MEG Energy Corp. : Upgrade To Buy

MEG : TSX : C$34.17
Target: C$44.00

MEG Energy Corp. is an oil sands company focused on sustainable in situ oil sands development and production in the southern Athabasca region of Alberta, Canada.
MEG is actively developing enhanced oil recovery projects that utilize SAGD extraction methods.
All amounts in C$ unless otherwise noted.

Keystone XL does not matter,  we are going positive on heavy oil fundamentals, we are raising our rating on MEG Energy to BUY from Hold. We believe the company will in the near-term be in a sweet spot where it benefits from both netback improvements and production growth:
 We believe it has the best direct cash flow torque to improved infrastructure due to its rail and barge agreements as well as its commitments on Flanagan South. And it also provides the lowest company specific risk to XL being rejected or delayed given it has no commitments on the line (i.e., it won’t need to scramble to find an alternative route).
 Phase 2B is expected to commence first production later this year increasing the company’s production by 35 MBl/d vs. its Q2/13 average rate of 32 MBbl/d. However, as seen with the company’s current plant, we expect to see rates higher than the stated design due to an outperformance of the SOR and RISER initiatives.
 As such, due to the direct netback impact and expected production growth, we see its CFPS rising roughly 188% YoY in 2014. 

Company-specific key catalysts over the next six months will be:

1)Monthly AER production numbers demonstrating rising production. Of note, July SAGD numbers were recently released showing MEG’s Christina Lake volumes rising 1.1 MBbl/d or a little over 3% MoM;

2)meeting its ‘13 exit rate target of 37-43 MBbl/d; and 3) demonstrating the uptick in its netbacks when it reports Q4 results in early 2014.
 We are raising our target from $39 to $44 to reflect our bullish stance on the stock with respect to our improved heavy oil outlook. Our target price is based on 1.25x our risked NAV estimate. The premium to NAV reflects the company’s high quality asset, excellent operational execution, and direct exposure to the shift change in heavy oil fundamentals given its rail, barge, and Flanagan South arrangements. We are also adding MEG as our  pick for Oil Sands/Heavy oil.


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