MEG Energy Corp

MEG-T

A fall in WTI prices has not helped. The debt is very high, but have paid down a large amount. He is doing more research to see what is the appropriate debt level they should have. He will wait.

They simply have the highest beta to rising oil prices. By next year, two-thirds of their production goes directly to the US Gulf Coast and getting preferential pricing. They are trading at a 31% yield on free cash-flow. Great value. Yield 0%. (Analysts’ price target is $8.34)

He's trimmed his energy holdings to 5%, but is now buying back because energy is coming back. MEG is his top choice here and bought some last week. MEG is the most undervalued Canadian energy stock. Oil though can be volatile.

All oil stocks have had a nice bounce-back. The risk behind crude is over and upside is coming. He'd buy this and oil stocks.

MEG was down on release of Q4 results. It gives exposure to heavy oil in Alberta. They can keep production cap and generate $527M in free cashflow based on $60 oil next year. If they chose to buyback stock, they could purchase 36% of their shares outstanding in 1 year. They are focusing on delevering the company. They can service their current debt and thinks they may be better off to buyback shares. Extremely undervalued.

The street is not appreciating how much cash flow this company is generating. The balance sheet at $55 oil or higher is absolutely not an issue. Yield = 0.0% (Analysts’ price target is $7.78)

What happened with Husky? He has to be vague. HSE-T stepping away from its tender of MEG-T was not about Alberta curtailment risk. It was not about the lack of pipeline progress. Rumours suggest 60% of the shares were tendered. So it makes him think it was something too sensitive to be officially released. Perhaps there could have been an outside entity or government that would not allow Husky to purchase MEG. That is as far has he is going. MEG has been a huge winner for the production curtailment as the WCS differentials have tightened.

The highest leverage to both rising oil prices and tighter WCS differentials. He thinks WCS will trade to $17-$20 for the next few years. For every $1 change in oil prices, he thinks their share price will improve by $1. Husky walking away was a great opportunity to buy at a great value. Yield 0%. (Analysts’ price target is $8.23)

It dropped because Husky dropped their bid for the company. Can MEG make it on its own or are there other potential buyers – he would not hold his breath. It will continue to de-lever and become more attractive in the marketplace. Another potential bidder may not have to be in a hurry to buy it.

Taking a counter-cyclical view, Husky is investing upstream. His best guess is that the Husky closes. It's unlikely there'll be a white knight for MEG.

Breaking News The unsolicited offer has been given an exemption by the ASC that avoids having to provide identical consideration to all securities holders. This means MEG will plan to waive its shareholder rights plan, but still plans to reject the offer the Husky. He feels this is an unusual decision by the ASC and MEG, but does not have an opinion on the issues.

Do you like the MEG - HSE merger? He has been a supporter of tightening heavy differentials. He no longer holds MEG-T and regets it -- because it really is a high torque heavy oil company. The street does not think HSE-T will have to increase the bid to buy them. If you hold MEG-T you are essentially holding HSE-T now. He thinks there are better companies to invest in to maximize your exposure to heavy oil improving.

When the Husky deal was announced he sold their position into this. The energy space is out of favour right now -- especially heavy oils. He would not step in, but would continue to hold if he had it.

Husky Energy is bidding for this at $11/share and trading at $8.01 today, so if the bid is approved, will a shareholder get that $11/share buying at $8.01? No, because it's not a cash bid, but a hostile one in shares at 0.57 shares of Husky. Meg is tracking Husky down. It's now trading at a 60-cent implied discount to the Husky bid. He expects this deal to go through. Meg is worth about $8.60/share in terms of Husky shares, then you'll end up owning shares of Husky, then you can decide what to do with them (hold or sell). So, you'd buy shares of Meg, short Husky and hope to pick up that 60 cents when the deal closes.

He sees the deal going through in January. He thinks Husky still needs to increase their bid slightly. Currently MEG is trading at a 4% discount to the bid. It is better risk reward to buy their corporate bonds vs stock, and therefore some have been shorting the stock.