Summary
MEG reported good Q1 results. Production is flat and can start to grow after 2026. The balance sheet is very sound. MEG is a profitable company. Q1 profits were above expectation due to low depletion/depreciation charges and low royalties. PE is medium/high. Returns in 2025 are decent and can increase after 2026. MEG profits and shareholder returns are robust under low oil prices.
In my 85 oil and gas company ranking MEG sits in the top 10 at a high 7th position.
Production
• MEG is using a using steam-assisted gravity drainage (SAGD) to produce heavy bitumen. The production of MEG since 2019 has been fairly flat as steam facilities have not been expanded. Production increases (9%) were due to efficiency improvements in the SOR. Production grew from 93.6 K BoE/d 2019) to 102.2 K BoE/d (2024).
• Q1 production (103.2 K BoE/d) was slightly above Q4 (100.1 K BoE/d). I had expected a production of 102 K BoE/d. MEG did not provide a Q1 outlook.
• MEG reiterated its 2025 outlook of 95-105 K BoE/d, indicating a flat production in 2025 compared to 2024 (102 K BoE/d).
• MEG did not provide a Q2 outlook. I expect a Q2 of 94 K BoE/d. The dip is due to annual maintenance activities.
• MEG has started a Facility Expansion project which will increase production with 25 K BoE/d. The project will be completed in 2026. As the reservoir with new wells will need time to warm up the first benefits in production can only be seen by mid-2027.
• Production from 2027 onwards can be up to 125 K BoE/d. This can be sustained for a long period as MEG has ample reserves (1,158 M BoE). MEG may decide in the future on a further expansion projects. This is not included in my model and I will keep this as an upside.
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Balance sheet
• MEG has a solid balance sheet.
• Q1 equity ratio (=equity/balance sheet total) was a high 68.0%, slightly up from the 67.5% in late 2024.
• Q1 long-term debt (C$ 857M) was flat to late 2024 (C$ 858 M). The Q1 debt/EBITDA ratio on an annual basis is a low 0.60,
• The balance sheet does not need reinforcement and allows for generous shareholder returns.
Profitability
• MEG is a profitable company.
• Q1 eps was C$ 0.82. versus C$ 0.35 in Q4. I had expected an eps of C$ 0.35. The eps was boosted by a C$ 0.25 due to a change in depreciation/depletion strategy. This is a non-cash item.
• Royalties are normally a moderate 11-12%. Royalties in Q1 (8.2%) were lower than expected.
• Unit costs (including depreciation/amortization, overheads, and interest, but excluding diluent) are a medium low US$ 35/bbl.
• For 2025, with WTI at $ 60-65/bbl and a 5% reduction on Canadian oil prices due to US imports, I expect an eps of C$ 1.69-1.96. The PE is a high 10.0-11.6.
• In 2029, with the higher production from the expansion project, the eps can increase to C$ 1.85-2.34 (PE drops to a medium 8.4-10.6).
• MEG profits are robust under low oil prices.
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Shareholder returns
• Shareholder returns are decent.
• MEG has indicated it wants to returns 100% of the FCF to shareholders.
• MEG pays a quarterly dividend of C$ 0.10, or C$ 0.40 on an annual basis. This is equivalent to a return rate of 2.0%.
• MEG bought back shares for C$ 159 M in Q1.
• Shareholder returns in 2025 at $ 60-65/bbl should equate to a decent 7.1-8.8%.
• Starting 2027 returns can increase to 11-13%.
- MEG - returns.jpg (46.64 KiB) Viewed 216 times
Conclusions
MEG reported good Q1 results. Production is flat and can start to grow after 2026. The balance sheet is very sound. MEG is a profitable company. Q1 profits were above expectation due to low depletion/depreciation charges and low royalties. PE is medium/high. Returns in 2025 are decent and can increase after 2026. MEG profits and shareholder returns are robust under low oil prices.
In my 85 oil and gas company ranking MEG sits in the top 10 at a high 7th position.