MEG Energy Corp. announced its 2021 capital investment plan and operational guidance. Highlights include:
- 2021 capital budget of $260 million, expected to be fully funded within internally generated 2021 cash flow;
- 2021 production guidance of 86,000 to 90,000 barrels per day (bbls/d); and
- 2021 non-energy operating costs and general and administrative ("G&A") expense guidance of $4.60 to $5.00 per barrel and $1.70 to $1.80 per barrel, respectively.
In addition, MEG is increasing its 2020 full year production guidance to 82,250 - 82,500 bbls/d from 81,000 - 82,000 bbls/d and expects to exit the year with approximately $100 million of cash-on-hand.
Of the $245 million of sustaining and maintenance capital, approximately $180 million, or 75%, directly supports MEG's 2021 production guidance. This capital, of which approximately 45% will be invested in the first quarter of 2021, will be primarily directed toward the drilling, completing and tying in of new SAGD and infill wells. The majority of the production associated with this capital will begin to ramp up in the second half of 2021, reaching full production levels in mid-2022.
The remaining $65 million of sustaining and maintenance capital represents a portion of the investment required to sustain production levels in 2022 and beyond. Approximately two-thirds of this capital is targeted for investment in the second half of 2021 and will be directed to the initiation of the development of new well pads which are part of MEG's medium-term sustaining and maintenance capital investment program.
In March and May of 2020, due to the unprecedented negative macro oil price environment at the time, MEG announced a cumulative reduction in its 2020 capital investment program of $100 million to preserve financial liquidity. Approximately 80% of this deferral related to well capital which is now included in the 2021 capital budget. The result of this capital deferral from 2020 into 2021 is a front end loaded sustaining capital profile and a production profile that trends slightly lower in the first half of the year, but then reverses and trends upwards through the second half of the year as the new wells start to ramp up at the end of the second quarter.
The $15 million of capital investment targeted to field infrastructure, regulatory, corporate and other represents capital necessary to maintain MEG's business that is not directly associated with sustaining and maintenance of production at Christina Lake.
No significant plant turnaround is scheduled for 2021. As previously announced, MEG moved its originally planned 2021 turnaround work into 2020 and successfully executed a 75-day turnaround in the summer of 2020 in order to minimize staff levels at site during COVID-19 and maximize utilization of MEG's internal resources thereby lowering overall cash costs.
2021 Funding Plan and Financial Liquidity
MEG designed its 2021 capital program to be fully funded within 2021 cash flow at a full year average WCS price of approximately US$30.00 per barrel, which approximates the average WCS price realized to date in the second half of 2020 and is lower than current strip WCS price.
If realized WCS pricing underperforms this level over the course of 2021 MEG expects to have approximately $100 million of cash on hand which has been built up through the course of 2020 to support funding of the 2021 capital program. Additionally, should 2021 average WCS pricing on a sustained basis look to average significantly below US$30.00 per barrel, MEG will consider deferring a portion of the $65 million capital investment to be directed to sustaining production levels in 2022 and beyond in an effort to maintain an internally funded full year 2021 capital program without impacting 2021 production levels.
MEG's modified covenant-lite $800 million revolving credit facility is in place until July 2024 and remains undrawn. The facility has no financial maintenance covenant unless drawn in excess of $400 million. If drawn in excess of $400 million, MEG is required to maintain a quarterly first lien net leverage ratio (first lien net debt to last twelve-month EBITDA) of 3.5 or less. Under MEG's credit facility, first lien net debt is calculated as debt under the credit facility plus other debt that is secured on a pari passu basis with the credit facility, less cash-on-hand.
The Corporation's earliest long-term debt maturity is in 2024, represented by US$600 million of senior unsecured notes due March 2024. None of the Corporation's outstanding long-term debt contain financial maintenance covenants and none are secured on a pari passu basis with the credit facility.
2021 Commodity Price Risk Management
For 2021, MEG has entered into benchmark WTI fixed price hedges and enhanced WTI fixed price hedges with sold put options for approximately 40% of forecast bitumen production at an average full year price of US$46.15 per barrel. The first half weighting of these WTI hedges primarily reflects the first half weighting of MEG's capital investment profile. MEG has also hedged approximately 35% of its expected 2021 condensate requirements at a landed at Edmonton price of approximately 95% of WTI and approximately 30% of expected 2021 natural gas requirements at C$2.69 per GJ.
MEG's non-energy operating costs have historically been industry leading, and over the last three years MEG has focused on rationalizing ongoing G&A expense. G&A expense guidance for 2021 is approximately 35% lower than 2018 G&A expense on both an aggregate and on a per barrel basis, a result of a continued optimization of operations, reduction in staffing levels and rationalization of ongoing administrative costs.
2021 is the first full year MEG has capacity to ship 100,000 bbls/d of AWB blend sales, on a pre-apportionment basis, to the U.S. Gulf Coast market via its committed capacity on the Flanagan South and Seaway Pipeline systems ("FSP"). MEG intends to fully utilize this capacity, and assuming full year average apportionment of 25% (35% 1H, 15% 2H) on the Enbridge mainline system in 2021, MEG expects to sell approximately two-thirds of its AWB blend sales volumes into the U.S. Gulf Coast via FSP with the remainder being sold into the Edmonton market. MEG expects full year 2021 total transportation costs to average between US$7.75 to US$8.25 per barrel of AWB blend sales. No AWB blend sales by rail are contemplated in 2021.