MEG Energy CEO says recent transactions ‘significantly de-risk’ company by extending maturity profile

By Paul Deckelman

New York, Feb. 9 – MEG Energy Corp. successfully completed a series of recent financial transactions, which the Calgary, Alta.-based oil-sands energy producer’s president and chief executive officer said “significantly de-risk” the company.

William “Bill” McCaffrey told analysts on a Thursday conference call following the release of MEG’s results for the 2016 fiscal fourth quarter and full year ended Dec. 31 that the transactions, which closed on Jan. 27, “will underpin our vision for the future.”

One was the extension of the company’s covenant-lite revolving credit facility to November 2021 from its previous expiration date in 2019. The commitment amount of the revolver is US$1.4 billion, down from the previous facility’s US$2.5 billion. The revolver has no financial covenants and is not subject to any borrowing base redetermination.

MEG chief financial officer Eric Toews noted that the revolver at present remains undrawn.

McCaffrey also noted that the company had refinanced its US$1.2 billion term loan, extending its maturity from March 2020 to December 2023. The refinanced term loan will bear interest at an annual rate of Libor plus 350 basis points with a Libor floor of 1%; the former term loan carried an interest rate 275 bps over Libor.

MEG also visited the junk bond market, selling $750 million of 6½% senior secured second-lien notes due 2025, which priced at par to yield 6.501% in a quickly shopped transaction on Jan. 12. Proceeds from the new deal were used to refinance its existing $650 million of 6½% senior notes due 2021.

And the CEO noted that the company had raised C$518 million via an equity transaction “which will substantially fund our 2017 capital program.”

That capital was raised in the form of subscription receipts on a bought-deal basis from a syndicate of underwriters; MEG said on Jan. 27 that the escrow release conditions for that subscription receipt offering had been satisfied and the issued subscription receipts will convert into common shares with no further action on the part of holders.

McCaffrey said that those financial transactions “provide us with a five-year window to grow production, reduce costs, and strengthen our balance sheet with essentially no change to our interest costs. The fact that we were able to materially extend our maturities with very little incremental cost indicates just how supportive our bank group and credit markets are of the quality of MEG’s assets, our execution track record, and the overall direction of the company.”

He continued that “we’re really pleased with the equity raise – that the equity raise went so well and was so supported by the marketplace. This opens the door for us to return to growth,” as the company begins implementing eMSAGP – a production process involving the injection of steam into oil sands reservoirs to recover the heavy petroleum in there – at its facility in Christina Lake in northern Alberta. McCaffrey said that MEG would direct approximately C$320 million towards this initiative out of its overall capital budget of C$590 million.

He further said that MEG expects the implementation of the eMSAGP and the expansion of the company’s brownfield project to access petroleum from already mature oil fields would bring its overall production up to some 113,000 barrels and reduce its cash cost by C$6 to C$7 per barrel, and that “using strip [i.e., current market] prices, we believe we can reach a net debt-to-EBITDA ratio of 3[times] to 4 [times] once these projects are completed.

He said that “we anticipate there will be further improvements to our debt metric as subsequent projects are developed. In addition the refinancing transactions we recently completed give us the added flexibility to pursue additional deleveraging alternatives which would improve our debt metrics even further.”

During the question-and-answer portion of the conference call following the formal presentations by McCaffrey and Toews, an analyst wanted to know whether the company had any specific deleveraging moves in mind, such as the possible sale of its 50% ownership stake in the Access Pipeline, a 214-mile dual line running between MEG’s Christina Lake Project and the Edmonton-area upgrading, refining and transportation hub, where the Access Sturgeon terminal is located.

McCaffrey replied that “we look at a number of opportunities. It wouldn't be right for me to comment on them right now. We do look at certainly Access and we are looking at other possibilities as well. But the general comment on it would be they all have to stand on their own merit. They have to make sense financially to us, and they can’t have too high a cost to us.

He concluded that “we did work while we got our debt restructured to allow us freedom to do more of that if it makes sense with those conditions in mind.”

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