September 17, 2024
MEG Energy Corp.
Company description
Founded in 1999 as a private oil sands company, the company modified its name to MEG Energy Corp. in 2002. MEG went public in August 2010 via a $700 million IPO.
MEG’s production is 100% bitumen weighted and flows entirely from its Christina Lake (100% wi) in-situ SAGD project in northeast Alberta. MEG’s Surmont (100% wi) and Growth Properties (100% wi) provide longer-term growth potential. In the first quarter of 2018, MEG closed the sale of its 50% interest in the Access Pipeline system, and the Stonefell (100% wi) terminal near Edmonton, Alberta, in an effort to reduce debt.
Investment summary
We rate the shares of MEG Energy Outperform.
• Continued Strength. Our constructive stance toward MEG reflects its strong leadership, enhanced market access via Flanagan-Seaway to the US Gulf Coast, strengthening balance sheet, and long-life assets.
• Oil Sands Pure Play. MEG occupies the fairway as a pure-play oil sands investment, with a bitumen production base flowing entirely from its Christina Lake in-situ SAGD project. As such, MEG would benefit from any sustained strength in oil prices.
• FCF Allocation. There are three planks to MEG’s shareholder return framework, which are girded by net debt levels. As at June 30, 2024 the company's net debt (company definition) stood at about US$634 million:
US$1.7 billion: MEG achieved its interim net debt target of US$1.7 billion in the second quarter of 2022, which opened the door for 25% of its free cash flow to be allocated toward its share repurchase plan, with the balance toward net debt reduction.
US$1.2 billion: MEG achieved its net debt target of US$1.2 billion in the third quarter of 2022, opening the door for 50% of its free cash flow to be allocated toward shareholder returns, with the balance earmarked for ongoing debt reduction.
US$600 million: Upon reaching its net debt target of US$600 million, which the company expects to occur in the third quarter of 2024, 100% of free cash flow will be allocated toward shareholder returns, weighted toward buybacks with a modest dividend (which was announced to be implemented alongside its second-quarter 2024 results).
Outperform
TSX: MEG; CAD 24.64
Price Target CAD 35.00