MEG : TSX : C$41.97 Buy , Target C$56.00
MEG proved our thesis Thursday that it (along with other heavy oil producers) was poised for a strong rebound, albeit we didn’t expect such strength for MEG in one day.
The company continues to display its strong operations and low cost structure; which was evident in its Q1/12 results as MEG achieved thethird highest netback quarter in its history (~$39/bbl), despite wide heavy oil differentials. With the WCS/WTI price difference narrowing (~15% of WTI), Q1/12 results behind us, and possible organic production upside potential through operational enhancements, (which could yield upside to Street estimates), we believe the stock can continue with its upward trend. .
Christina Lake 2B scheduled to add at least 140% to MEG’s notional productive capacity. The construction of the 35 MBbl/d phase is progressing and on schedule for start up in 2013. MEG will look to drive efficiency initiatives to push the production envelope beyond initial design capacity, similar to the 20% exceeded in Phases 1 and 2. Such results would imply that Phase 2B could produce close to 42 MBbl/d, which on that basis alone would mean a 5% increase to our estimated NAV for the MEG vs. only the 35 MBbl/d design capacity.
MEG’s non-condensable gas and infill well pilots exhibit potential for even further production upside. The company tested non-condensable gas on three well pairs and saw a 25% reduction in steam requirements (vs. the anticipated 10-15% seen before), thus providing the opportunity to re-deploy the steam elsewhere (in this case likely to infill wells).
The two infill wells at Christina Lake achieved production of ~400 Bbl/d each with a cumulative SOR of ~ 1.0x at the end of March. MEG is looking at the possibility of implementing these initiatives across Phase 2B, which brings the possibility of even further upside to the 42 MBbl/dtheoretical production capacity we mentioned above. Assuming there will ultimately be one infill well per two of Phase 2B’s 42 SAGD wells, and each infill well is able to produce 200 Bbl/d, that would imply an incremental 4.2 MBbl/d of production, or another 12% increase to the design capacity.
TARGET PRICE $56
$56 target is based on 1.2x our estimated risked NAV. The premium multiple reflects the top-tier asset and operatorship, potential operational upside and the relative premium the market places on the company. Shares are currently trading at $1.28/estimated recoverable bitumen