MEG Energy Corp.

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

Greg Pardy - RBC Joe Gemino - Morningstar

Great. Thanks, Donna.

And good morning everyone. And welcome to our second quarter conference call.

For our conference conversation today we have with us our CEO, Bill McCaffrey, and our CFO, Eric Toews. To start off Eric will give us a review of the results of Q2 and then Bill will take, give us a good look forward outlining our strategy to grow and de-lever the company.

I will remind you today, our call contains forward-looking information. Please refer to our quarterly reports and other documents at SEDAR in our website for further information.

And with that I will turn it over to Eric.

Thanks, John. And good morning, everyone.

As John indicated, I'll serve an update on our operating and financial performance over the past quarter which will impacted by the first quarter turnaround that was completed in April, included a number of near records in terms of production and cost. The second quarter mark another milestone for the company, as we began to see the results of further implementation of the EM SAGP on Phases 1 & 2 at Christina Lake.

Production for the quarter came in at 83,000 barrels per day, coming out to turn around in April. May and June production averaged nearly 87,000 barrels per day and as a result, we remain on track to meet our production guidance for the year.

During Q2, we saw an increase in WTI of 36% and a corresponding reduction at WCS differential of approximately 14% quarter-over-quarter. This translated into an almost 300% increase in our betterment realization from the first quarter to $30.93 per barrel.

The enhancement efficiency gains associated with the EM SAGP has had a considerable impact on production, steam-oil ratio, our per barrel unit cost and the capital needs of the company. While we increased our production by 4% year-to-date compared to the same six month period last year, we also dramatically reduced our unit net operating cost and G&A by 26% and 30% respectively.

As a result, our corporate breakeven cash cost averaged $44 WTI per barrel during the second quarter 2016, compared to approximately $50 per barrel, last year. Combined higher production stronger realized pricing and lower operating cost resulted in cash flow from operations of a $7 million or $0.03 per share in the second quarter as compared to cash using operations of a 131 million in the first quarter.

Turning to Q2, our capital investment was approximately $20 million. Given the strong operating results for the first half of the year, we expect that we are sustaining a maintenance marketing and other initiatives in 2016, by only spending a $140 million for the full-year, which is 18% below our revised guidance of a $170 million and roughly 60% below original budget of 328 million.

We have been able to accomplish this to the efficiency gains achieved through the application of the EM SAGP. We plan to keep our capital investment at a $170 million which depending on market conditions will enable us to dedicate up to $30 million towards initiating future growth later in the year.

Bill will elaborate on this further in a couple of minutes. Let me take a moment to talk MEGs financial position.

At the end of the second quarter, we increased our cash in hand to $153 million. The current strip prices in the capital investment of $170 million for the year, we expect our US $2.5 billion revolver to remain undrawn at the end of 2016.

MEG's strong financial liquidity along with its well-structured debt and stability to maintain operations with very low capital investment, continued to be defining attributes with the company. On that note, I'll pass it over to Bill.

Well, thanks, Eric. Not long ago, we were able to produce a barrel of oil for about $10.

Now, through as a result of cost control and efficiency gains, I'm pleased to say that in the second quarter we were able to lower our net operating cost to just $7.42. This is a strong illustration of the gains we've made towards sustaining reduced, to sustainably reducing the cost of our business which will enable us to grow in a lower oil price environment.

And because of this success, we're seeing the success we're seeing at a reduced cost, reducing our cost, we are lowering the range of our 2016 non-energy cost from our original guidance of $6.75 to $7.75 per barrel down to $6 to $7 a barrel. I'll now like to share with you our vision for the company, were we finally go over the next three years.

Our goals is to strengthen our balance sheet well and advance of any negotiations of extension of our debt. We'll accomplish this by developing high return, short type approaches that will add meaningful cash flow or at the same time improving our debt matrix.

In combination with the benefit from the growth in production, we will also continue to focus on reducing our absolute level of debt. Taking advantage of our world class resource space, we will develop projects using our proven proprietary technology.

The resulting efficiency gains will effectively lower per barrel unit cost and further reduce our GHG intensity, making us comparative not only on the regional but global basis. We now know where we want to get to.

Now, let me be a little more specific on the plans to get there. We'll continue to build off the momentum that we saw in the second quarter as we plan for the implementation of two new growth projects.

Combined, these projects will add approximately 30,000 plus barrels a day to our production date. We anticipate they will also continue to drive our cash cost lower by $4 to $5 per barrel and further reduce our corporate breakeven cost as we grow production to between a 110,000 and 120,000 barrels a day.

Now, because much of the total non-energy G&A and interest cost do not change with the added barrel, the revenue associated with these projects will then contributed disproportionately to the company's bottom line. In addition, this will have a major impact towards improving our debt matrix of the company.

Late last year, we began to more fully implement EM SAGP on Phase 2, incorporating learning that we gain from its initial application. This has enabled us to drop the steam oil ratio in Phase 2 to approximately 1.5, which is similar to the results we obtained in Phase 1.

We have now deployed EM SAGP across 30% of our production base with very consistent results. Over the next two years of the Phase 2B reservoir reaches the maturity required for EM SAGP application, we plan to roll out the technology to the two new well, which accounts for approximately 70% of our current production.

This phase of growth involves a drilling of infill wells and the use of non-condensable gas to reduce steam injection. The frees up steam will be redeployed to new SAGD well pairs to increase production.

As this course largely consists of drilling wells, we currently anticipate the capital intensity below $20,000 per flowing barrel. Our first phase of growth will add 15,000 to 20,000 barrels incremental production and generate IRRs of over 30% at $45 WTI.

While we can deliver this growth over a 12 month period, the ability to grow on a well-by-well basis means that we have tremendous flexibility to vary the pace of growth in response to market condition. We are preparing to start implementing the inside fee in Phase 2B by dedicating up to $30 million towards drilling new wells.

Now as Eric mentioned earlier, this funding would come from the unused portion of this year's downly revised $170 million capital budget. The work is planned for the second half of this year, however, we will monitor market conditions and can adapt accordingly if necessary.

Once implemented, these initial wells will add approximately 33,00 barrels a day to our production base over about a six month period. The next growth opportunities are brownfield expansion which had steam and processing capacity in addition to the SAGD well pairs.

Capital intensity for this projects anticipated to be below $30,000 per flowing barrel and we'll add roughly 13,000 barrels of production over in an eight months period. Projects anticipated to generate 15% IRR at $45 WTI.

And management and the board are currently assessing the pace of growth to roughly a 120,000 barrels a day. And reviewing their funding option the company has at its disposal.

The pace of growth, commodity prices, and the continued reduction of the corporations cost base will all be factored into this decision. In addition to, in addition to reduce the variability of the cash flow associated with changing commodity prices, we mention the use of a hedging program during our last quarterly call.

Our current objective is to set a floor price for a barrel, at or above our cash thoughts we're leaving room to take advantage of improving oil prices as supply and demand continued to come down. As I mentioned earlier, in combination with our growth, we are also focused on reducing our absolute levels of debt to strengthen the balance sheet.

Along this topic, divestiture of the access pipeline remains a priority for the company. Given our focus on reducing our cash thoughts, striking the right balance between the proceeds from the potential sale of the pipeline and the impact of added tools to our breakeven cash thought is an important part of our overall deleveraging and growth strategy.

In summary, over the last 18 months, we've been taking advantage of lower oil price environment by using the time to redefine mix strategy going forward. Our overall goal is the position the company to be competitive in various commodity price environments.

We've made considerable gains in reducing our overall cost base, which has been reflected in the second quarter results. Through efficiency gains, we will continue to drive our breakeven cost to a level which makes us competitive among the best in the world.

Our strategy is to focus on our strength, which is the application of a proven proprietary technology. This will allow us to grow, reduce our cost and contribute meaningfully to the improvement of our debt matrix.

With that, I'll now turn it back to John.

Great, thanks Bill and Eric for your remarks. We're going to turn it over to for questions in a minute.

But I do have to remind you that if we can keep the questions at a strategic level, Helen and I will be here available after the call to help you with any detailed modeling. So, with that, Donna let's open the lines for your questions.

Thanks. Good Morning.

Bill, could you maybe just distinguish between the two phases of growth, I mean I guess the first one you laid out is fairly straightforward, it really seems as though it's really just a matter of kind of drilling infill wells as you mentioned. Does the second phase of growth then start to entail modifications made to the plan in terms of steam and water handling?

I just want to understand what the second phase is, is different, how it's different?

Yeah sure, thanks Greg. Yeah, there are two separate phases, so there are two separate choices.

The first phase is largely taking advantage of efficiency being with our steam that we are freeing out. So, as our EM SAGP continues to advance, we are seeing greater and greater efficiency that’s pretty much been for us and so it's largely focusing on drilling wells to take advantage of that free debts been.

The second component of it is the grounds of expansion, that does add steam and water softening to be able to grow additional volumes and that’s a 13,000. So, think of the first one as EM SAGP and think of it as 15,000 to 20,000 barrels a day and the second one is an expansion that does have some modifications to the plant on the water inside because we know that oil side can still handle that.

So, we're trying to get best capital efficiencies in all of these things and to take advantages of the tremendous efficiency gains that we're getting from our proprietary inside people desk.

Okay, that’s great. Thanks, very much.

Thank you. Congrats on the great quarter.

I have a couple of questions. 1) Regarding the improvements in your non-energy operating cost.

How sustainable do you think are those going into the future? And 2) can you touch more into the timing of when you'll expect to undertake these growth projects or these growth phases that you've mentioned?

Yeah great, thanks Joe. On the first one, on the non-energy, we feel we are sustainable and we think that we can actually improve on it.

So, if you think of our non-energy cost is largely fixed and we put those over a strict number of barrels, as we grow these highly economic quick-to-cash-flow projects, we are able to actually spread that same type of cost over more barrels. So, directionally as we head down that path of added barrels, we will see that cost come down even further.

On your second question on the timing of these phases, the best way to look at them is we'll break them in two parts right now. We'll think of EM SAGP as the first one, and then you want to think of that as the ability to add growth on an individual well basis.

And that is quick to turn around the cash flow. And also think of it as relative no very high torque to the bottom line because we don’t have to add non-energy cost, we don’t have to add G&A and it doesn’t impact our interest payments.

So, we will be able to spread those three categories over more barrels and hence move our cash thoughts further. And timing of that is we want to be careful and we're just being very calculated in the timing that we start on the EM SAGP process right now.

But as you can do it on well-by-well basis, we have tremendous ability to be flexible as we assessed the market conditions. And then the absolute pieces I said in my script there was it's a combination of a piece of developments at the board feels as appropriate, if the price of oil and it's where we can drive our cash cost down too.

Thank you.

Yes, thank you.

Great. Thanks, Donna.

And thanks everyone for listening in to the conference call. Of course Helen and I again will be around after the call to answer any of your detailed questions.

So, thanks for your interest and we'll talk to everyone soon. Thanks, bye.