MEG Energy Corp.

John Rogers - VP, IR Bill McCaffrey - CEO Eric Toews - CFO

Benny Wong - Morgan Stanley Mike Rimell - UBS Steven Karpel - Credit Suisse Gary Stromberg - Barclays Capital Nick Lupick - AltaCorp Capital George Stein - Core Partners

Great. Thank you Donna and welcome everyone to the third quarter 2015 conference call.

We have with us today our CEO, Bill McCaffrey and CFO, Eric Toews. Before I turn it over to Bill for his remarks, I remind you that today's call contains forward-looking information.

Please refer to our quarterly report and other documents at SEDAR and our website for further information on that. So with that, I would turn it over to Bill.

Bill.

Thanks John and good morning everyone. On our call today we would like to review our third quarter results and then update you on the successes we have achieved from our cost reduction initiatives and in particular, how these initiatives are positioning us for our future growth plans.

Looking first at the Q3 operating results, production came in at 82,700 barrels a day. This was a record quarterly production average, despite having a portion of our quarter going through post turnaround ramp-up.

With the turnaround and the subsequent ramp-up activities now behind us and with new wells expected to come on in Q4, we remain comfortable with our guidance of 78,000 to 82,000 barrels a day in 2015 and look forward to our strong start in 2016. I'll give more details about our cost reduction initiatives later on, but obviously the record low CAD5.98 per barrel non-energy op costs achieved in the quarter, reflects the relentless effort we're putting into reducing costs.

Now while we're pleased with our performance on production levels and cost control, we also need to look at the broader markets and related pricing impacts. As I've said in the past, we can see short term dislocations in the market which are caused by temporary events.

We saw these impacts in the third quarter, primarily from refinery outages, both planned and unplanned in the Pad 2 areas. Together these outages temporarily reduced demand for heavy crude and in combination with the climbing world oil prices negatively impacted pricing.

In general, Mya and WCS continue to trade in a narrow differential on a transportation adjusted basis, reflecting the continued movement of Canadian heavy oil to the U.S. Gulf Coast and a healthy amount of competition amongst Pad 2 and Pad 3 refiners for our product.

Here MEG is extremely well-positioned to take advantage of the expanding market opportunities brought about by recent pipeline additions to the U.S. Gulf Coast.

For example, our commitment on the Flanagan-Seaway Pipeline system doubles from the current 25,000 barrels a day to 50,000 barrels a day in early 2016, allowing us to further strengthen our ability to cost-effectively move barrels to the highest price market we have available to us. With our production increasing, our increased market reach and our cost reduction initiatives, we continue to strengthen our ability to generate positive cash flow, even in the current low price environment.

On that note, I'll turn it over to Eric to talk a bit about our financial position.

Thanks Bill and good morning. MEG generated CAD24 million from cash flow from operations in the quarter or CAD0.11 per share, despite WTI averaging just over $46 U.S.

per barrel. This was the lowest quarterly WTI price that MEG has experienced since becoming a public company.

This financial performance is illustrative of the benefits of MEG's continued efforts to lower its cost structure and increase its market reach. MEG's financial liquidity remains strong.

At the end of the third quarter, we had over CAD350 million in cash on our balance sheet, as well as continued access to our undrawn U.S.$2.5 billion revolving credit facility. Our credit facility is like all of our existing outstanding debt, free of any financial maintenance covenants.

It is also not calculated from nor dependent on MEG's reserve value which means MEG does not undergo boring base redeterminations. Our first long-term debt maturity is not due until 2020.

Our full year capital investment is now being revised downwards to CAD280 million from our previous guidance of CAD305 million. This number includes CAD24 million of capitalized turnaround costs which were not previously included in the guidance number of CAD305 million.

The significant reduction in our capital spending was driven primarily from the efficiency gains that have been achieved to lower our sustaining maintenance capital. When MEG initially put out its CAD305 million 2015 capital budget in December of 2014, our stated goal was capital preservation, allowing MEG to maintain a very solid liquidity position for as long as low oil prices persist.

We believe our performance to date clearly indicates that we're showing success in achieving this goal. We also indicated at the time that we would use 2015 to position MEG to grow at lower oil prices.

Bill will discuss the status of this work in more detail in a few minutes. With respect to our deleveraging process, we continue our review of options available to us to utilize our interest in the access pipeline to reduce MEG's financial leverage.

While it's not appropriate to give specifics on the process at this time, we can say that we're making good progress and have been pleased with the interest expressed to date. With that I'll turn it back to Bill.

Thank you, Eric. To pick up on Eric's remarks, the third quarter illustrates that the breakeven WTI necessary to cover all of our fast cash costs is now down to the $42 to $45 U.S.

per barrel rate. That is down from estimates earlier this year of $45 to $50 U.S.

per barrel and I think it's a good illustration of the progress we continue to make towards lowering our cash costs. In addition, technological improvements and cost reductions have enabled us to reduce our sustaining and maintenance costs to roughly CAD7 to CAD8 per barrel.

This low level of sustaining and maintenance capital is the key differentiator of our business and contrasts well with the share oil operators, who we understand require roughly 3 times this amount to keep their production flat. And it's my belief that for companies to grow at lower oil price, they must keep a strong focus on reducing both their operating and their sustaining and maintenance costs.

We have been driving down our non-energy costs year-over-year. Our non-energy op costs to date are 43% lower than just four years ago.

Our costs to produce a barrel of oil is now below CAD10 a barrel. This is a reflection of the quality of the reservoir, our strategy around its development, the operating practices being applied and the application of our proprietary technology.

I'm going to come back to that in a few minutes. A large part of our effort has been directed towards reduction in non-energy op costs and that's the portion of the costs that we can control.

Our Q3 non-energy costs were, as mentioned, a new record low at just CAD5.98 a barrel and as a result of what we've seen year-to-date, we're lowering our full year non-energy op cost guidance to between CAD6.90 and CAD7.10 per barrel and that's a full 16% reduction from mid-range of the earlier guidance of CAD7.30 to CAD9.30 per barrel. I'll now speak to some of the specifics we've been working on to reduce our costs.

Through the application of EM SAGP, we've been able to reduce our steam oil ratio which in turn lowers our operating and capital costs, by producing more barrels with the same amount of steam. We have to date reduced steam injection by more than 70% in Phase 1 and 35% to date in Phase 2, while keeping production on trend.

We're taking advantage of these efficiency gains to redeploy steam to new wells, some of which are scheduled to come on stream in Q4. Additionally the anticipated increase in recoveries from 60% to 70% associated with EM SAGP is helping to dramatically reduce our sustaining capital requirements.

Another benefit of is our greenhouse gas emission reduction where we're roughly seeing 20% lower than the industry average, through the use of our ES SAGP along with co-gen. This is meant only as an example of how technology can and is helping reduce greenhouse gas emissions throughout our industry.

To increase efficiencies, we have also been working diligently with our suppliers to improve the run-time and reliability of the various components, both at our central plant and from our wells. One example is our electrical submersible pumps.

Advances in technology relating to ESPs have enabled us to nearly double the run time of these pumps which significantly reduces our operating costs and sustaining and maintenance requirements. Another example of where we've been able to significantly reduce costs is in our camp and site services.

As fewer people are needed in the field, we've been able to consolidate our camp facilities. We have also aggressively negotiated with our suppliers and optimized maintenance.

As a result, we've been able to reduce our camp and site services costs by 60%. And now that we're developing greater clarity around our brownfield development plans, we've also been able to reduce the size of the organization to align with our future needs.

Over the past year, we have reduced our overall workforce by over 30% which includes a combination of contractors and employees. On future growth, we're making significant advances towards reducing capital requirements about the central plant facilities and our wells and well pads.

First on our central plant. I have mentioned in the past about improvements we're making on the overall throughput capacity, with a significantly lower capital investment than greenfield developments, we expect to more than double the overall throughput of the Phase 2B central facility.

Second, on our wells and well pads, drilling costs have come down meaningfully. We're also looking at new designs for our well pads which will not only enable us to reduce our surface footprint by nearly 50%, but also reduce our costs as it relates to growth and sustaining capital.

We believe that the above mentioned initiatives in our low-cost brownfield expansion opportunities with these initiatives and opportunities, we're well positioned to be able to grow in a low price environment and we'll do this once we're comfortable with the direction of oil prices. To summarize, MEG has taken an aggressive approach in managing through this low price environment, with a focus on putting in place sustainable cost reductions.

The application of technology and the continuous focus towards improving efficiencies, has enabled MEG to produce a barrel of oil for under CAD10 and maintain its production at a cost of about CAD7 to CAD8 per barrel, while at the same time, significantly reducing the capital required for future expansion. Importantly, the monetization of the assets pipeline also has the ability to significantly strengthen our balance sheet.

Our goal at the start of the year was to put in place debt, but strengthening our position in a low-price environment and I'm pleased with the progress that we've made to date. And with that, I'll turn it back to John.

Great, thanks Bill and Eric for your remarks on the quarter and the strategy. We will now open the lines to questions from participants on the call.

Once again, as in the past, it would be great if people would keep it to a strategic level. Helen and I obviously will be around right after the call to handle any of your modeling calls.

With that, Donna, could we open the lines for questions?

In the past you've mentioned you're looking at the cost of the brownfield expansion in a range of 25,000 to 30,000 per flowing. Can you remind me, is that an all-in number including well costs?

And the second part to that, with all of these initiative, cost initiatives and savings you're seeing, are you guys still comfortable with that range or do you think there is potential of the cost to be even lower than that range? Thanks.

The costs that we mentioned with the brownfield, we currently think that the central plant is in the 20,000 to 25,000 barrel a day part and then we think the addition of wells, depending on the location and combination of whether it's SAGD wells or part of our EM SAGP process would be in the low teens. So you would have to put those two numbers together.

And in terms of further costs, we do think there are opportunities to reduce costs further and we continue to look at those as we optimize the new pad designs.

And any color on how much crude you guys railed in the quarter?

We typically don't give that out, Benny, just for competitive reasons, but we do move through it when we think there's an opportunity. If for example in Q3 where there was some widening of differentials due to planned and unplanned maintenance in Pad 2, that provided an opportunity to move some crude and we do keep that as active.

We see it as a very solid relief valve to be able to move barrels that way and so we can turn those on and off on a moment's notice.

And just with a final question. Seems condensate costs seem to be a little bit lower for the quarter.

Do you think this is a trend that we're seeing or do you think it's something non-moving forward for the quarter itself? Thanks

Yes, it's always hard to predict into the future. We're seeing some softening of condensate prices in the Gulf Coast and we do have very effective and efficient methods in moving it up.

So it is tough to see. There is a good supply into Edmonton these days and we do have, as I said, very good supplies in the U.S.

Gulf Coast, but it's kind of hard to predict the future on that.

Could we got your high level thoughts on the growth profile into year end and more importantly into the first half of 2016 and then on the CapEx side you suggested that maintenance capital is now closer to CAD7 to CAD8, versus your last estimate of CAD8, so that obviously allows us to back into 2016 maintenance capital. I know it's a bit early for this, but could you comment any way on what that growth capital wedge is going to look like in the coming year?

Yes, we do our budgets in December and so we're actively working on that right now. Obviously we'll have a base level that is sustaining in maintenance and then we need to discuss with our Board what the appropriate approach is going forward in 2016.

So it would be premature to really mention that. But we have been putting a lot of work into play.

So that when we're comfortable with oil prices, we would be ready to go with some development plans that way.

Okay. And would it be fair to say that you're probably closer to the lower end of that CAD7 to CAD8 on the maintenance side in 2016?

In the current year, we certainly are. And in 2016 we're just doing the work on it but we're comfortable that the range is viable.

This year for sure. Yes, I just do want to make sure I caution that each the year is dependent on the activities you have.

So you can bring on production from various ways, SAGD or infills and that, so you will see variations but we think we're capturing those.

Just a couple of quick questions. As far as Flanagan South is concerned, did I hear you right that you're now moving 25,000 and by early 2016 would have the option to double that or would you be actually moving it?

We will actually be moving it. Early 2016 we will have capacity firmed up to 50,000 barrels a day down to the Gulf Coast.

Okay. And the next question is with regards to the access pipeline.

So you've got a 50% stake in that. Are you looking at selling the whole 50% or a part of that?

Yes, we're open to all options in this area. We're evaluating it from a deleveraging position.

We're very positive on the responses we're getting and we're looking at the, up to the 50% on it.

Just a couple from me. First on the access pipeline, I know it's part of a wider deleveraging initiative.

I think previously you expressed where you had expressed some willingness to kind of grow into a debt. I wonder how we should think about potential proceeds and whether there is some willingness there still?

Thanks.

Well, our direction right now as we've said, the objective we've done is to free up capital from that pipeline in order to strengthen the balance sheet. And this is all part of our bigger picture of being able to position ourselves, both in terms of lowering our costs and strengthening our balance sheet in low price environments to be able to grow.

So our focus is on freeing up the capital. We do need to optimize the cash cost versus the freed up dollars in this amount, but it's a focus on deleveraging.

One more just on the inventory side of things. Would you be able to tell me what your current well inventory is?

I don't have that right now. I can tell you that we're bringing on six new well pairs in the fourth quarter and that will be very early on in production, so we don't expect to see much in the fourth quarter on it.

But we do have some available wells and as we continue to free up steam, we will point that at those wells, so that is very exciting, because as I mentioned during the prepared remarks, we have seen tremendous success with the EM SAGP at freeing up steam, far exceeding our expectations.

I was just trying to get a sense of latent capacity as far as wells you could direct steam to?

Yes, no, as say, I don't have the absolute number here. I apologize for that.

But we have drilled wells throughout the year. Some of that will go to maintaining and sustaining our production and then the rest will go to add to that.

I didn't quite follow the answer to the question to deleveraging. If I look at your total debt today, what is the goal to achieve on an absolute level of debt, not looking at it on a ratio, but just in an absolute level of debt, what is the goal?

Our goal is to strengthen the balance sheet and to reduce the debt to the maximum degree we can. That's going to be a function of what we get for proceeds and then as I said, we have to balance that about the impact that has to our cash costs.

We don't come out with a goal to reduce it to X, as much as we're going to try and take full advantage of the monetization of the access pipeline.

Right. Maybe asked another way, I don't want to say what are you trying to achieve, but maybe that's a simplistic way to ask the question.

You have very significant liquidity today. So what is the strategic idea on the balance sheet?

What are you trying to achieve? I understand you're trying to reduce leverage, but I don't understand the end goal so to speak?

You're correct, that our debt is not due, its covenant life. We do see an opportunity because the interest in infrastructures fund and that, to own these types of assets and we think it's appropriate that if you are in a low-price environment and you do have this type of interest and as long as you can maintain your strategic initiatives that fit within it and as long as you can balance the cash costs versus the reduction in debt, then we think that can just further strengthen our position to be able to grow in a lower oil price environment.

And we think it will also help change the dialogue on the Company, to get us back to conversations on growth and operational excellence and in the last little while there's been a focus on absolute levels of debt, even though it is not due and we just think it's an appropriate thing to explore and see what the art of the possible can be here. It all has to make sense.

And then just finally lastly, can you reiterate the thought on what the use of proceeds would be, let's presume for a moment you get a large number and you sell your entire position. Can you bucket what the use of those proceeds would be for, whether it's debt reduction or it's to ramp up CapEx or maybe it's something else?

It will be largely be focused on deleveraging the balance sheet. We focus on debt reduction and anything that we can do to reduce the debt to EBITDA.

Steven hit most of my questions, but can you just elaborate on when you expect to have some resolution on the potential monetization of access pipeline. Do you see we'll see more in this quarter or is that more of a 2016 event?

It's hard to know. We're very active on it.

It's definitely the primary focus in the corporation right now. It's definitely something that we spend a huge amount of time on.

I guess what I would say is that we've seen tremendous interest in the access pipeline. I think it exceeds what we would have anticipated.

And so as a result there is a lot of work do. And then when you look at the process that you're involved with, people need time to properly evaluate that and also then you're into negotiations with varying parties and since there is a large interest in it, we're very active on it right now.

So it's as fast as we can actually move in this area that we're very, very active in it right now.

My question is more around the longer term timing of growth, assuming that the commodity environment doesn't really change between now and the end of the year. Are you going to, do you feel like you're going to be able to have the clarity maybe with the 2016 budget announcements or what-have-you to give investors a bit of an idea of what the future growth profile of the Company.

Looks like even if we are, if the commodity environment doesn't allow you to go ahead with it right away, maybe just to give you an idea of what it looks like once you are more comfortable with the commodity?

That's something we're reviewing with our Board at the present time. What I can say on it is we have indicated that it's brownfield development.

That the sizes are in the 10,000 to 20,000 barrel a day which what's really interesting about that is it allows you it grow at relatively low capital steps. And we're putting clarity into that work right now.

And it's something we just have is to discuss with our Board, as to whether they're comfortable on that at the time. And as I said, we're putting all of the plans in place right now and we're getting some comfort on some good plans that way, but we really, I can't say that we would release them until we really discussed it with the Board.

Most of my questions have been answered, but just quickly on the access, are you guys required to offer the access pipeline proceeds to the term loan? And then secondly, on the deleveraging side, outside of access, what else are you guys exploring there?

In terms of the first part of it, the term loan is its own agreement on it. The assets are secured by that.

But we aren't required to do anything in particular that way. But I mean we have to look at all of the terms of the existing loan agreements in order to really determine which approach is appropriate there.

And then it is the largest, the answer to your second question in terms of deleveraging, we do look at various aspects but really the pipeline is the obvious one. It's the one that could have the most meaningful value to us.

Essentially it will be something like a leverage lease, where you guys are essentially selling something at 12 or 13 times to and then taking the expense side of that, is that kind of the right way to think about it?

Yes, that's certainly one of the possibilities. I mean we do open it up for options for people to explore the full part of it.

It's key to us is we're really trying to make sure we do a full evaluation on this and we get the best and brightest minds focused on what the possibilities are. Certainly one of the ones, the one that you suggested is a possibility, but there are others too.

Well, thank you very much, Donna. Thanks everyone for listening in on our call and of course Helen and I will be available for any follow-up calls you may have.

So thanks everyone and have a good day. Bye now.