD, as were bitumen sales of ~105mbbl/d. We are anticipating volume growth through year-end since MEG began steaming its second 2024 well pad in Sept., with prod'n to ramp-up in Dec. The Q3 SOR was a top-quartile 2.36, down from 2.44 in Q2, and primarily reflects the planned timing of new well steam injection, in our view.

•  Q3 FFOPS of $1.34/sh was in-line with consensus (+1% vs. TD est.). Non-energy opex of $5.18/bbl landed marginally below our $5.35/bbl estimate (-3%), while royalties of $17.45/bbl were roughly in-line (-1%).

•  Transportation expense, which factors in a full quarter of TMX shipments, came in at $17.65/bbl (+6% y/y) and was also in-line with our estimate.

  Our Investment Thesis

  MEG's consistently strong operational performance and balance sheet deleveraging supported the transition to 100% return of FCF in October. We also see a clear, economic ($20k-$25k/bbl/d), and derisked path forward for CL capacity growth to 125mbbl/d, from 110mbbl/d currently, and expect this growth to get sanctioned with the release of 2025 guidance in Dec. In our view, the longer-term growth potential is upwards of 145-150mbbl/ d since management considers the NW flank of CL potentially even higher quality than the SE. This likely gets delivered at a responsible rate of 3-5%/annum. While capex through 2026 has been front-and-center for certain investors since mid-2024, consensus estimates now appear to capture the top-end of management's stated $550-$650mm mid-term outlook. MEG now trades at a 2025E strip FCF yield (total capex) of 12% vs. its closest peers (ATH/ SCR) at 9%/10%, and remains our top pick. Our target price marginally increases to $36/sh on revised financial estimates.