MEG Energy Corp.

John Rogers - VP, IR and External Communications Bill McCaffrey - President and CEO Eric Toews - CFO Helen Kelly - Director, IR

Mark Friesen - RBC Capital Markets Benny Wong - Morgan Stanley

Great, thanks you Sebastian, and good morning everyone. And welcome to MEG’s fourth quarter 2014 conference call.

We have with us in the room today our CEO, Bill McCaffrey; and our CFO; Eric Toews along with Helen Kelly and myself from the Investor Relations Department. I will remind you that today’s call contains forward-looking information, so please refer to our quarterly reports and other documents on SEDAR, and of course our Web site for further information.

And with that, we'll pass it over to Bill to give you a few comments on his view of the quarter. Bill?

Well thanks, John, and good morning everyone. For our discussions today, I’d like to focus on three key topics; first, we’ll take a look at our year-end 2014 operating results; second, we’ll share our thinking with respect to our revised capital spending plans for 2015; and finally, we’ll discuss our financial position, our liquidity, and how we’re thinking about our business in the current environment.

So let me start with our operating highlights. In the fourth quarter, production exceeded 80,000 barrels a day, and this put us ahead of our near-term 80,000 barrels a day target which was planned for early 2015 and marks our seventh consecutive quarterly production record.

It also contributed to an annual production record of 71,000 barrels a day, and that’s above the high-end of our upwardly revised guidance range for 2014, which is coincidently the seventh consecutive year of annual production growth for MEG. We also realized record low non-energy operating costs of $6.42 a barrel during the quarter, which reflects higher production and very strong plant reliability.

This low cost production base provides a strong foundation that positions us well not only today but well into the future. Now with the strong operating performance that we’re seeing, we’re obviously very pleased with all the elements of our business that are in our direct control.

However, as is the case with the entire industry in Q4, there were challenges from external factors, particularly the dramatic drop in global oil prices. So, let me talk for a few minutes about how MEG is continuing to position itself in this current environment.

As you know, in mid-December, we revised our capital program to $305 million for 2015. Our focus is very much on preserving our cash position and maintaining reliable operations, but even with this low level of capital spending in 2015, our production growth targets remain close to 19% above our upwardly revised 2014 target range and almost 28% above our initial guidance for 2014.

Those volumes are projected to come with associated non-energy operating costs in the $8 to $10 a barrel range once we take into account the two plant turnarounds that are scheduled for this year. Now while 2015 is a significant reduction from our earlier capital projections, the relatively low level of capital to maintain our existing operations demonstrates that MEG can quickly adapt its investment program to changing market conditions.

We have proactively taken a defensive financial position during the current lower oil price environment, but I feel it’s important to also indicate that we’re using this time to challenge the organization to find new ways to further reduce our already low operating, sustaining, and maintenance costs, and also to look at how we can grow this business utilizing less capital and continue that growth during periods of lower commodity prices. And I am going to come back to that in a few minutes, but for now, let me turn it over to Eric to discuss our current financial position.

Thanks Bill. MEG's capital investment in 2014 totaled $1.2 billion, approximately $600 million lower than our 2014 capital budget.

This significantly lower level of investment resulted primary from cost savings achieved by moving to a Brownfield development focus and from the deferral of certain projects in the face of a weaker oil price environment in the back half of the year. This calculated reduction in capital spending, combined with a strong operating performance in 2014 has positioned MEG to enter 2015 with $656 million of cash on its balance sheet.

The size of this cash balance further protects MEG’s business should oil prices fall materially lower than levels recently experienced. Based on the current market access we’re seeing for our barrels and considering today’s pricing environment, we anticipate that 2015 cash flow will fully fund MEG’s cash costs as well as a significant portion of our 2015 capital budget.

In December, MEG began shipping on the Flanagan Seaway pipeline system, putting into service a key piece of MEG’s Hub and Spoke marketing strategy and further reducing our costs to access world pricing. MEG has 25,000 barrels per day of initial capacity on Flanagan Seaway, ramping up to 100,000 barrels per day over time.

Notwithstanding the successful startup of the Flanagan Seaway pipeline late in the quarter, our fourth quarter net backs were impacted by higher apportionment levels on Enbridge’s system between Edmonton and Hardisty. This impacted the value received for sales in the Edmonton market area.

We expect this apportionment to be short-term and that it will recede once Enbridge’s Edmonton to Hardisty expansion project is completed, which we understand is currently projected in late first quarter early second quarter of 2015. This expansion is expected to add 570,000 barrels per day of capacity out of Edmonton further improving transportation logistics into Pad 2 and Pad 3 markets.

Looking at the Company’s financial strength, MEG maintains significant liquidity in this lower oil price environment. In addition to operating cash flow and a strong cash position, MEG has access to its undrawn five year US$2.5 billion bank facility.

This bank facility as well as all of our current outstanding debt is free of any financial maintenance covenants and is not dependent on nor calculated from MEG’s year-end crude oil reserves. Our first long-term debt maturity is not due until 2020.

To summarize, we believe MEG’s low cost structure, our low sustaining capital reinvestment levels, and significant financial liquidity affords the Company’s ability to execute our business in the type of oil price environment we’re currently in well into 2016 and beyond. With that, I’ll turn it back over to Bill.

Thank, Eric. I would now like to take a minute to discuss ongoing work that will allow MEG to grow at lower oil prices and lower capital intensity, and I have mentioned in past conference calls that we have done performance testing on our Phase 2B plans showing the turnaround in 2014.

We’re now following up on those results with additional performance tests on both Phase 2 and 2B plans. And as part of broader focus in our plans to learn from these tests, where we will use, where we will be focused on reducing the capital further by increasing the plant throughput capabilities with the end goal of improving the already strong economics of our projects.

So, key to this strategy is going to be that we build smaller extensions on to our existing facilities at lower costs, and as I mentioned, this plant testing will be performed throughout 2015. So to sum it up, with well structured debt, conservative capital spending, and significant cash on-hand, we’re financially well positioned in a low commodity priced environment.

With strong operating results in both production and costs in 2014, we’re positioned to continue our growth in 2015. And we’re using this time to investigate ways to move ahead with smaller projects and growth initiatives that can drive incremental cash flow at lower commodity prices.

In short, we believe we are in a solid position to handle this current price environment and are preparing for opportunities to further enhance all aspects of our business as we move forward. With that, I think I’ll turn it back to John.

Great. Thanks Bill and thanks Eric for your comments.

We’re going to open it up for questions. Just as a reminder, we really would hope -- we have a lot people online today, and we really would hope that we keep the questions at a strategic level.

Helen and I of course will be around later to help you with your more detailed modeling questions. So with that, Sebastian, we’ll open the lines for questions.

I just have a few questions here, so first of all with respect to G&A, I was wondering if you could maybe comment on the split in your employee base between operational, corporate, and maybe employees sort of dedicated towards growth projects and have you had to consider making any changes to that cost structure?

Mark, on that if you don’t mind, can we defer this -- that particular question to a little later. I would like to get the actual split for you and give you a fulsome answer to that, so if Helen and I could deal with that a later, we'd like to go on that.

Sure, sure. And changing gears then to hedging, in the past, you’ve made your strategic position on that pretty clear.

I just wondered with what we’ve been seeing with the current commodity price environment, if that has caused you to maybe change your view of hedging going forward?

No our view has always been the same as we’re always open to hedging where it makes sense. The key you have to do on this though is to take into account the number of market factors that are there, so we always look for the right opportunity, but it does have to make sense in a complete assessment out of there.

You’ve obviously highlighted the cutback to CapEx and how flexible that is, just wondering what you see is the trigger for possibly increasing that CapEx going forward?

Well, what we’re doing right now is a series of small or a series of tests at the plant that will allow us to see what the incremental production can be and what capital cost that is. And then we have to get comfortable with the market conditions at that time before we would move forward, because we’ve mentioned it in the past that we see as we go forward in time, we would like to rely on a growing component of our cash flow as funding those projects.

So, our thinking is if we’re able to bring down that capital cost in moving production volumes forward and we can rely on greater cash flows, that’s the right way to go for the Company going forward and that’s why 2015 and the tests that we’re going to do are very important.

So, it’s not just the simple oil price trigger?

No, no I mean you think about it, we see it’s the same work we would do now whether it’s lower or higher prices, but -- and you get the same results. Our job is to come out with lower capital intensity projects and to find faster ways to cash flow in.

As we do that and we get confident with the testing and evaluation and assessment of those costs, then that will give us a comfort level and then we’ve just got to make sure that we’re comfortable with where the cash flows will be before we pull that trigger.

With respect to marketing, how many unit trains were shipped in the fourth quarter and how do you see your rail marketing strategy maybe being effected or changing in the current price environment and with Flanagan coming on as well?

We moved nine unit trains in the fourth quarter and our strategy is the same as -- sorry nine per month, so we’re still moving a fair amount by rail on that. Flanagan is a big deal in the market.

It is making a big difference with pricing in the Pad 2 area as we’re able to go down to Pad 3, so it is very valuable to us. Rail is still an important aspect too, because if you have apportionment and that would restrict your barrels from getting there, you need a relief valve and that’s the relief valve that we use.

And then it helps us also broaden our market to multiple customers, and we do find that valuable as well, and by being directly connected by pipe to rail, we have a very efficient system that can help mitigate some of those costs.

My final question is, if you could adjust your financials for the impact of line pack, what would the cash flow have been in the quarter?

I don’t know that we’ve calculated it that way, I mean there is a number of factors to put into it, and so I don’t have an answer for you.

Mark, I’ll be happy, Helen and I will be happy to kind of noodle away with that at a later time in the call and try to get the better answer.

Well, when I am looking at your off costs quarter-over-quarter, it seems like the savings is a little bit more than just spreading over incremental barrels, just wondering if there is any underlying cost savings as you guys are experiencing or if there are just any one-time events reflected in there?

Yes for the quarter the $6.42, there was no one-time cost in that. We are focused on cost reduction, so as a good observation, we do focus on reducing the costs, so our team has that always in their front burner for them, and I think these times emphasize the importance of being very focused in that area.

And just a follow-up, is there a sense of expectation of how much apportionments will impact you guys in the first quarter with Enbridge work being done?

We don’t have that number right now, but what they have given us the guidance on is that they’re expanding as I said in the script here that we were -- it’s expanding between Edmonton and Hardisty and that they’re already asking for line fill in those areas and planning on it. So we’re thinking that we will see lower apportionment post that time.

I mean, it would make sense to. And I think you’ll see some positive impacts throughout the quarter of the differentials associated with that.

Great, well thank you, Sebastian, and once again thanks everyone for listening into our fourth quarter conference call. Again, Helen and I will be happy to hear from you with any detailed questions you may have.

So other than that, have a great day and we’ll talk to you very soon. Bye now.