Earnings call transcript: MEG Energy Q2 2025 reveals strong cash flow

MEG Energy Corp reported its financial results for the second quarter of 2025, highlighting robust free cash flow generation and strategic plans for growth. The company generated $148 million in free cash flow during the first half of 2025 and expects to surpass $500 million by year-end. With a market capitalization of $776 million and a year-to-date return of 22.32%, InvestingPro analysis suggests MEG Energy is currently undervalued. Despite operational challenges, including wildfires that impacted production, MEG Energy maintained its full-year guidance and emphasized its strategic expansion projects.

Key Takeaways

• MEG Energy generated $148 million in free cash flow in H1 2025.
• The company repurchased approximately 3% of its shares, returning $220 million to shareholders.
• Q2 adjusted fund flow was $125 million, equivalent to $0.49 per share.
• MEG maintained its full-year guidance and expects to generate over $375 million in free cash flow.
• Facility expansion projects are on track, with completion expected by mid-2027.

Company Performance

MEG Energy’s performance in Q2 2025 demonstrates its ability to generate strong cash flow despite operational challenges. The company achieved an average bitumen production of 63,500 barrels per day, although this was impacted by a turnaround and wildfires. With a healthy current ratio of 2.05 and revenue growth of 10.92%, InvestingPro data shows the company maintains a FAIR financial health score of 2.12. The company’s strategic focus remains on capital-efficient growth, with plans to increase production to 135,000 barrels per day. MEG continues to leverage its Christina Lake assets while exploring opportunities at Surmont, Kirby, and Nay River.

Financial Highlights

• Free cash flow: $148 million in H1 2025
• Share repurchase: $220 million, ~3% of shares
• Q2 adjusted fund flow: $125 million or $0.49 per share
• Operating costs: $10.88 per barrel
• Dividend increase: 10% to 11¢ per share

Outlook & Guidance

MEG Energy’s full-year 2025 guidance remains unchanged, with expectations to generate over $375 million in free cash flow. Sustaining capital expenditures are projected to remain around $450 million, with a target to reduce sustaining CapEx to $10 per barrel from $12. The company is focused on completing its facility expansion project, which aims to add 25,000 barrels per day by mid-2027.

Executive Commentary

Darlene Gates, CEO of MEG Energy, emphasized the company’s strategic positioning: "MEG is uniquely positioned to deliver low-risk, capital-efficient growth." CFO Ryan Kubik added, "We expect to generate over $375 million in free cash flow," highlighting the company’s strong financial outlook.

Risks and Challenges

• Operational disruptions: Wildfires and turnarounds have impacted production volumes.
• Market volatility: Fluctuations in oil prices and economic uncertainty could affect financial performance.
• Regulatory changes: Potential changes in environmental regulations may impact operations.
• Project execution: Delays in expansion projects could affect growth targets.
• Competitive pressures: Increased supply from OPEC+ and global competitors could impact market positioning.

Q&A

During the earnings call, analysts inquired about the details of MEG’s facility expansion project and the company’s strategy for reducing sustaining capital expenditures. Executives confirmed that the strategic review is ongoing, with an update expected by mid-September. The discussion also covered MEG’s approach to extending turnaround cycles from three to four years, aiming to enhance operational efficiency. For investors seeking deeper insights, InvestingPro offers comprehensive analysis through its Pro Research Report, including detailed financial metrics, peer comparisons, and expert analysis of MEG Energy’s market position and growth potential.

Full transcript - MEG Energy Corp (MEG) Q2 2025:

Jeannie, Conference Operator: Good morning, ladies and gentlemen. My name is Jeannie, and I will be your conference operator today. I’d like to welcome everyone to MEG Energy’s Second Quarter twenty twenty five and Six Months Results Conference Call. All lines have been placed on mute to prevent any background noise. After the Meg team’s remarks, there will be a question and answer session.

If you would like to withdraw your question, please press star one again. I’d like to remind our listeners that this call contains forward looking information. Please refer to the advisories in MEG’s disclosure documents filed on CR Plus and on their website for more on these disclaimers. Full details on MEG’s second quarter and six months results are available in yesterday’s press release. At this time, I would like to turn the conference over to Darlene Gates, President and CEO of MEG Energy.

Please go ahead. Thank you, Jenny.

Darlene Gates, President and CEO, MEG Energy: Good morning, everyone, and thank you for joining us to review MEG Energy’s second quarter twenty twenty five financial and operating results. I’ll begin today’s call by highlighting our financial performance and strategic execution before turning it over to our CFO, Ryan Kubik, for a more detailed look at the numbers. Also joining us this morning are additional members of our senior management team, Tom Gear, our senior vice president of Oil Sands, Eric Olsen, our senior vice president of marketing, and Lal Yudowski, our senior vice president of corporate development and legal. I’m incredibly proud to share that the MEG team safely and successfully completed the largest planned turnaround in our company’s history. What makes this achievement even more impressive is that it was completed while navigating the added complexity of regional wildfire conditions with an unwavering commitment to safety of our people and the communities we serve.

The turnaround was completed on time, on budget, and with exceptional safety performance across all key metrics. In addition, we completed over a 150 tie ins for our facility expansion project, helping to minimize future production interruptions and advance our growth plan. This project, which will add 25,000 barrels per day of production capacity by mid-twenty twenty seven, remains firmly on track and on budget. Thanks to the strength of our asset base and the resilience of our business model, MEG generated a 148,000,000 in free cash flow in the first half of the year and returned 220,000,000 to shareholders repurchasing approximately 3% of shares outstanding. At current strip pricing, we’re on track to generate over 500,000,000 of free cash flow in 2025.

As I mentioned, the wildfires, which impacted communities and operators across the region, caused damage to third party infrastructure, which delayed our post turnaround ramp up by approximately twelve days. Despite this, our team restored production to pre turnaround levels within two weeks of restart, and July production averaged about 109,000 barrels per day positioning us for a strong second half. In the second quarter, bitumen production averaged 63,500 barrels per day with an average steam to oil ratio of 2.38. As expected, the turnaround reduced volumes by approximately 32,000 barrels per day with wildfire contributing an additional 12,000 barrels per day. Full year 2025 operating and capital guidance will remain unchanged.

Our world class Christina Lake assets combined with our strategic growth initiatives positions us to deliver low risk, capital efficient growth, reduce per barrel costs, and generate significant shareholder return. Before I turn it over to Ryan, I’m pleased to share that May’s board of directors has approved a 10% increase in our quarterly dividend, raising it to 11¢ per share payable on 10/15/2025. This increase reflects our confidence in the strength and resilience of our business model, our commitment to disciplined capital allocation, and our focus on delivering meaningful returns to shareholders. With that, I’ll turn it over to Ryan for a more detailed look on our financial results.

Ryan Kubik, CFO, MEG Energy: Thanks. As Darlene mentioned, MEG’s dividend increase is supported by our strong financial performance. And with low corporate breakeven, MEG is positioned to sustain and grow that dividend over the long term through disciplined investment and share buybacks. At current strip pricing, we expect to generate over $375,000,000 in free cash flow in the 2025, providing ample flexibility to support our capital allocation priorities. Adjusted fund flow in the second quarter of this year was $125,000,000 or $0.49 per share, reflecting the impact of lower bitumen realizations and reduced sales volumes due to the planned turnaround and wildfire related delays.

The WCS heavy oil differential narrowed to US10.27 dollars per barrel in the quarter, supported by improved pipeline access and strong demand for Canadian heavy crude. That differential, however, was more than offset by the WTI benchmark price, which averaged below US $65 per barrel, influenced by global economic uncertainty and increased OPEC plus supply. Our operating costs, net of power revenue, were $10.88 per barrel in the second quarter, including nonenergy operating costs of $8.16 per barrel. These per barrel operating costs will be significantly lower in the second half of this year as production rises and we start up new wells and high quality resource. Capital expenditures in Q2 totaled $200,000,000 up from $123,000,000 in Q2 twenty twenty four, driven by our planned turnaround and continued investment in our facility expansion project.

While our share buybacks are temporarily paused due to the unsolicited offer process, our capital return strategy remains unchanged, and we plan to resume share repurchases when able. With that, I’m going to turn the call back over to Darlene for closing remarks.

Darlene Gates, President and CEO, MEG Energy: Thank you, Brian. I’m incredibly proud of how our team delivered this quarter, executing a two hundred and fifty thousand hour turnaround while advancing our strategic growth initiatives and maintaining operational resilience through challenging wildfire conditions. MEG is uniquely positioned to deliver low risk, capital efficient growth to a 135,000 barrels per day, while continuing to reduce per barrel cost and generate robust free cash flow. Our stand alone strategy is compelling, anchored by the strength of our world class Christina Lake assets and supported by a deep portfolio of attractive growth opportunities at Surmont, Kirby and Nay River. As previously announced, our board initiated a strategic review on June 16 to explore whether a superior alternative to our stand alone plan exists.

That process is ongoing, and we will provide an update ahead of the expiry of the unsolicited bid in mid September. We will not be commenting further on the review during today’s call. I want to thank our shareholders for their continued confidence and engagement. Your support is critical as we navigate this pivotal moment in Meg’s journey. And with that, we’re happy to answer any of your questions.

Jeannie, Conference Operator: And your first question comes from the line of Neil Mehta with Goldman Sachs. Please go ahead.

Ryan Kubik, CFO, MEG Energy: Yes. Good morning, Darlene and team, and understood on some maybe some limitations on the M and A side. I had a couple of questions around projects. And the first is just the facility expansion. You said in the release that you’re on track for 2027, and you got a lot of tie ins that were completed during the turnaround.

But just your perspective on how that’s ramping, what are the critical path items, that’s that’s probably the most important project in in your in your docket right now.

Darlene Gates, President and CEO, MEG Energy: Yeah. Thanks, Nina. I’ll do I’ll start, and then I’ll have Tom jump in with the some additional commentary. I you hit it very well. It is a very strategic important project in our portfolio, and the team has been executing exceptionally well.

The first step for the team was to hit those tie ins during the turnaround. They delivered that during the time frame turnaround still maintains its cost and schedule. And the next step that they’re working on right now is field construction activities are underway. And recently, they completed the steam generator. You might have seen some pictures out there on the steam generator, you know, facility that’ll be going out on the foundation later this quarter.

And and I’d also say that that they’ll start some of the modules by later this year. So those will be this year’s kind of major milestones. And as we move ahead, really, steam generation will start next year. And then the facility expansion, the rest of that project will include the third processing chain. Tom, any other commentary you wanna throw to you to add more color around that?

Tom Gear, Senior Vice President of Oil Sands, MEG Energy: Yeah. No. Thank you. Think the the teams have been progressing this really well with regard to critical path. All key long lead items have already been purchased.

So when you look at that, it’s really about field construction at this point through the following year and then into 2027. So it’s really just the field execution pieces of this. And as Darling mentioned, we’ve got module deliveries happening later on, and that will be just the assembly of all these components to provide that in service date in 2027.

Darlene Gates, President and CEO, MEG Energy: It’s amazing, Neil, if I just summarize all of that, it’s firmly on track and on budget, and we’re about 15% completed to date.

Ryan Kubik, CFO, MEG Energy: Right. That’s very helpful. And then I know there’s limits in terms of what you could say around the strategic review. Darling, can you just remind us what you said about time line around it? Is there any parameters around that?

Just even if you can reiterate your public comments around that.

Darlene Gates, President and CEO, MEG Energy: Yeah. As we noted and and you mentioned in the prepared remarks, we’re not commenting on the strategic review process on the call today. But what we have said is that the board will be coming back by mid September with an update to our shareholders.

Ryan Kubik, CFO, MEG Energy: That’s perfect. Thank you, Catherine.

Darlene Gates, President and CEO, MEG Energy: Thank you.

Jeannie, Conference Operator: Your next question comes from the line of Dennis Fong with CIBC World Markets. The

Ryan Kubik, CFO, MEG Energy: first one is just around sustaining CapEx and the standalone opportunity set that you highlighted. You discussed an idea of kind of driving sustaining CapEx towards $10 per barrel from $12 beforehand. Can you comment a little bit around, is this predominantly scale? Does this incorporate larger timing between turnarounds or further efficiencies that you see in terms of, obviously, extended central processing facility footprint?

Darlene Gates, President and CEO, MEG Energy: Hey. Good morning, Dennis. I’ll start, and then I’ll ask the team to jump in again with any other commentary they wanna add here. As you know, the sustaining capital as we move forward is a combination of many different things. Starting with turnarounds for sure, extending them from three years to four years is clearly the path that the team has laid out for us after the successful turnaround.

That’s the first component. But another major component is just around the development plan that the team has laid out. They’ve got most of the infrastructure as they start to develop down to the Southeast and also to the Northwest. And once you make that primary investment of the infrastructure, then you’re tying off you’re tying into that infrastructure with the additional path. Allows you to get a very capital efficient program because you’re making those investments today and then benefiting from those with additional path.

Brian, Tom, any other comments?

Ryan Kubik, CFO, MEG Energy: Other than, you know, we are expecting sustaining capital, we’ll stay right around the $450,000,000 level where it is today. And so you do get that economy of scale as production rises with our FEP. You’re spreading that relatively fixed cost base over more barrels, bringing the per barrel cost down a couple of dollars per barrel. Great.

Jeannie, Conference Operator: Are no further questions at this time. I will now turn the call back over to Darlene Gates for closing remarks.

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