MEG Energy: A Strong Vote Of Confidence

MEG Energy Corp. (TSX:MEG) (“MEG” or the “Company”) is pleased to announce that it has entered into an agreement with Wolf Midstream Inc. (“Wolf”) for the sale of the Company’s 50% interest in Access Pipeline and 100% interest in Stonefell Terminal (the “Transaction”) for cash and other consideration of $1.61 billion, representing 13.4x 2018 annualized EBITDA.

MEG Energy Press Release, February 8, 2018

Finally, I have been waiting for a year. Here is what I said in March of last year:

I sold what was left of my position in MEG Energy (MEG) for a sub-50% gain. WTI at sub-$50 won’t be enough for MEG to sell its pipeline at a good price. Hence share price appreciation will be limited in the short-term.

Cadotte Capital Partners, March 13, 2017

Share appreciation was indeed nonexistent for the last year. A combination of higher oil prices and lower production costs lead Wold Midstream to finally buy the 50% interest remaining in the Access Pipeline. Wolf, a subsidiary of the CPPIB, believes MEG will be able to supply its pipeline with plenty of crude for the next 30 years.

MEG Energy got the same price than Devon Energy, despite its much smaller size. It’s a strong vote of confidence in the operations of MEG Energy. The proceeds will go to repaying some of the debt and accelerate growth plans.

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

Canadian Natural Gas Disaster: Outlook And Strategy

  • Natural gas demand in Western Canada was vastly overestimated;
  • All while natural gas supply was grossly underestimated.
  • Game-changing egress isn’t in sight.
  • Natural gas stocks will continue to underperform in the medium-term.
  • I’ll sell Painted Pony in mid-February.

Click here to read the entire article on Seeking Alpha.

Painted Pony: The Capital Lease

It all started with this:

In addition, the Company has completed an engineering study with a third party midstream company to build a natural gas processing facility, including refrigeration and associated liquids handling, at the Townsend 33-J pad with an expected capacity of approximately 190 MMcf/d. This new plant is anticipated to commence operations in late 2015 pending execution of final agreements, and is expected to reduce transportation, processing, and operating costs, and increase liquids production.

Painted Pony Energy Press Release, August 13, 2014

In other words, Painted Pony will be paying fat fees to AltaGas for a long time.

Fast forward to today, and the capital lease expense will amount to C$60M in 2018, or C$0.59 for each Mcf from Townsend (commitment of 267 MMcf/d starting January 1, 2018).

It’s not all bad. AltaGas spent C$440M to build the facility. Using debt, this would translate to C$35M of interests per year from the financing rate of last August. Plus the additional leverage, which would have been unworkable in the current natural gas environment.

Painted Pony gained access to a new processing plant without adding debt, while sacrificing some of its netback from the associated production. The charge of C$0.59 per Mcf from Townsend is significant.

LNG being so far down the road, the upside from this partnership in the medium-term is the marketing of NGLs by AltaGas. Painted Pony will be able to export propane to Asia as soon as Q1 2019.

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

TransGlobe Energy: I Bought Some

Added a small position this morning.

What I’ll be looking for in the coming months:

  • Funds flow from operations, meaning healthy heavy oil discount (management expectation: $10 per barrel).
  • Performance of the Canadian asset (management expectation: very bullish).
  • Egyptian oil production (management expectation: increasing production with the new drilling crew).

Some more info to look out for:

TGL November Presentation November 9

Source: TransGlobe Energy, November 2017 Corporate Presentation

I now have skin in the game.

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

Razor Energy: Light Oil Value

Meet the newest member of my portfolio: Razor Energy.

Source: TMX Money

Razor produces light oil and NGLs through the Swan Hills Platform and additional liquids from the Kaybob South area. The company acquired the Swan Hills assets from Penn West Petroleum in 2016. The Kaybob South assets were purchased in 2017.

Assets

The Swan Hills reservoir has been producing oil since 1962. Here is what the ownership of Swan Hills looked like in 2011.

Source: A&D Drill Bits, BMO Capital Markets, 2011

Since then, operators have changed: There has been a lot of activity surrounding the company’s core assets in the recent past.

Source: Razor Energy, November 2017 Corporate Presentation

Cardinal Energy bought assets in September 2015 and then again in September 2017. Pengrowth Energy acquired those assets in April and September 2017. Crescent Point Energy was active in consolidating the whole area in June 2015. All those lands are adjacent to those of Razor, and part of both the Swan Hills Platform (located East of Swan Hills) and the Virginia Hills Units.

Already, back in 2015, Crescent Point noted there was a lot of upside in oil exploration using newer technologies in the area.

The Coral Hill Assets are large oil-in-place pools with low recovery factors to date and are in the early stages of horizontal development.

Scott Saxberg, CEO of Crescent Point Energy, July 2, 2015

Razor also plans to drill horizontal wells between the two Virginia Hills Units. The newer wells are shown in the red square below.

Source: Razor Energy, November 2017 Corporate Presentation

In detail:

Source: Razor Energy, November 2017 Corporate Presentation

Horizontal wells are shown as red lines in the image above. Wells are expensive (C$4M per well). One well was drilled in October 10 and two other wells are licensed as of now.

The Kaybob South assets are another area of focus for the company.

Source: Razor Energy, November 2017 Corporate Presentation

Returns are higher in this area particularly because of lower drilling costs. Razor acquired those assets in May 2017. Drilling is planned for 2018.

Production

(C$/boe)Q2 2017Q3 2017
Revenue46.8842.68
Other revenue4.323.29
Royalties10.868.24
Operating costs29.1130.86
G&A4.713.44
Financing4.572.01
DD&A7.026.47

Source: Razor Energy, 2017 Financial Statements, 2017 MD&A

Price realization is very good because of the type of oil sold. Depletion and depreciation is low. Give credit to the attractive price paid and the low production decline of those assets.

The only drawback is the very high operating costs, at almost C$30 per barrel. Even though management has made this a priority, operating costs can’t be reduced substantially. Management is targeting operating costs of C$27.50 per barrel.

Razor owns midstream assets which provided extra cash. This is identified as “Other revenue”.

Funds flow from operations were of C$0.09 and C$0.04 per share in Q2 and Q3, respectively (C$0.13 and C$0.10 per share excluding decommissioning obligations).

Funds flow from operations were lower in Q3 because of lower Canadian oil prices, mainly because of a strong Canadian dollar. This affected revenues to the amount of C$1.1M in Q3. Total funds flow from operations in Q3 would have totaled C$2.7M (C$0.18 per share) in Q3, 60% higher than in Q2. Funds flow from operations should rebound strongly in Q4, considering the lower Canadian dollar and stronger WTI oil prices.

In addition:

Included in the capital budget is $2.0 million to address the Alberta Energy Regulator’s requirements under the Inactive Well Compliance Program, and other end of life well and facility spending. The company spent $918 thousand in the third quarter of 2017 on asset abandonment activities for a total of $1.7 million year to date.

Razor Energy Press Release, November 23, 2017

As such, only C$0.3M in decommissioning obligations will be spent in Q4. Total capital expenditures should be similar than in Q3, at C$4.8M.

The higher cash flows from operations explain the aggressive NCIB by management. Razor already started to buy back shares of the company (more than 165,000 shares as of today). There are 15.8 million shares outstanding.

Conclusion

Negative: The company is in debt. The company has a C$30M term loan from AIMCo, bearing interests of 10% per year. Net debt stands at C$17M. The debt load is high considering funds flow from operations of C$1.3M and C$0.7M in Q2 and Q3. At the very least, funds flow from operations are already positive, even with low WTI oil prices ($48 in Q2 and Q3).

  • Insider ownership is good: Management and directors collectively own 22% of the company.
  • The light oil and NGLs production mix help mitigate Razor’s high costs.
  • The NCIB should give some volume to the stock and provide a floor for investors.

Insider buying has been very intense lately.

Source: Canadian Insider

I bought two weeks ago.

On another note: Purple is the new trendy color in oil and gas (see Obsidian Energy).

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

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