The chief executive of MEG Energy Corp. sees “tremendous demand” for Alberta oil due to the war in Ukraine and a European energy crisis.
Benchmark crude West Texas Intermediate has surged in recent months due to economic recovery from the global COVID-19 pandemic, and spiked to levels not seen in eight years this week due to Russia’s invasion of Ukraine. On Friday, WTI hovered around US$111 per barrel in the morning’s trading.
WCS historically trades at a discount to WTI due to higher transportation and refining costs, and at times, that discount has been steep. According to the Canadian Association of Petroleum Producers, in 2018, Alberta heavy crude was trading at a US$38 discount to WTI — lost revenue the industry attributed to a lack of pipeline export capacity.
However, in 2022, Alberta oil is once again soaring high. WCS broke US$100 per barrel this week, and differentials have narrowed to historic lows. On Friday, WCS was trading at less than a US$2 discount at Houston and Hardisty, and Evans said he sees no sign of demand slowing down.
“Today, differentials are trading in the U.S. Gulf Coast for WCS … in that $2 to $3 range, which is showing the tremendous demand, worldwide demand, for this product,” Evans said on a conference call to discuss fourth-quarter results Friday.
“And obviously, with some of the challenges that we’re seeing in terms of energy supply coming out of Europe, we expect to see very low WCS … differentials on a go-forward basis.”
The Calgary-based oilsands developer earned $177 million in its fourth quarter and says it will soon reach its net debt target and initiate a share buyback plan as a result of stronger oil prices.
For the three months ending Dec. 31, MEG earned 57 cents per diluted share, compared with $16 million or five cents per diluted share in the same quarter of 2020.
MEG reported fourth-quarter revenue of $1.3 billion, compared with $786 million in the fourth quarter of 2020, and record bitumen production for the fourth quarter of 100,698 barrels per day.
The company said it repaid approximately US$325 million of outstanding debt during the full year 2021, and expects to reach its net debt target of US$1.7 billion soon.
MEG’s board has approved the filing of an application with the Toronto Stock Exchange that will allow MEG to initiate a share buyback program, the company said. The plan will allow it to buy back up to 10 per cent of its public float.
Analyst Phil Skolnick of Eight Capital said in a research note Friday that MEG “just keeps getting better operationally” while its balance sheet keeps getting cleaner.
“We believe this will put MEG further in focus from an M&A perspective, especially given the positive macro fundamentals on oil,” Skolnick said.