MEG Energy: Tough But Good Decision

MEG Energy had a very good run since OPEC’s deal late last November. This all came crashing down on January 12: The company announced an ambitious refinancing and growth plan. First, here is what we know as of now:

  • The credit facility’s maturity date is extended to November 5, 2021
  • The amended credit facility will permit certain opportunities to de-lever without lender’s consent
  • The $1.2B term loan will be refinanced to extend its maturity (no word yet on pricing and due date)
  • The $750M notes due 2021 will be refinanced (unchanged at 6.50%) and extended to 2025
  • The company will issue over 66 million shares for C$7.75 apiece

All over-leveraged energy E&P companies I know had to issue shares and dilute existing shareholders to survive. The share count will increase 30% in our case. I think overall this is good news despite what the market thinks (bad news). I understand the reaction:

  • First and foremost: the Access Pipeline still isn’t sold
  • The current 2017 production guidance points to lower production
  • The massive growth capital program (C$320M in 2017 and C$80M in 2018) will reach full capacity only in early 2019
  • The company is committed to paying more in financing costs with extended maturities

This confirms that the company wasn’t able to sell the pipeline because of its credit profile. The market is missing something however. There is now renewed hope the sale will go through because of this refinancing plan:

  • Extended maturity dates
  • 25% growth to 100,000 bopd in two years
  • MEG’s shares are in strong demand from what we saw last week
  • OPEC’s changing stance concerning oil prices
  • Lower cash costs by 2019

All of this should help convince institutional investors that now is the time to buy the pipeline. For me, the pipeline sale is the biggest catalyst yet to come. And this refinancing plan is another step towards its realization.

I added to my position on January 12.

Disclosure: I am long MEG. Not for republication on Seeking Alpha.

Price Differential Of Canadian Bitumen

Knowing the price differential, or how it is calculated, will give you an hedge compared to other investors.

Indeed, Canadian oil is cheaper when sold in the US. It is fairly obvious for anyone invested in Canadian oil and gas companies, especially in the oil sands industry.

WCS Comparison Prices US Feedstock January 11

Source: Oil Sands Magazine

As we can see, the Mexican Mayan sells for $10 extra versus the Western Canada Select, despite both being comparable heavy oil grades. This price differential is also known as the heavy oil discount.

Light sweet crude oil requires less energy to refine and should theoretically sell for a better price. This might have been true in the old days but the logistics of moving the right type of crude to the right customer creates price differentials that go far beyond just quality.

Source: Oil Sands Magazine

The realized sales price is a function of the cost of actually moving the Canadian heavy oil to the refineries.

WCS Shipping Costs January 11

Source: Oil Sands Magazine

We can estimate a minimum heavy oil discount of $10 per barrel. The transportation costs will double depending on the route taken by the oil, say if your oil is moved by train.

Not for republication on Seeking Alpha.

Pine Cliff Energy: Good News At A good Price

Pine Cliff Energy recently sold a non-core oil asset for C$31M. This asset produced 500 boe per day, which brings us to a price of C$62,000 per flowing barrel.

Not bad as Raging River Exploration recently completed a transaction in the Viking area for C$85,000 per flowing barrel. The premium is understandable as the transaction included more than 100 additional drilling locations.

This sale reduces Pine Cliff’s net debt drastically to C$75M from C$125M in August. This will strengthen the company and allow it to thrive in the uncertainty ahead.

Indeed, while natural gas futures increased in 2017, the outlook for 2018 and beyond turned bearish.

AECO Natural Gas Monthly Index December 10

Source: gasalberta.com

The company will be able to withstand a period of lower natural gas prices with its cleaner balance sheet. Just to remind us:

The current environment of natural gas prices has created opportunities to continue to make value-adding and potentially counter-cyclical acquisitions and Pine Cliff anticipates that it will continue to be able to act quickly on acquisition opportunities identified and to fund these activities from working capital, debt or equity issues.

Source: Pine Cliff Energy’s website

Pine Cliff itself was in trouble in early 2016: management wasn’t thinking about potential value-adding, couter-cyclical acquisitions in April 2016. The cleaner balance sheet will enable Pine Cliff to execute its strategy and withstand price shocks.

Disclosure: I am long PNE. Not for republication on Seeking Alpha.

MEG Energy: My Thoughts After The OPEC Deal

MEG Energy’s stock is skyrocketing. Mostly, sentiment changed in the market. The agreement between OPEC countries brings back the notion of higher oil prices in the future instead of the lower for longer rhetoric we have been hearing.

There are many reasons for the rally:

First, the company has low-cost operations. It took the company C$14.00 per barrel to take its oil and bring it to the market.

Second, sustaining capital is low. The company makes free cash flow as soon as WTI oil price hits $50.

Third, the company plans to grow oil production by 30,000 barrels per day, a 38% increase. Management was waiting for one thing before ramping up growth projects:

[…] we are looking at the macro conditions and trying to understand where OPEC’s at.

Bill McCaffrey, CEO of MEG Energy, 3Q 2016 conference call

As you know, the company carries a heavy debt burden. However, almost a third of its debt will be gone when the pipeline is finally sold. The current change in sentiment will certainly help in realizing the sale.

My investment was somewhat of a dud before the current rally. I was wrongly banking on the pipeline sale and the consequent deleveraging. It never happened and the stock was stagnant.

There is another bright spot: there has been no shareholder dilution as of now.

Next year’s guidance will be released in the coming weeks.

Disclosure: I am long MEG. Not for republication on Seeking Alpha.

Choosing An Unlevered Canadian Energy E&P

I raised cash after selling part of my Amaya position (I bought back some, as I said on StockTwits). To let you know: I already spent that cash on Gear Energy last week. My quick calculations were right: Gear Energy is cheap.

I will be looking for a solid balance sheet just in case the rout in oil prices continues. As you know, I already own MEG Energy, a leveraged E&P company. One is enough.

I made a basic stock screening of Canadian oil E&P companies (75% or more liquids production) with low debt (total debt on equity needs to be under 30%).

Unleveraged Oil E&P - TSX Screening

TSX TickersNet debt (C$M)EV (C$M)FFO (C$M)Net debt/FFOEV/FFO
WCP7954,6584231.911.0
RRX1002,2561970.511.4
SPE481,048760.613.9
CJ23647530.412.1
GXO29184211.48.9
GXE34178251.97.5

Source: Corporate presentations and my own work.

I already own Raging River Exploration. I will include the company in today’s comparison nonetheless. I have been handsomely rewarded by holding on Raging River Exploration, let’s try and repeat that.

As you know, I need an unlevered company. Gear Energy is an unlevered company in disguise for three major reasons:

First, 38% of Gear Energy’s debt is convertible to equity. The extra dilution from these convertible debentures is included in the EV/CF ratio.

Second, Gear Energy’s cost profile will improve. Indeed, the company purchased Striker Energy, a light oil producer in Western Alberta. This will increase corporate netbacks by over 25%.

Finally, Gear Energy plans to increase production by 10% next year while holding debt steady.

The additional cash flow and decreasing leverage warrant a higher EV/CF ratio. Furthermore, Gear Energy’s transformation is complete after multiple dilutive equity placements.

The company took care of its balance sheet and bought a light oil producer to diversify its production away from heavy oil. It also has an incredible board member in Neil Roszell (CEO of Raging River Exploration), which I know well.

I will update the table above with estimated numbers for next year. I believe the picture will be even clearer.

In conclusion: I’ll buy the dips.

Disclosure: I am long GXE. Not for republication on Seeking Alpha.

Amaya: Why I Sold My Shares

I sold my entire Amaya position for C$20 per share today.

The numbers: We know C$24 per share is the best we can get in the short-term. The deal’s failure will lead to a fall of C$4-5 per share to C$15, the price at which I recently bought.

Selling now ensures me a 30% gain and the possibility of buying back shares at a depressed level should the deal fail. However, I might be leaving money on the table.

Last but not least: the profits can be relocated to other stocks.

Be certain though: I will buy again if the stock hits the C$15 mark.

Not for republication on Seeking Alpha.

Amaya: Water Under The Bridge

[…] the Board concluded that at this time remaining as an independent publicly-traded corporation best positions Amaya to deliver long-term shareholder value. […] Amaya and William Hill have determined that they will no longer pursue the merger.

Source: Amaya

The market saw this as very bad news: Amaya’s stock dropped 10% today. I disagree. The company still has too much debt to consider merging with another company.

Not all is bad: the company plans to grow its 2016 adj. EBITDA and net earnings by 10% and 20%, respectively. Free cash flow and net earnings will grow nicely.

As we can see, adj. net earnings will grow faster than adj. EBITDA as the online casino business pick up steam. Indeed, the online casino business has very high operating margins (upwards of 90%, per a previous conference call). In other words: it greatly affects the bottom line.

Full Q3 2016 results are expected within a month.

Disclosure: I am long AYA. Not for republication on Seeking Alpha.