Montrose Environmental Group, Inc. Price & Performance (MEG)

Thank you, Lutie. Good morning, everyone, and thank you for joining us to discuss MEG Energy's year end 2024 financial and operating results. With me on this call this morning are Ryan Kubik, our Chief Financial Officer Lyle Udetsky, our SVP of Legal and Corporate Development and Eric Olsen, our SVP of Marketing. I'd like to remind our listeners that this call contains forward looking information. Please refer to the advisories in our disclosure documents filed on SEDAR Plus and on our website for more of these disclaimers. For full details on our year end results, please refer to yesterday's press release. 2024 was a significant year for MEG. We proudly celebrated our twenty fifth anniversary and our continued maturation as a leading pure play thermal oil producer. We are focused on delivering increasing free cash flow per share and sustainable shareholder returns. Thanks to our team's unwavering focus on safety, operational excellence and disciplined capital allocation, we were able to improve our safety performance, achieve record production, hit our net debt target, institute a quarterly dividend and sanction our facility expansion project. I now want to touch on some key points that speak to our strong financial and operational performance.

In 2024, we generated approximately $1,400,000,000 in adjusted fund flow and $837,000,000 of free cash flow. This strong cash generation enabled us to fulfill several key commitments to our shareholders, including balance sheet strength. We reached our U. S. 6 hundred million dollars net debt target following through with on a focused multiyear deleveraging strategy that began in 2018. Return of capital. We instituted a sustainable quarterly base dividend of $0.1 per share and repurchased and canceled 17,000,000 shares. Over the last three years, we have returned over $1,300,000,000 to shareholders through share repurchases and dividends. Production growth. We achieved our fourth straight year of record production at just over 102,000 barrels per day, delivered at a steam to oil ratio of 2.39, reflecting strong operational efficiency from our Christina Lake asset. Improved bitumen realizations. We benefited from our strategy of maximizing access to Tidewater to reach new international customers and improve realized bitumen prices. Heavy oil fundamentals significantly improved through 2024 as the TMX pipeline provided unconstrained egress from the basin. WTI to AWB differentials narrowed to approximately $16 per barrel in 2024, a $5 improvement over 2023. In the fourth quarter specifically, the WTI to WCF discount tightened to $12.56 per barrel from $21.89 in the fourth quarter of twenty twenty three.

This represented a 43% improvement. These tighter heavy oil differentials and reduced volatility demonstrate the importance of delivering Canada's energy to global markets and its fundamental benefit to Canadian heavy oil pricing. It also highlights why continued discussions surrounding diverse market access for Canadian oil and gas remains important. Now, I'd like to turn the call over to Ryan for a discussion of our financial performance.

Thanks, Darlene. MEG generated about $1,400,000,000 of adjusted funds flow for the year. Continued focus on cost management again yielded excellent results. 2024 operating expenses net of power revenue were top quartile at $6.32 per barrel, including non energy operating costs of $5.39 per barrel. Capital investment for the year was $548,000,000 which included the start of our multiyear production growth strategy. After capital expenditures, MIG generated $837,000,000 of free cash flow, enabling us to repay our remaining twenty twenty seven notes and repurchase 17,000,000 MEG shares or about 6% of our 2023 year end outstanding shares. In total, including $27,000,000 of dividends, we returned $481,000,000 to shareholders in 2024, up from $446,000,000 in 2023. Our share repurchase strategy has also enhanced our per share metrics, delivering a 5% increase in adjusted funds flow per share. In 2025, we expect to deliver strong results. Production guidance is between 95,000 to 105,000 barrels per day, including the approximate 8,000 barrel per day impact of our second quarter turnaround. Non energy operating costs are expected to remain highly competitive at between $5.3 to $5.8 per barrel. And capital expenditures are estimated at $635,000,000 including $130,000,000 associated with our facility expansion project and $70,000,000 for the turnaround.

With low leverage and no debt maturities until 2029, we continue our commitment to shareholder returns And MEG's Board of Directors has declared our next quarterly dividend of $0.1 per share for payment on 04/15/2025. With that, I'm going to turn the call back to Darlene for closing comments.

Thanks, Ryan. Before I close my remarks, I want to provide perspective on our positioning amid the current market dynamics. We continue to work collaboratively with industry and government to emphasize the importance of integrated North American energy markets and growing Canada's access to global markets. Looking ahead, our value proposition remains compelling and differentiated for MEG. In 2025, at a U. S. $70 WTI, we estimate generating $1,250,000,000 in adjusted funds flow with $615,000,000 available for shareholder returns. That's enough to repurchase approximately 7% of our outstanding shares. We have positioned MEG to thrive through various market cycles with our high quality resource base, operational excellence, low breakeven and strong balance sheet. This foundation supports our commitment to long term shareholder returns while providing the resilience to navigate changing market conditions. We remain confident in our strategic direction and are excited about MEG's future. In closing, I want to recognize everyone on the MEG team for their hard work and delivering on our commitments in 2024. On behalf of MEG's Board of Directors and our management team, I want to thank our shareholders for your continued support. With that, I'll turn the call back over to Luti, and we can begin the Q and A. Thank you.

We will now begin the question and answer session. And with that, our first question comes from the line of Greg Purdy with RBC Capital Markets. Please go ahead.

Yes. Thanks. Good morning. Thanks for the rundown, Darlene and Ryan. A couple of quick ones for me. There's just on the facility expansion we're seeing $470,000,000 so up $30,000,000 is that FX or FEED or what have you that's getting lumped in there to adjust that? And then, can you just really remind us of timelines for the expansion, please?

Sure, Greg. I'll jump in there. The total cost of the project is $470,000,000 What you're probably recognizing is the number in the business update that we provided at year end was a go forward number of $440,000,000 So, when you combine that with the $30,000,000 we spent in 2024, that makes the $470,000,000 So, just simple math there.

Okay.

And so, does that help? Okay. And then, timelines for the project, probably what we've got listed out, steam boiler foundation begins and long lead purchases in the first quarter of twenty twenty five. In the second quarter, we're looking at advanced engineering model reviews rates that taking you from the 60% to 90% model reviews and major facility tie ins during the second quarter turnaround. And as you look ahead in the first half of 'twenty six, you'll start getting the steam modules arriving in assembly and steam in service by year end 'twenty six. As you move into 2027, that's when the expansion part of the project, the processing part comes into the facility expansion.

Okay, that's great. Thanks for that. And then maybe just to pivot, you referenced just diversification and where the barrels are going. I'm really curious as to what you're seeing on the dock with TMX in terms of appetite for AWS. And then also just curious whether the pricing conditions you're seeing globally right now would actually justify taking on some spot capacity, whether that would be you or somebody else? And just curious whether the math would work at this point?

Thanks for that, Greg. It's Eric. As we look at operations on TMX, we're pleased with how that's been operating. We continue to see smooth operations with kind of no issues during the winter, which has been a positive. In terms of the demand for AWB, we continue to see strong global demand for heavy crude. With TMX, we've had the opportunity to get AWB into more international customers and their early processing experience with our crude has been great. So we continue to see that strong demand. In terms of the economics around the barrels moving off of TMX, it does change monthly depending on the local demand issues in Asia, what's happening with margins, turnaround conditions, etcetera. I think where you're likely to see spot shipments moving would be more around the time when gift tariffs come into effect. That's when you'd see the extra incentive to move a significant amount of spot capacity. For now, it's largely the contracted volumes that are moving.

And your next question comes from the line of John Royall with JP Morgan. Please go ahead.

Hi, good morning. Thanks for taking my question. So my first question is on SOR. I know you've talked about the SOR for your new well pads coming in quite low. But just looking at the overall, it ticked up a bit in 'twenty four relative to 'twenty three. Can you talk about the drivers there? And any puts and takes we should think about for 2025 on SOR?

Yes. I'll jump in. Thanks, John. I think, to our ratio for 2024, very consistent with what we've been sharing, more about the timing, seeing in the new pads and you don't get the production back right away. So, that drives your steam to oil ratio. As you move into 2025, you'll see that starting to come down. And part of what the better resource that we've been talking about in the business update as we look to the Southeast and to the Northwest, that better resource higher oil saturation will start to drive the steam to oil ratio in a downward trend as well. So, again, it's really resource driven that strong resource asset that we have will drive the improvements in the steam to oil ratio as we look ahead.

And then, my follow-up is on pathways. Can you just give us the latest on where the industry is in terms of working with the government to find a framework that works for everybody? And how far do you think we are off from that kind of framework at this point?

I'll jump in again on this one. Pathways, I always bring everybody back. Pathways is about driving cost and carbon competitiveness. That's really where the conversations are focused on. The alliance continues to advance the foundational carbon capture and storage project. So, we're looking to transport CO2 on the pipeline through multiple oil sands facilities from sequestration and then we inject it into the Cold Lake region. Those conversations continue with both federal and provincial and those dialogues continue. It really comes down to the progress of that is around driving that cost competitiveness. It's getting that to the next steps. And so, that's where the conversations and the focus continues. There's meetings happening as we speak right now. That is the focus of the team and we're still pushing quite hard to be honest. And again, it comes back to making the oil sands cost and carbon competitive. The fundamentals don't change and politics don't change. It's really what is having we're just needing to drive those two components in order to progress this. So, that's really where we're still focused.

And your next question comes from the line of Manu Holzap with TD Securities. Please go ahead.

Good morning, everyone, and thanks for taking my question. My first one is a follow-up to Greg's on and I'm just going to drill down a little bit here just on U. S. Gulf Coast access and more specifically your export capability. How much was exported off the Gulf Coast in the quarter? And if tariffs were to take effect on Tuesday, is there a scenario where the exports your exports, your Gulf Coast exports would be exact? Thank you.

Thanks, Meno. This is Eric. I appreciate the question. Looking back at the quarter, our exports from the Gulf Coast were in the 10% to 20% range. As we look ahead to the potential possibility for tariffs, certainly, our diverse market access strategy, the assets that we have in the Gulf Coast position us well to be able to ramp up those exports very quickly. So with the tankage in the dock space we have, we definitely have the ability to move more barrels. And so depending on the details behind the executive order, based on what we've seen today, we believe that more than half of our sales could be non tariffed.

Terrific. Thanks, Eric. I appreciate that. And then the second question is on hedging. So the heavy differential, it's tighter than a lot of people were expecting in that $13 range last I checked. Are you seeing any opportunities to hedge that out? And I understand the balance sheet doesn't need it and that your growth is comfortably funded through free cash. But is there any temptation given the tariffs overhang?

Hey, Meno, it's Ryan. I'll take that one. You hit on it. We control risk today with our strong balance sheet. And we have the capability to kind of weather that volatility. When you think about hedging tariffs, you hit it, we would look at hedging the WCS differential. That market is very illiquid and you're limited in what you can actually put in place and how long the duration of those hedges. And it kind of limits what you can actually hedge. So there's not a lot of appetite to get out there and put a position on because it's just not that meaningful. And when you consider the impact of tariffs, we actually think it may be relatively muted. We do expect that you would see a widening in the differential at a 10% tariff. You might see a $2 to $4 per barrel widening in the WCS diff. But, we're also seeing a weakening in the Canadian dollar at the same time that's going to offset that. So, from a high level perspective, it does reduce the free cash flow, but the impacts are relatively low. And you're unlikely to see us get out there and hedge the WCS BIF.

Okay. Thanks, Ryan. I'll turn it back.

Thank you. And your next question comes from the line of Neil Mehta with Goldman Sachs. Please go ahead.

Yes. Thank you. One micro, one macro. The micro is we're going into a turnaround, I believe in the second quarter, Darlene. I'm just curious on what you want to accomplish during that maintenance and how do you ensure that you get through that as effectively as possible?

The turnaround, I'll start with Big Picture team is all over this, highly organized, energized for this turnaround. They're in the final preparation phase, right? So, the scope is fully defined and integrated, enabling that detailed scheduling and resource. The planning remains in line with the budget, so no concerns there. And it really comes back to the team is doing the general maintenance for turnaround. And it's primarily focused on the ten year frequencies, regulatory frequencies and the tie ins for the project, right? Those will be the kind of major turnaround components. Other than that, it's just your normal turnaround activity that you have at this time of year.

All right. Thank you. And then, the macro, just a follow-up is, you guys said that about half of your barrels could probably be exempt from the impact of tariffs, in part because of the way you market through the Gulf Coast. Can you just unpack that a little bit and help us understand all the ways that you can work around some of these impacts to the extent they go into effect next Tuesday?

Thanks, Neil. It's Eric. Thinking about that 50%, the drivers behind that are again the diverse market access that we have. So the ability to move barrels through TMX, through the Gulf Coast, very significant volumes potentially through the Gulf Coast and a component around the potential treatment of how our imported U. S. Source condensate is handled from a tariff perspective.

Your next question comes from the line of Dennis Fong with CIBC. Please go ahead.

The first one is just around The U. S. Six Hundred Million Dollars net debt floor. Obviously, we've seen a lot of volatility and you've even discussed a little bit of the potential impacts of tariffs in potential weakening Canadian dollar. Can you just remind us as to obviously the guardrail, the methodology behind the U. S. Dollars 600,000,000 net debt floor? And is that maybe just adjusted if FX materially or CAD materially weakens in the near term?

Thanks, Dennis. The net debt floor, the strategy net debt will move up and down just depending on our cash requirements and working capital. You can think of us maintaining US600 million dollars of total debt. That's our only bond outstanding at this point in time. And we're not necessarily managing at this point in time to US600 million dollars net debt. So, we did have a little bit of cash sitting in the bank at the end of the year. That was working capital requirements. We had to pay our $27,000,000 dividend right at the end of the year. We had a debt payment that was due early in the year. We had share buyback tax that was due early in the year. So, we probably held back a little bit more cash than we typically would do in order to pay those bills. So, when you think about net debt, it's just going to rise and fall as our cash rises and falls. And the strategy is still the same. When we think about share buybacks, we will look at what cash is in the bank at the end of the period, hold back what we need to make payments and run the business, and then use the rest to buy back shares.

So net debt will just fluctuate naturally over time.

Great. I appreciate that context. Secondarily, can you talk towards a little bit around either procurement, supply chain management and kind of procedures or bits of execution that you put into place that help you really drive or provide confidence around the execution of the facility expansion project and the actual development of it, obviously understanding that you do have several pieces of equipment already on-site?

Thanks, Dennis. Good morning. The project itself, I know there's a lot of conversations around project execution with everything going around in the macro. We see low project cost and execution risk right now with the tariff rate, The U. S. Tariff. We have minimal exposure to The U. S. And the procurement in this project. A large portion of the fabrication is completed in Canada, here locally in Alberta. And we're using existing working with a number of Canadian suppliers, right? So that it helps us communicate why the risk is lower for us. The project, the complexity of the project is also very integrated into our existing Christina Lake facility. And then, what that means is it's utilizing similar equipment and processes and capabilities that we've already got. We mentioned, we've been spending twenty five years running this facility. Our team's got a lot of expertise and experience. The front end engineering design phase has been complete, right. And so, you understand your scope and your parameters, and you're really just moving into that detailed engineering, and that's progressing very well. The project with its lower complexity and helps us bring that expertise together and the fact that we own many of our major vessels and once through steam generator, when you put that all together, we're on track to order any of the remaining equipment in the first half of this year.

So, team is really bringing in the engineering, the design, the execution components. Lot of it's done local. Lot of it, any of the long leads that are left are really the teams got line of sight to that. They've got the contracts in place and really now it's just the execution of that over the next six months to twelve months.

Thank you. And I'm showing no further questions at this time. I would like to turn it back to Mrs. Darlene Gates for closing remarks.

Thank you, Luthie. And thank you to everybody who joined us this morning for our year end results conference call. If you have any additional questions, please contact Investor Relations. We look forward to speaking to you again on our first quarter call.

Thank you. And ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.