MEG Energy Corp. (MEG) Earnings Call Transcript & Summary

Good afternoon. My name is Jeff McCaig, and I am Chairman of the Board of Directors of MEG Energy. It's my pleasure to welcome you to MEG's Virtual Annual and Special Meeting of Shareholders. Due to the public health impact of COVID-19 and consistent with the recommendations of public health officials to cancel large public gatherings, MEG decided to hold its meeting in this new virtual format in order to help mitigate health and safety risks to our community, shareholders, employees and other stakeholders. On behalf of the MEG Board of Directors and all of us at MEG, I would like to extend our best wishes to all of our stakeholders and our sincere wish that you and your families remain safe and healthy during these difficult times. Let me take a minute to explain how this new format works. Your information screen displays instructions on how to participate in the meeting by voting and submitting questions. Voting and question functionality are only available for registered shareholders and their duly appointed proxy holders. All other guests are in listen mode only. Later in the meeting when polling is open, voting will be displayed on your information screen. If you have already voted, you do not need to take any further action unless you would like to change your vote. [Operator Instructions] The formal portion of the meeting will be followed by some brief remarks from our CEO and a 10- to 15-minute question-and-answer period where we will have an opportunity to answer your questions that have been submitted online. If you are a registered shareholder or a duly appointed proxy holder, you can submit your questions at any time during the meeting by selecting the messaging icon on the information section of your screen and typing your question. For questions relating to voting matters, please submit your questions immediately. If your question relates to a voting matter, we will answer your question when we reach that item during the meeting. All other questions will be answered at the end of the meeting after the CEO's remarks. Before we begin the formal portion of the meeting, I would like to provide an update on the corporation's Board renewal process. I am pleased that Susan MacKenzie has agreed to stand for nomination at today's meeting. If elected, Ms. MacKenzie will be a great addition to our Board, bringing extensive technical, operational and strategic expertise as well as extensive organizational and human resources experience. I would also like to recognize Mr. Harvey Doerr, who has decided not to stand for reelection this year after serving on the Board since 2010. On behalf of the Board, I would like to sincerely thank Mr. Doerr for his many contributions to the Board and the corporation during his tenure, including serving as the interim CEO in 2018 during a period of leadership transition. Lastly, as part of our ongoing Board renewal process, I'll be stepping down as Chair of the corporation following the conclusion of this meeting after having served as Chair for the past 4 years, although I am standing for reelection as a director. Mr. Ian Bruce, if reelected, has agreed to take on the duties of Chair of the Board following the meeting. If the director nominees are elected as proposed, the Board will have undergone extensive renewal since 2018, with 5 new members joining the Board. And we will have achieved compliance with the corporation's diversity policy, which requires that females and male each represent at least 30% of the directors following the corporation's 2020 Annual General Meeting. I will now call the formal meeting to order. In accordance with the company's bylaws, I will act as Chairman of this meeting; and Lyle Yuzdepski, our Corporate Secretary, will act as secretary of the meeting. I would like to begin with introductions of our Board of Director nominees. In addition to Derek Evans, our President and Chief Executive Officer, who is with us today, the Board nominees, the majority of whom are attending the meeting virtually are myself, Jeff McCaig, Grant Billing, Ian Bruce, Judy Fairburn, Robert Hodgins, William Klesse, Susan MacKenzie, James McFarland, Diana McQueen. Next, in addition to Derek Evans, the MEG leadership team attending the meeting virtually today are Eric Toews, Chief Financial Officer; Chi-Tak Yee, Chief Operating Officer; Lyle Yuzdepski, Senior Vice President, Legal & General Counsel; Erik Alson, Vice President, Marketing; Sorin Bujor, Vice President, Resource Development; Jeremy Gizen, Vice President, Operations and Engineering; and Dave Granger, Vice President, Human Resources. Moving forward with the meeting, I appoint Elissa Rojo from Computershare Investor Services to act as scrutineer of the meeting. The business of today's meeting is described in the notice of meeting and the management information circular dated May 5, 2020, both of which were delivered and filed in advance of this meeting. A link to the management information circular is available on the information section of your screen. The business of the meeting is to receive the audited financial statements for the year ended December 31, 2019, and to consider and vote on 4 items as set out on Pages 6 to 10 of the management information circular. They are the election of directors; the appointment of the corporation's auditor; the continuation of the corporation's shareholder rights plan; and the nonbinding advisory vote on the corporation's approach to executive compensation. For efficiency, we have prearranged for Chi-Tak Yee and Dave Granger, both shareholders of MEG, to move and second the formal business motions. I've been advised by the secretary that notice of this annual and special meeting was properly given, and a quorum is present. Accordingly, I declare the meeting properly called and constituted for the transaction of business. We'll now proceed with the formal business of the meeting. The first item of business is to receive the audited financial statements and the auditor's report for the year ended December 31, 2019. The financial statements were delivered to shareholders in advance of the meeting, and a link can be found on the information section of your screen and also in -- on MEG's website at megenergy.com. We'll now move on to the voting items. The polls are now open for voting on all 4 items of business on which a vote is required. You may vote at any time until the last item of business is completed, at which time I will declare the polls closed. Voting will be conducted by online polling, and your voting options should be visible on your screen if you are a registered shareholder or a duly appointed proxy holder. If you have already voted, you do not need to take any further action unless you would like to change your vote. Item 2 on the agenda of business is the election of directors. The Board of Directors has determined that 10 directors are to be elected until the annual -- next annual meeting. In accordance with MEG's majority voting policy, the directors will be voted on individually rather than as a slate. As described in management information circular for this meeting, management proposes that the following persons be nominated for election to the Board: Grant Billing, Ian Bruce, Derek Evans, Judy Fairburn, Robert Hodgins, William Klesse, Susan MacKenzie, Jeffrey McCaig, James McFarland, Diana McQueen. MEG's Board of Directors has adopted an advanced notice bylaw. This bylaw provides certain requirements to be satisfied for additional director nominations to be valid. In particular, a nominating shareholder's notice of a director nomination must be given not less than 40 days prior to the applicable shareholder meeting. This advanced notice requirement is beneficial to all shareholders, including those shareholders not present or represented here today as it permits nominations to be received and considered by the corporation, the Board of Directors and all shareholders in a timely and orderly manner. As MEG did not receive any other director nominations within the prescribed notice period, we will not be considering any nominations in addition to those listed at this time. Accordingly, may I ask for a motion, please?

Mr. Chairman, I move for a vote on item 2, a resolution individually electing each of the proposed nominees as a director of the corporation.

Thank you, Mr. Yee. Is there a seconder for the motion?

Mr. Chairman, I second the motion.

Thank you, Mr. Granger. Are there any questions on this motion?

There are no questions on the motion.

Thank you, Mr. Yuzdepski. We will now move to item 3 of the agenda, which is the appointment of PricewaterhouseCoopers LLP as auditors of the corporation, as set forth on Page 7 of the management information circular for this meeting. May I have a motion, please?

Mr. Chairman, I move for a vote on item 3, a resolution to appoint PricewaterhouseCoopers LLP as auditors of the corporation, as set forth on Page 7 of the management information circular.

Thank you, Mr. Yee. Is there a seconder for the motion?

Mr. Chairman, I second the motion.

Thank you, Mr. Granger. Are there any questions on this motion?

There are no questions on the motion.

Thank you, Mr. Yuzdepski. We'll now move to item 4 of the agenda, which is the continuation of the corporation's shareholder rights plan, as set forth on Pages 7 to 9 of the management information circular. May I have a motion, please?

Mr. Chairman, I move for a vote on item 4, a resolution for the continuation of the corporation's shareholder rights plan, as set forth on Pages 7 to 9 of the management information circular for this meeting.

Thank you, Mr. Yee. Is there a seconder for the motion?

Mr. Chairman, I second the motion.

Thank you, Mr. Granger. Are there any questions on the motion?

There are no questions on the motion.

Thank you, Mr. Yuzdepski. We'll now move to item 5 of the agenda, which is the nonbinding advisory resolution to approve the corporation's approach to executive compensation. May I have a motion, please?

Mr. Chairman, I move for a vote on item 5, a nonbinding advisory resolution to approve the corporation's approach to executive compensation, as set forth on Pages 9 and 10 of the management information circular for this meeting.

Thank you, Mr. Yee. Is there a seconder for the motion?

Mr. Chairman, I second the motion.

Thank you, Mr. Granger. Are there any questions on this motion?

We have no questions on the motion.

Thank you, Mr...

There are no questions on the motion.

Thank you, Mr. Yuzdepski. We will now pause for 60 seconds to allow those voting online to do so. [Voting]

Okay. Online polling is now closed. In order for today's resolutions to be passed, the approval by a simple majority of the votes cast by shareholders must be received. I have received the scrutineer's report and confirm as follows: first, each director nominee is elected to the Board to hold office for the ensuing year or until their successors are elected or appointed; two, PricewaterhouseCoopers LLP are appointed as auditors of the corporation; three, the continuation of the shareholder rights plan has been approved; four, the nonbinding advisory vote to accept the approach to executive compensation has been approved. I direct the secretary to file the final scrutineer's report with the minutes of this meeting. Details of the voting results will be filed with the securities regulators and included in our news release following the meeting. This now concludes today's formal business. We will conclude the meeting and turn to the CEO remarks and question-and-answer portion of the meeting. Could I have a motion to terminate the meeting, please?

I move that this meeting be terminated.

Thank you, Derek. I declare the formal business of the meeting concluded and now turn the meeting over to you for your remarks.

Thank you, Jeff. Hello, everyone, and thank you for joining us today for this webcast version of our Annual and Special Meeting of Shareholders. I'd like to take the opportunity, on behalf of the entire MEG leadership team, to extend our best wishes to all our stakeholders and trust that your families and friends remain safe and healthy during these very challenging times. Before I begin my remarks, I would also like to draw your attention to the advisory on the screen. It refers to the information I'm about to discuss. Additional information regarding our forward-looking statements and financial measures can be found in our 2019 Annual Information Form, 2019 annual MD&A and in our first quarter news release as well as our first quarter MD&A and financial statements. The past few months have delivered unprecedented challenges. The COVID pandemic, associated demand disruption and resulting negative impact on oil prices has created real challenges to the health and safety of our employees and to the short-term operation of our business. I'm very proud of how quickly MEG responded to the COVID pandemic. We responded swiftly and decisively to ensure the safety of our personnel as well as securing the continued safe and reliable operations at Christina Lake. Concurrently, we've reduced our capital budget, operating and G&A cost structures to ensure that we will remain well positioned from a financial liquidity perspective. Improving the organization's financial strength was a priority through 2019. Our position today benefits from our substantial 2020 hedge book as well as the tenure and structure of our indebtedness and credit facilities as well as the low-decline, low-cost structures of our Christina Lake asset. Our financial liquidity and debt profile are key questions we continue to address with shareholders. Since early 2019, we have repaid $633 million of long-term debt, entered into a new modified covenant-light 5-year credit facility and refinanced USD 1.2 billion of existing indebtedness. The corporation's earliest maturing long-term debt is 4 years out, represented by USD 600 million of senior unsecured notes due March 2024. None of the corporation's outstanding long-term debt contain financial maintenance covenants. Additionally, MEG's modified covenant-light $800 million credit facility has no financial maintenance covenants unless drawn in excess of $400 million. If drawn in excess of $400 million, MEG is required to maintain a net debt to trailing EBITDA of 3.5x or less. We run a business that happens to be an oil business. We're not an exploration and production company. We're a manufacturing and production company. We have a manufacturing facility that can handle 100,000 barrels a day of bitumen, and we have 60 years of proven and probable drilling inventory. We're not focused on growth for growth's sake. We're focused on maximizing free cash flow to improve the balance sheet by reducing indebtedness and providing a sustainable return to our shareholders. Our proactive actions in reducing the size of our capital budget in response to COVID-19 is a great example of the measures we have and can take to ensure our financial liquidity so that one challenging year will not disrupt our ability to surface the underlying value from our top-tier asset over the remaining 60-year reserve life. MEG's low decline rate allows for lower sustaining capital that enhances the sustainability of the business and its financial flexibility, allowing it to uniquely weather volatile commodity price environments. It is also an absolutely essential characteristic for maximizing free cash flow and long-term financial sustainability. In 2019, we had cash flow of approximately $700 million that generated $500 million of free cash flow after accounting for CapEx of approximately $200 million. That $500 million of free cash flow allowed us to reduce our long-term debt by an equivalent amount. In addition to a low decline rate, our Christina Lake asset also features an extremely low steam oil ratio. A low steam oil ratio is indicative of superior reservoir quality as well as the various technologies being utilized to maximize the value of steam being used to produce the bitumen. MEG has a long history of using innovative technologies in the SAGD space that have reduced the steam oil ratio to amongst the lowest in the sector as well as generating one of the lowest operating costs in the in situ sector. We continue to focus on innovative technologies that will enhance our free cash flow by reducing our cost structures. We look forward to sharing the results of a new innovative diluent reduction technology with you in the near future. Cost reduction is an important pillar of our free cash flow generation story and is a corporate priority and a focus for all employees. All cost structures are subject to ongoing review. Since 2018, we've reduced G&A by nearly $30 million as we transitioned the organization from a growth organization focused on large capital projects to an organization focused on sustaining CapEx expenditures and maximizing free cash flow. MEG's purpose is to help provide the world with ethical and environmentally responsible oil. We recognize that climate change is real. And if the world is serious about reducing global greenhouse gas emissions, we need to be part of the conversation and a leader in demonstrating on how this can be done. Based on an independent review relative to other large reserve holders, Canadian oil is the most responsible from an ESG perspective in the world. We believe that the world needs more Canadian oil, not less, for a successful transition to renewable energy. We're proud to share the innovative work we are doing on ESG. MEG strives to be an industry leader in environmental performance, with greenhouse gas emissions 20% below in situ averages, 0 freshwater used in our thermal operations, responsible land use and active engagement with indigenous businesses and their communities. Our ESG objectives cover all aspects of how we interact with stakeholders. These objectives, together with the corporation's financial performance, drive executive compensation. With respect to the ESG aspects of our business, our goal is to drive down and eliminate GHG emissions, reduce environmental impacts, continue to deepen relationships with our communities and be a company employees are proud of and excited to work for. With all the uncertainty caused by the recent market conditions, be assured that we remain focused on our long-term sustainable strategy and focus on maximizing free cash flow. Our business model is unique and allows MEG to be nimble in the face of changing market conditions, while at the same time, affording us the flexibility to make short- and long-term decisions that are in the best interest of our shareholders. I'd like to take this opportunity to thank our outgoing Chairman, Jeff McCaig, for his outstanding contributions since being appointed to the Board in 2014. His leadership, skill and oversight have positioned MEG well. His passion for innovation and his belief in the long-term value of what we do every day at MEG will be missed. In closing, I want to recognize the hard work and dedication of our talented employees and thank you, our shareholders, for your continued support. I look forward to updating you on our progress in the coming quarters. We will now address questions that have been submitted online. It does not appear that we have had any questions submitted online from either registered shareholders or proxy holders at this time. Ladies and gentlemen, on behalf of your Board of Directors and leadership team, thank you for attending our Annual Meeting of Shareholders, and have a great day.