Meg Energy Oil Exploration Update (double production to 65,000 by 2013, 260,000 b/d in 2020, Surmont 2018, phase 3)

    Meg Energy is one of Canada's largest oil exploration companies that owns 100% of a 3.7 billion barrel, 80 block section of Christina Lake, one of Canada's largest oil megaprojects (development began in 2008). In the first nine months of 2011 the company produced 25,450 bbls/d up 33.4% from 19,071 b/d in the corresponding period of 2010, but only 20,945 in 3q11 due to maintenance activity (versus 19,339 b/d in 3q10, all production comes from Christina Lake). Production and revenue recorded record highs in the second quarter of 2011, at 27,826 b/d and $279m respectively. Production is forecast to reach 29-31,000 b/d by the end of 2011 attributable to new equipment being installed at Christina Lakes' second phase expansion (when construction work there is completed in 2013 (operating at 100% compared to less than 30% currently) operations there will bring in an additional 35,000 b/d, more than doubling current production possibly to as high as 65,000 b/d). C$500 million of the C$1.4 billion in total project costs needed by phase 2B has already been spent with the balance coming in 2012. The company has only been producing since the last quarter of 2009 when output was 2,427 b/d.

MEG Energy has $937 million to spend next year on growth projects (which represents 70% of its $1.37B 2012 capex) the majority of which has already been allocated to phase 2B with the rest ($1-200m) going to the 3rd phase (initial construction), the exact amount to be determined pending a key regulatory decision in 1H2012 (3rd phase is key since it will add 150,000 b/d). There's also Surmont that should be coming online close to 2018 (Surmont has vast resources of heavy oil but very little of it represents upgraded reserves). MEG capital expenditure was $243.218 million in the July-September period (2011) compared to only $96.561m in 3q 2010. Maintenance costs and more money going to growth projects increased long term debt which is now at $1.792b up from 1.005b in 3q10. The last phase isn't expected to be completed until 2015-2020 and so the maximum 260,000 b/d estimate probably won't be reached until the latter part of that period.

The steam required to melt bitumen so that it can be brought to the surface by the process known as steam assisted gravity drainage, is produced at a power plant that doubles as a cogeneration plant which allows the company to turn excess steam into power able to be sold to the Alberta Power Grid (the extra money helps reduce operating costs ----> which increases operating netback). Western Canadian Select price is lower than WTI because it is a mixture of heavier oils/bitumen and synthetic oil and thus produces fewer barrels of oil per metric ton (prior to processing). Production costs per barrel were down significantly in the nine month period to $16.38 from $22.81 due to higher production volumes and Christina Lake producing at a normal phase (not ramp up phase as in 2010). Revenue from extra power sold to Alberta power grid (cogeneration plants) reduced net operating costs down to $11.95 from $18.63/bbl. In the 3rd quarter Meg received enough compensation from sold power to pay down per barrel operating costs by $5.13 ($4.43/b in the nine month period), that's up significantly from $2.13/bbl in the 3q10 ($4.18 in 9m10).

According to the company, its 1.9 billion barrels of 2P reserves are worth $12.1B, there's also another 1.8 billion barrels of inferred resource worth $7.0b (the company's market cap is under $9B). Christina Lake covers a large area, Cenovus Energy and ConocoPhillips already operate a large scale, synthetic oil project there that produces under 30,000 b/d that's also undergoing expansion (they tap into the McMurray Formation). The project is within the well known Athabasca Oil Sands of central-east Alberta.

Approximately 20% of Alberta's oil sands are close enough to the surface to be recovered by open pit mining, the rest requires vairous in-situ technologies. Alberta's royalty rates on oil production have fallen from an avg of $3/bbl to $2/bbl over the last decade and that has made it an even more attractive place to produce. Oil sands can be over five times more expensive to produce than conventional however with oil prices up more than 400% since 2001 that barrier to investment is becoming less of an issue (if the price of oil remains at or over $60/bbl which makes oil sands production economically viable, Alberta's oil production could reach as high as 11M bbls/d by 2045). Reason that heavy oil commands a lower price on the open market than WTI? You need 1.7 barrels per metric ton more of the <10 degree API heavy oil versus lighter oil because its high specific gravity (density as compared to a reference) makes its API gravity lower leading to fewer barrels produced according to this calculation. In the first nine months of 2011 the price of WTI oil was up 23.0% to $95.48/bbl from $77.65/bbl ($89.76 in the 3q11).

Eldorado Gold & European Goldfields, Low natural gas price affects production, What happened to Canadian oil company dividends? (no more trusts)

European Goldfields (% chg 5d, 1mo, 3mo, 6mo: -7.93% +29.54% -0.34% +26.5%) - updated as of December 19, 2011
Shares are currently trading above the 200 day moving average (in stark contrast to just a month ago-Nov 18 when they were below it).
For 9 of the last 11 months the stock has suffered (down about 29% until the last month when it showed some resilience, including last month's 18.4% increase the stock is still down 16% last 11 months) due to a longer than anticipated permit review process in which Greece decided whether or not to grant approval for the Olympias and Skouries gold-copper porphyry projects in northeastern Greece (permit initially applied for in 2006) (even after decided the stock continued to fall slightly, down 13% in the 3 months leading to mid November). Skouries alone has the potential to produce at a rate of 350,000 ounces of gold equivalent (about half of that coming from silver). The company took a while even just to make up the 9% stock decline experienced over the two months leading up to the decision (July 12, 2011). Base metals like copper continue their lacklustre showing ($4 August 22, 2011 compared to $4.45 on July 29th) making the copper assets less attractive. Dec.14 after takeover rumous subsided European Goldfields stock fell 8.8% on the day.

The two new permits take away a lot of the risk that scared investors away from the company. Including projects in Turkey and Romania, European Goldfields appears to be well on its way to becoming Europe's largest gold producer by 2013-2014 (over 400,000 ounces of pure gold/yr doesn't include silver and copper). Construction of the mines also won't be a problem with Greece's largest construction company, Ellaktor as its largest shareholder (19.36%), 2nd largest shareholder is Blackrock Investment at 7.3%. More reason to optimistic about the company outlook: takeovers! Eldorado Gold and Centerra Gold both operate projects in some of the same areas and would probably overpay in a takeover. Also, European Goldfields is considering a move to the main London Stock Exchange index moving up from junior AIM. In mid December 2011 there was a run on European Goldfields stock due to hints at a possible Centerra Gold takeover.
Also of note, first production at Olympias will be in 2012 & the company's only source of cash flow currently is a small mine in Stratoni, Greece.

European Goldfields acquired by Eldorado Gold Sunday December 18, 2011 for $2.5B. The new Eldorado Gold will have a market value of about $11 billion and produce 1.5 million ounces of gold by 2015. Shareholders of European Goldfields will receive 0.85 Eldorado shares and C$0.0001 in cash; The price being paid by Eldorado for EGF is about $13.05/share which is a 46.14% premium to the stock's month low of $8.95 reached on November 23, 2011. The deal comes at the same time the company is securing $600M from Qatar Holdings to finance the Skouries and Olympias projects in Stratoni Greece. The following day, on Monday Eldorado Gold pledged to spend $2 billion and create 2000 jobs in Greece over the next several years. Although Eldorado saw total cash operating costs per ounce go up $55 or 13.3% (9mo) owing to lower grade ore mined at Kinsladag (still the largest mine by output but ore grade is less than 1/4 as high as it is at the other mines), there were no negative effects felt on the company's income statement as the price of gold skyrocketed over the year, giving the company a 31% (9 months) and 38% (3rd qtr) boost in price realization per ounce to $1571 & $1700/oz respectively.

Natural Gas & Oil
    Since oil's near term rebound from below $80 back up to the $100 level (last 2 times oil breached that level: Feb 2011 & Oct 2008) many Canadian producers haven't added to their dividends. The reason? Ever since the end of the 2010 fiscal year the majority no longer enjoy the tax free incentive that came with being a trust in Canada, due to new government legislation doing away with the tax benefits (consequently many including Baytex, Vermilion, Provident, Penn West have since converted back into corporations). Although this may cause investors to lose interest it may not be bad for companies in the long run; More profit will be reinvested back into the company through expansionary efforts (they may see tax benefits to that). Berkshire Hathaway, for example pays no dividend even though it owns many companies which do. Maybe they should look to Exxon Mobil for advice, one of the world's ten largest companies it avoided paying US taxes in 2009 (used tax shelter practices to send earnings overseas). Exxon was not alone, of the 1.3 million US corporations only 33% paid taxes in their home country between 1998 and 2005 (another strategy used is using losses from previous years against current gains).

On October 27, 2011 Canada's third largest oil company, Cenovus Energy reported on the third quarter. Overall production was steady however natural gas production was down by more than 10% qoq, a trend not disimilar from its peers in the industry. It also set a long term production target for natural gas at 400-500 mmcf/d which is only half the rate at which it produced gas when the company first split from Encana in 2009. The lower results have nothing to do with resource depletions; Cenovus has been diverting capital expenditure away from gas and into oil which isn't surprising given that oil prices have increased by more than 400% since 2001 while natural gas prices (incluenced by supply and demand particularly the center of US deliveries in Louisina/NYMEX) are near a 9 year low of $3.32/m3. Natural gas was as high as $16 in 2008, $6 in 2009. Even the little amount that has been invested into natural gas assets ($22m in the 3q compared to over $220m for Christina Lake/Foster Creek) was done with a focus on oil ($200m increase in natural gas cash flow due to the $22m capex, was reinvested in oil assets). 36 mmcf/d of gas producing assets were sold off between 3q10 and 3q11. Between 2006 and 2010 Chinese imports of natural gas increased 1500%.
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