MEG Energy Corp.

John Rogers - Vice President, Investor Relations and External Communications Bill McCaffrey - Chief Executive Officer Eric Toews - Chief Financial Officer

Greg Pardy - RBC Capital Markets Dan Healing - The Canadian Press Nia Williams - Reuters Benny Wong - Morgan Stanley Jeff Lewis - Globe and Mail Sheela Tobben - Bloomberg 365

Thanks, Alina and good morning, everyone and welcome to our first quarter conference call. For our conversation today, we have with us our CEO, Bill McCaffrey and our CFO, Eric Toews.

To start off, Bill will discuss our vision and priorities for 2019 supported by the financial transactions we announced back in January. Eric will review our results for the first quarter of 2017.

I will remind you that today’s call contains forward-looking information. Please refer to our quarterly reports and other documents on SEDAR and our website for further information.

And with that, I will turn it over to Bill.

Thanks, John and good morning everyone. As we look back at our first quarter results, I would like to put them into context with our goals and objectives through 2019.

Over the next 2 years, we will implement our proprietary eMSAGP technology and our phase – on our Phase 2b assets, which will begin to increase our production in the third quarter and add an incremental 20,000 barrels per day over our current production base by 2019. We plan to complement this eMSAGP growth with the Brownfield expansion on Phase 2b, which will add an incremental 13,000 barrels a day.

And in 2020, we expect our production to reach 113,000 barrels a day, which is 40% higher than our current levels. With our eMSAGP implementation underway in the first quarter of 2017, we have now commenced the first step of this journey.

Our objectives for 2017 are as follows. We will continue the strong production performance demonstrated by our operations to-date while working towards further efficiency improvements.

We will execute on our highly economic growth projects. These projects will significantly increase production, decrease our steam-oil ratio, further reduce cost, improve sustainability of the business and move the company towards a more normalized balance sheet.

Our third objective is to maintain the strength of our financial liquidity. So, let’s take a moment to discuss the first quarter.

Production for the first quarter of 2017 was higher than our production for the same period last year. It was also within the range we set for the quarter of 77,000 to 79,000 barrels a day.

Q1 was the first quarter since reinitiating our growth and we have been very pleased with the drilling results that have been seen to-date. Our focus so far has been on infill wells.

In Q1, we drilled 14 of the total 39 infill wells planned for 2017. We also planned to drill up to 28 SAGD well pairs this year, which will be brought on stream in the latter part of 2017 and into 2018.

Now, these well pairs enable us to take advantage of the freed-up steam associated with the efficiency gains from the eMSAGP process. As anticipated, the infill drilling program resulted in adjacent SAGD well pairs being temporarily shut in and correspondingly lower production in the first quarter of 2017 compared to the fourth quarter of ‘16.

With our drilling now underway, we have set the stage for our growth programs to begin yielding benefits. As wells are tied in, we will begin seeing an increase in our production rates which will commence in the third quarter.

We remain on track to meet our annual production guidance of 80,000 to 82,000 barrels a day and to exit the year producing 86,000 to 89,000 barrels a day. At the end of the first quarter, we had $549 million of cash in the bank, which is significant given how far we have progressed with our growth initiatives.

Additionally, in the first quarter, we completed a comprehensive refinancing, which positioned us well to continue to strengthen our balance sheet. Our first outstanding debt is not due until 2023 and we maintain a strong liquidity position.

Along with our cash on hand, this provides MEG with significant liquidity as we move forward on our journey to 113,000 barrels per day and beyond. And we are well positioned with respect to the three corporate priorities I set out at the beginning of my comments.

With that, I will turn it over to Eric.

Thanks, Bill and good morning everyone. As John indicated, I will start with our financial performance over the past quarter.

The combination of technological advancements and an absolute focus on cost control has enabled us to reduce our per barrel non-energy operating costs by 50% since 2011 and 35% since 2014 to $5.20 per barrel in the first quarter, well within our guidance of $4.75 to $5.75 per barrel. We also achieved net operating cost of $8.43 per barrel in the first quarter.

With WTI prices averaging $51.91 per barrel, we were able to generate adjusted funds flow of $43 million in the first quarter. Let me take a moment to talk about MEG’s financial position.

The company undertook capital investments of $78 million during the first quarter of 2017. Our cash balance of $549 million and projected 2017 cash flow is expected to fund the remainder of our 2017 capital budget of approximately $510 million.

Our $1.4 billion 5-year covenant like revolver remains undrawn. We continue to apply our hedging strategy, which is focused on protecting our capital program against downward oil price movements and helping us mitigate the volatility we are seeing in the marketplace.

We have hedges in place for approximately half of our blend sales for the rest of the year. We have also hedged more than 40% of our condensate purchases through the remainder of 2017.

We are targeting production for the second quarter of 69,000 to 73,000 barrels per day due to our 35-day major maintenance turnaround planned at Phase 2. As Bill mentioned earlier, we remain on track to meet our annual production guidance.

With that, I will pass it back to Bill.

Thanks, Eric. Well, to conclude, I would like to highlight the significant changes which have taken place in our business.

As mentioned, the debt restructuring and the capital raise have enabled the execution of a very visible path for MEG to 113,000 barrels a day. This has been made possible by the success of our proprietary eMSAGP technology.

And I would like to quickly list the benefits of this proven technology that is transforming our company. First, along with our Brownfield expansions, eMSAGP is enabling us to lower our capital cost by 25% to 50% with further opportunities for savings still ahead.

Our prior Greenfield costs were over 41,000 per flowing barrel. Our future cost at Christina Lake will average between 20,000 and 30,000 per flowing barrel.

Second, eMSAGP is allowing us to reduce our development times for projects to 12 to 18 months from the 3 to 4 years we would have had to spend when we are constructing Greenfield projects. Third, when we spread our fixed costs over the incremental barrels from our eMSAGP and Brownfield expansion, we will reduce our overall corporate cash costs by $6 to $7 a barrel.

Fourth, on the production that we have applied eMSAGP to, we have cut the steam oil ratios in half and reduced our energy cost and greenhouse gas intensities. Our overall net GHG emissions – emission intensities are currently 22% below the industry average and has potential to be reduced even further as we continue to expand eMSAGP.

Lastly, the returns on the first two expansions are exceptional ranging between 30% and 40% at $55 WTI and approximately 20% to 30% at $45 TI. As these expansions are rolled out, the benefits will be very apparent.

Starting in the third quarter, we expect to begin seeing production increases and a corresponding decrease in our cost per barrel in steam oil ratio over time. And we expect to see production continue to go up and our cost per barrel in steam oil ratios to keep going down as we further our growth.

After we have reached 113,000 barrels a day in 2020 with a 12% compound annual growth rate, we envision a business that can continue to reduce costs and be even more sustainable and resilient to commodity price swings. We plan to follow the first two expansions with a series of high return, short cycle projects that can take us all the way to our current regulatory approved limit of 210,000 barrels a day.

Now, our teams put a lot of work into the planning and development of this strategy. Our focus now is on its continued implementation as we create value for our shareholders.

And with that, I will turn it back to John.

Thank you, Bill and Eric for your comments on the quarter. What we will do now is open up the phone lines to questions.

So Alina, if you want to the callers – and I will mention again that if you can keep your questions at the strategic level, Helen and I will be around later to answer your specific modeling questions. So Alina, if we can go ahead.

Thanks. Good morning.

Bill, could you elaborate a little bit on what the 13,000 barrel a day expansion will entail?

Sure, Greg, no problem. It involves just adding additional steam to the existing plant.

So it is a – what we see happening over time is that as we grow our volumes, we will look for where the next bottleneck would be. We don’t have to do that on the first eMSAGP, because what we are doing is freeing up steam that we can redeploy to new wells.

So the second part will be adding additional steam that can be deployed to two additional wells beyond that.

Okay, great. And then just your spending, obviously limited in the first quarter as you are gearing up to do things, but could you give just us an idea what the shape of the program will be for the balance of 2017 and is it possible that you will under-spend the $590 million?

Sure. Yes.

As a general description of the capital spend, which is to start off drilling with three rigs right now, as that continues we get into continue drilling as well as the actual tie-in of those wells so that has an increase at that time of the spend of capital. To look at our total budget in perspective, I would say we are very, very pleased with the success of the drilling to-date and that we are seeing efficiency gains and cost savings in the drilling program.

And so – and we believe that will continue throughout the year. This time, we are not revising anything.

We are comfortable with our budget, but we are very comfortable where we sit.

Okay, great. Thanks very much.

Thanks Greg.

Good morning. Thanks for taking my question.

I just had a question about transportation and marketing in view of the election results from BC, which could possibly create a barrier to building a Trans Mountain expansion, is this going to affect MEG particularly and do you think that it could result in more use of say, crude by rail?

Thanks Dan. Well, MEG has a very diversified strategy on the marketing and so no particular market access would hurt MEG, because of its diversification.

Our largest volumes currently go to the Gulf Coast and PADD 2 [ph]. We do have barrels available to go out to the West Coast in the event that TMX gets built.

I don’t want to comment on the election results or anything, but it’s not a major impact on our performance or anything.

Do you think that the Federal government should step in and make clear that TMX is going to be built?

I think that’s going to be for the government to decide, Canadian government has to decide its position if they have approved it and so there will be very important questions that they have to ask themselves, but I don’t want to form an opinion on their behalf.

Okay. Thank you.

Hi there. I just want to ask about the additional phases of Christina Lake, when are you likely to make investment decisions on those and sort of up to a capacity have you made to fund investment decisions so far?

Thank you. Yes.

What we do is we have a series of expansions. The guidance we have given is that they will be in that 20,000 to 30,000 barrel a day on a flowing barrel basis as you go forward.

We are mapping out those future ones. The general comment I could make is that the future phases are very well delineated, giving us a high comfort on the resource quality in those areas and that they would be very similar in scope and nature to the Brownfield expansion that we are doing.

So we think of them as a little bit more of the same. We sanctioned them one at a time.

And so right now, we have sanctioned the first one, which is the eMSAGP component, but we have also done a lot of the work and engineering is complete on the second one. And we just keep going down the line.

It’s a continuum as we go forward towards our regulatory approved 210,000 barrels a day.

Okay. Thanks.

And is there is a certain oil price at which these expansions will breakeven with a good return on capital, do you have any price in mind?

The way we look at it, I think the 2x projects that Bill referenced with the range of returns case being [ph] – the range of returns on 2x is somewhat representative of how we see the rest of the phases. So from an oil price perspective, we don’t see in the future an oil price where we would be hindered in moving forward, but it depends on the ultimate decisions we make around capital budgets and timings they come up.

Yes. And I would add to that, that we mentioned that even at $45, these are very economic.

And so Eric’s comment is very good that we do – we feel comfortable with that – with the price range that we think.

Okay. Thanks.

Hey, good morning guys. Apologies if you have already addressed this question as I missed it being on the call, you mentioned in your press release thinking about moving forward anticipating moving forward the Brownfield expansion 2018 budget, anything else in 2018 that you guys are thinking about on a preliminary basis that you guys might look at, maybe in terms of spend on technology side or marketing or any levers or guidelines you guys are kind of looking at in terms of crude prices or whatever in terms of how you guys are thinking about that budget?

Sure. Well, 2018 budget is actually done in December, so it is away for us to comment too much on it.

But when I comment I would put is that we are very much focused on the implementation and execution of the eMSAGP at this point as well as positioning out the Brownfield expansion and so that will be the most meaningful focus of any capital investments for ‘18.

Got it, okay. Thanks.

And I just wanted to get a sense of – do you have an outlook or you would share or what are your views on where have your old differentials are now even before this recent outage in same crude differentials relative to before, do you see this dynamic persisting with OPEC cards or how are you thinking about that?

Yes. We think on a general statement that we would probably see tight differentials in the second quarter and probably returning to more normal differentials in the remainder of the year.

But I will say that OPEC is – has been reducing its production and it is reducing its heavier barrels and that’s reducing the amount of barrels available to the Gulf Coast. And so I see that as something that will continue.

And with declines in Venezuela and Mexico, I think it does position the Canadian heavy barrel very well if you can get access to the Gulf and MEG is well positioned with that access.

Great. And as a final question is just how are you thinking about Surmont these days and how are they going to fit in with your longer term plans?

And I will leave it there. Thanks.

Okay, thanks. We are still in the regulatory process with the Surmont project.

We do see with our development plans at Christina Lake, those will continue with that series. Later on in time, we do see significant free cash flow in that area and I think that complements the development of Surmont very well.

Our focus right now though is and will continue to be on Christina Lake. Thanks, Benny.

Hi, thanks for taking my question. Bill, can you just clarify how much space you recently took on the Trans Mountain pipeline and what that brings your commitment to in total?

Yes. Thanks, Jeff.

We haven’t actually released that number. It’s not large relative to the rest of what we are doing on the Gulf, but it’s a little commercially sensitive at this time so I prefer not to say.

I will say though that it’s not meaningful in our portfolio.

Okay, thanks.

Yes.

Hi, good morning. This is Sheela.

So I just wanted to drill back to the information that was provided on the second quarter maintenance. I am trying to get a little more details on this.

This is on Christina Lake, I take it and can you say when it will start and end and has it started, actually? And do you have any other plans – do you have maintenance plans for the Surmont site as well?

Thank you.

Sure, thanks. Well, Surmont, first of all, was not under development yet so that would not have any maintenance.

Now on Christina Lake, this year, we have maintenance programs to do on our Phase 2b, which has already been done and Phase 1 and 2 which is currently underway. On our Phase 2b, that went very well and it was – there were no surprises in the turnaround.

And then on Phases 1 and 2, that’s currently underway right now. And at this stage, we haven’t seen anything meaningful – any meaningful surprises.

And I am right to make sure it’s clear that these are planned maintenance programs just to ensure that we maintain our equipment over time.

Okay. And I do have one other question, it’s on pricing like I need the other caller had asked about pricing for Canadian heavy crudes.

Do you have any targets for where you see it like WTF differentials turning towards the end of the year in light of OPEC’s cuts and so on and so forth?

As I mentioned earlier that we see them narrow in this next quarter and then returning to normal in the second half of this year. That would be related to the PADD 2 area.

We do see that OPEC continues with its program of restricting supply. We do believe that, that would continue to be the heavier barrel.

And that is very – that will keep differentials and the pricing differentials narrow and the pricing strong at the Gulf Coast and that is a target that we are focused on right now.

Do you have any figures like where you see it going, like where do you see it trading from the end of the year, what kind of pricing are you seeing?

No, that’s going to be based on the supply and demand at the time. So say, I do think that we will see narrow differentials at the Gulf, we are seeing it now, but that’s all the function of what OPEC decides to do in the second half of the year and they obviously haven’t announced their plans yet.

Okay, thank you so much. Appreciate it.

Thank you.

Hey, guys. Thanks for taking the question.

With the terming out of a portion of your revolver and refinancing of your term loan, is the balance sheet where you want it to be now or is there more you would like to do on that front?

No, the refinancing was very helpful that extended the life. So the first outstanding debt is not due till 2023.

It did allow us to do a couple of things. It allowed us to commence – because there is an equity raise, but it allowed us to commence our growth plans, which will de-leverage our balance sheet growth over the next few years and we talked a little bit about that in the script there.

And then the other thing is we do remain debt focused on absolute debt reduction. And in this area, what we do is we want to make sure anything that we would look at in terms of absolute debt reduction actually is – takes a look at the meaningfulness of an absolute debt reduction coupled with the impact that, that would have on the long-term impact of our business.

So, both are a focus. It’s the de-leveraging organically through the growth and assessing and looking for opportunities that would make sense to our shareholders in the long run to reduce the absolute amount of debt.

Just in terms of reducing the absolute amount of debt, obviously, the growth of EBITDA, you are naturally de-leveraging. But from an absolute perspective, any potential thoughts around accelerating that through, I don’t know if you have any baskets for open market repurchases or anything of that sort?

Well, we look at a number of options when we are doing that. And so again, we just want to make sure that whatever option we do execute on, if it makes sense to execute on one, we would do that with the idea of striking that write-downs between the proceeds and the long-term impact.

Sorry. Can you just – when you say the long-term impact, do you just mean balanced capital allocation between buybacks and investment in that growth CapEx?

Well, it depends really on what the option is that you would look at. You have to – anytime you make the decision if it was the sale of an asset or some other thing, you have to look at the outcome in the long-term.

One part of it is you would look at the amount of debt you could retire if you are on the subject of asset sale and but you have to look at any outcome or consequence that would be associated with that as it’s related to your balance sheet. If you are talking about buybacks, right now, we are more focused on de-leveraging organically than that, but we don’t rule out opportunities.

We are very opportunistic and focused and if there was something that made sense then we will look at it.

Great. That’s very helpful.

Thank you very much.

Thanks.

Hey, guys. Sorry about that.

Just had one more follow-up. Just want to see if we can get an update in terms of how you are thinking about asset divestitures and how you guys are thinking of potential selling of your Access interest and if Gore makes sense in terms of your strategic plan?

Thanks.

Yes. Thanks, Benny.

Well, consistent with what I was just mentioning there, in addition to the de-leveraging through the growth as I mentioned absolute debt reduction does remain a focus. Certainly, Access or Gore or those types of things are options that can make sense.

But again, you have to weigh the impact of the reduced leverage versus the effect that any one of those would have on the long-term impact to your business. So we do look at those types of things.

So those are two examples of the things that we do look at and we are actively thinking through that part of the business.

Great. Thanks, guys.

Great. Thanks, Alina.

Thanks everyone for listening into our first quarter conference call. Again, if there is any follow-up questions, Helen and I will be around after the call.

Other than that, everybody have a good day. Thank you.