MEG Energy Corp. Deleveraging Mission Complete
Our view: Our bullish stance towards MEG reflects its capable leadership team, solid operating performance, strong balance sheet and abundant shareholder returns. We are maintaining an Outperform recommendation on MEG and trimming our one-year price target by $1 (3%) to $34 per share. MEG is our favorite intermediate producer and on our Global Energy Best Ideas list.
Key points:
MEG Energy delivered solid third-quarter results punctuated by in-line production of 103,300 bbl/d (SOR=2.36x) and free cash flow generation of $221 million which supported share repurchases of $108 million. The company plans to release its 2025 budget on November 25, and host a Business Update session on November 26.
Lower-end of 2024 Guidance. Guidance wise, MEG reaffirmed its 2024 budget, but signaled on its conference call that it expects to come in toward the lower end of its 102,000-108,000 bbl/d production guidance range in connection with Alberta’s summer wildfire impacts and cold weather in early 2024. Accordingly, we have moved our fourth-quarter 2024 production outlook from 110,000 bbl/d to 105,000 bbl/d, with our annual outlook now at 103,200 bbl/d.
Deleveraging Mission Complete. MEG achieved the final leg of its deleveraging journey, reaching its US$600 million net debt target on October 1—unlocking the allocation of 100% of free cash flow to shareholder returns which will remain weighted towards share buybacks, with plans to revisit its per share dividend annually commensurate with production growth and shrinkage in its share count.
Flexible on Development. On its conference call, MEG emphasized that its balance sheet deleveraging progress allows it to move forward with its capacity growth projects, but it will pace its development path timing should oil prices dramatically pullback.
Free Cash Flow. Under our base outlook, we peg MEG’s free cash flow at approximately $865 million in 2024 and $641 million in 2025. Under futures pricing, we peg MEG’s free cash flow at $858 million in 2024 and $697 million in 2025.
Relative Valuation. Under our base outlook, MEG is trading at debt- adjusted cash flow multiples of 5.0x in 2024 (vs. our oil sands weighted peer group avg. of 5.9x) and 5.2x in 2025 (vs. our peer group at 6.1x), and free cash flow yields of 13% in 2024 (vs. our peer group at 10%) and 10% in 2025 (vs. our peer group at 8%). We believe that MEG should trade at an average valuation vs. our peer group given its capable leadership team, strong balance sheet, top quartile Christina Lake operations, solid operating momentum and abundant shareholder returns.