MEG ENERGY - The Transmountain Expansion Will Be a Game Changer

Update - MEG Energy

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Today’s note will be an update on

MEG - Up 50% Since My Last.

I first laid out my original thesis for MEG 0.00%↑ in this video.

MEG Energy Corp. TSX: MEG

Executive Summary:

MEG Energy Corp., an energy company, focuses on sustainable in situ thermal oil production in the southern Athabasca oil region of Alberta, Canada. The company develops oil recovery projects that utilize steam-assisted gravity drainage extraction methods to improve the recovery of oil, as well as lower carbon emissions. It also transports and sells thermal oil in North America and internationally. 

Key points: 

My favorite long-term Canadian heavy oil pure play.

Approx. 50 years of low decline 2P reserves, this will be important coming towards the later end of the decade. 

Break even approx $40 WTI - they sell to North America, MEG will grow production steadily to est. 15k BBll day by 2026 but remains a deleveraging play. 

Approx. $4 per share of tax pools makes the company an attractive buyout target.

Reserves:

35x years of P1 and 50 yrs of P2 stay flat production Vs Current MC - FCF 6.7x

There’s not much more to say here..

Ben’s notes: 

Pure play on heavy oil.

Activist investor Eric Nuttall owns 3.2% of total shares = 9%+ of his fund’s weighting. 

I have used USD for all my calculations in the valuation. 

When net debt hits $600mm (q3 ‘24 at $75 oil) 100% of FCF will be delivered to shareholders.

DCF valuation of 26.33 USD is implied with an average of $75 oil over 4 years. + Tax pools implies a price target of $30 USD+ over 4 years. At $80 WTI I think $40 is a reasonable target.

Risk: 

Low. Biggest risk IMO is a buy out at a 30% premium.

NEWS + UPDATES:

• They’ve bought back 13% of the float since ‘22

• These capital returns will be hold up down to $55 WTI

• BIG NEWS: The transmountain expansion will be online after May and this will significantly reduce the differential between Canadian oil and WTI. 

• MEG will benefit - Given its torque to the WCS - WTI differential this should bump up its cash flow $200mm or approx 15% FCF yield - all of which will go to shareholders.

Given its 2P reserve life, now solid balance sheet and shareholder friendly management, at $80 WTI I believe it’s worth $40 per share + tax pools worth $2-4, hence $45 is not unreasonable. 

I hope you like this ‘Executive Summary’ Format. It’s the exact same that I use for summarizing the equity research I do for Hedge funds and family offices here at Crassus Investments.

If you like my insights, you’ll love becoming part of the ROI club.

See you in the club.

Benjamin

Disclaimer: Each and every publication of the author, Benjamin, is intended solely for documenting my personal journey with options trading for income and travel purposes. I am not a certified financial advisor, and none of the content provided should be construed as investment advice. It is essential to conduct your own thorough research and consult a registered financial service provider for appropriate guidance. I cannot guarantee the accuracy or completeness of the information presented. Any actions taken based on the information shared in Options Mavericks are done at your own risk and discretion.