The next couple weeks will be busy processing quarterly earnings reports.
Oil and gas, however, will be the most interesting. There will be a bonanza of cash flows.
MEG Energy (TSX: MEG) was the first off the bat.
I’ll spare the details and focus on the following line in their PR:
Based on the current commodity price environment, MEG anticipates generating approximately $275 million of free cash flow in the second half of 2021, which will be directed to further debt repayment.
Just below that they talk about one of the worst hedges I can think of, which was to hedge for oil prices in Q2-2020 in a US$39-46 WTIC band. They have about 1/3rd of their production hedged at this level (29k BOE/d) which has lost them a gigantic amount of money. Fortunately it is done after the year is over, but it will be another $125 million of damage (lost potential) at current prices. The hedges cost them nearly half a billion dollars in lost opportunity in the first half of the year.
Adjusting for their hedge disaster, the “true” projected free cash for the second half is closer to $400 million.
Considering the enterprise value of the company is around $5 billion, that’s trading slightly above 6x EV/FCF. This isn’t a case of some US shale driller with a 35% annual decline rate – MEG’s asset is much longer lasting.
MEG currently does not give out a dividend. They are pouring free cash into reducing their debt – they announced they are paying back US$100 million of their existing US$496 million 6.5% senior secured second lien notes (matures 2025). At the rate cash is being generated, they will be able to retire debt this sometime in 2022, and after they will be able to work on the US$1.2 billion 7.125% senior unsecured notes. This tranche matures in 2027.
If oil stays at current pricing, the debt gets removed pretty quickly (in addition to saving money on interest expenses).
Eventually there is a point where it becomes logical to buy back stock, assuming they stay at 6x EV/FCF. It’s a matter of whether management wants the sure 6.5 to 7.125% return, or whether they want to buy back stock at a 16% return on equity.
I speculated that somebody else might be happy to do that for them.
just got in the mail today a big thick booklet about Surge Energy and Astra Oil (?) “proposed plan of arrangement” being held Aug 17th – Surge was on death’s door last spring and has rebounded somewhat over past year. Now like Uncle Jed on Beverly Hillbillies I got some ciphering to do