Post by retiredcfon Nov 27, 2024 9:19am
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Post# 36333201
CIBC 2
CIBC 2EQUITY RESEARCH
November 27, 2024 Earnings Update
MEG ENERGY CORP.
Business Update Highlights Growth Potential Backstopped By
High-quality Resource Developmen
Our Conclusion
MEG provided a business update in tandem with the final investment
decision (FID) of its Christina Lake expansion project and 2025 budget. We
view the planned capital spending and the expanded capacity as mostly in
line with our expectations. The company is showing a production CAGR over
the next six years of 5%, bolstering productive capacity at Christina Lake to
135 MBbl/d in 2027.
While we view there to be a general push for companies to accelerate free
cash flow (FCF) return to shareholders, we view this expansion as both
opportunistic for MEG and generates incremental FCF growth vs. a no-
expansion scenario (highlighted in Exhibit 4 herein). We maintain our Neutral
rating and price target of $32 per share.
Key Points
• Low-risk production growth supported by high-quality resource. We
estimate MEG still has ~38 years reserve life index (RLI) even with the
expansion of 25,000 Bbl/d production. As we look forward and at the
expansion towards the NW and SE regions of Christina Lake, there is an
opportunity for the company to target higher-quality reservoir driving
lower energy costs and higher per-well productivities. The target
reservoir in the NW showcases ~30m of net pay and >85% oil saturation
vs. current development at ~20m of net pay and 70%-80% oil saturation.
• Operational excellence has helped drive cost savings. Given the
experience MEG has with operating the asset, optimization has helped
improve efficiencies in operations. This has manifested itself into smaller
pad (surface) footprints, faster drilling times, longer-laterals and more
advanced analysis tools to track and improve production in real-time.
Further, the company has implemented an increased maintenance
interval from three to four years, and showcasing ~$175 million of
positive NPV from this innovation.
• Strong balance sheet helps maximize shareholder returns. We
estimate 2025E D/CF of 1.0x, with the company driving efficiencies
through its expansion project, which could lower SOR and operating
costs. We view the company’s ability to drive breakeven towards US$47
WTI in 2028 to 2030 as reasonable. Further, and as compared to a no-
growth scenario, we estimate that MEG generates 7% more free cash
flow over the next six years with the expansion project.
• Valuation. MEG Energy trades at a P/RNAV ratio of 110%, a 2025E
EV/DACF of 6.5x and a 2025E FCF yield of 7% vs. the large-cap group
at 91%, 5.8x and 12%, respectively