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.

Portfolio Update: Adding To My Energy Holdings

Last Wednesday was a test for energy investors. Did you resist the urge of following the masses by selling your energy holdings?

I resisted. I added to my favorite energy holdings last Wednesday, which are Gear Energy, Point Loma Resources and Raging River Exploration. Those companies can survive low oil prices and then thrive once oil prices rise.

Here are my recent moves in the market.

First, I sold all the lithium explorers I bought last month: Critical Elements, Nemaska Lithium and Natan Resources, now Enforcer Gold. I was lucky to turn out a profit on this: Critical Elements skyrocketed 50% after investors learned the company had hired a communication firm for a year.

This experience would be cash neutral at best if it wasn’t for this gain. Just for example: Enforcer Gold switched its focus to gold exploration after I bought the stock for its lithium properties. All in all, this is another point to not speculate on the market.

Second, I sold TransGlobe Energy. It turns out the Canadian assets aren’t as transformative as I thought they would be. I first estimated netbacks at C$11.50 per barrel for total consideration of 6X 2017 FFO. Instead, netbacks were as low as C$6 per barrel in Q4, which implies an estimated price tag of over 10X 2017 FFO.

The Cardium light oil acreage should provide interesting returns according to past presentations from Angle Energy. Management will drill these lands only in late 2017. Therefore it will take some time before shareholders see something good from these assets.

I sold what was left of my position in MEG Energy 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.

I added massively to my positions in Point Loma Resources, Gear Energy and Raging River Exploration using these gains.

I bought back Tidewater Midstream and Infrastructure on Friday after selling the stock two weeks ago. Support was limited below the 200-day moving average.

TWM March 13


Low AECO prices in Western Canada may delay growth projects by producers and lower flows in pipelines owned by TWM in the short-term.

I am now heavily positioned in the oil and gas sector with a strong presence in junior Canadian E&Ps with low leverage and high netbacks. Those companies can survive at $50 WTI and thrive at higher prices.

Disclosure: I am long GXE, PLX, RRX, TWM. Not for republication on Seeking Alpha.

Portfolio Update: Moving Chips To My Winners

I am now well positioned for 2017 after another series of move in my portfolio.

  • I added to my positions in Painted Pony Petroleum and in Gear Energy by selling part of my position in MEG Energy. I am preparing my portfolio for lower oil prices.
  • I opened a position in Tidewater Midstream & Infrastructure.
  • I bought back shares in TransGlobe Energy. TransGlobe’s Canadian transformation is a game changer to me. Plus the acquisition metrics are very good for TransGlobe shareholders.
  • I opened a position in Point Loma Resources.

I made a quick analysis for Point Loma Resources after hearing about the stock on Seeking Alpha. The stock is indeed trading at a very low 6.3X Year-End 2016 FFO. I estimate FFO of C$17.92 per barrel at year-end 2016. Furthermore, the company holds no debt except for convertible debentures and plans to grow production aggressively next year. In other words, the multiple should be higher.

Other interesting news for Canadian oil and gas producers: lower oil exports from Venezuela and possibly lower transport tariffs from TransCanada.

Lower heavy crude from Venezuela will benefit Canadian heavy oil and tighten the price differential of Canadian heavy oil versus WTI.

Finally, the new push for natural gas pipelines in the Northeastern US will force TransCanada to lower its transportation tariffs. Else it will face a severe decrease in its market share in Eastern Canada.

Disclosure: I am long GXE, MEG, PLX, PPY, TGL, TWM. Not for republication on Seeking Alpha.

Portfolio Update: Aggressive Moves To Start 2017

Here are my trades to start the year:

  • I added to my position in Amaya. Indeed, bad names will stop appearing in bad actor clause negotiations now that both David Baazov and Daniel Sebag are gone. Plus Amaya’s operations are coming out as very strong.
  • I bought back shares in Corridor Resources, as you know. It’s now or never for Corridor to move west and grab assets on the cheap before oil heads substantially higher. I need to go long before reading about the acquisition in a press release.
  • I added to my position in MEG Energy after the company announced a major refinancing plan.
  • I added to my position in Painted Pony Petroleum. The company is still undervalued despite being up 60% since I bought it nine months ago.

I also went long lithium by buying all the junior exploration companies operating in Quebec: Critical Elements, Nemaska Lithium and Natan Resources. I’ll let you know shortly how I narrowed it down to those three companies.

Disclosure: I am long AYA, CDH, CRE, MEG, NMX, NRL, PPY. Not for republication on Seeking Alpha.

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.

Oil Sands Magazine, January 2017

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.

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.