Nearly all Canadian upstream power producers noticed file monetary development final 12 months. How the expansion performs out and the way a lot of that money is allotted to shareholder returns are key drivers for TSX power shares this 12 months.

MEG Power to report Q1 earnings on Could 1

Among the many star performers, MEG Power (TSX:MEG) noticed its free money flows soar five-fold final 12 months in opposition to 2021. Such a steep soar created large shareholder worth, and the inventory has returned virtually 1,400% because the pandemic. It’s all set to report its first-quarter (Q1) earnings on Could 1. It is going to be attention-grabbing to see whether or not its upcoming numbers gas the inventory additional increased.

MEG Power goals to provide round 105,000 barrels of oil equal per day in 2023 on a capital expenditure of $450 million. It has low-cost bitumen wells within the Christina Lake undertaking positioned within the southern Athabasca area. It has a complete 2P (proved plus possible) reserves of two billion barrels, representing a reserve life index of over 5 many years. That’s a few of the largest reserve life index (RLI) within the Canadian power area. The RLI is just a sign of what number of years an organization would take to exhaust its reserves going at a present manufacturing fee.

MEG doesn’t personal refineries like its peer bigwigs, which makes it extra inclined to the Western Canadian Choose (WCS) differential. It’s the Canadian benchmark for heavy oil that trades at a major low cost to West Texas Intermediate (WTI) oil. Because the low cost widened final 12 months, it negatively impacted MEG’s money flows to some extent.

Monetary development and steadiness sheet  

Due to its fast free money circulate development final 12 months, MEG Power repaid $1.3 billion of debt final 12 months. It at present sits at $1.3 billion internet debt, taking its leverage ratio to 0.8. That’s a noteworthy enchancment from its leverage of round 5 in 2020. MEG used to have a heavy debt burden on its steadiness sheet a couple of years again. Nevertheless, this capital self-discipline and steadiness sheet strengthening has made it fairly funding worthy.

MEG is at present allocating 50% of its free money flows to shareholder returns, primarily buybacks. It aggressively purchased again hundreds of thousands of shares final 12 months. It is smart to favor share repurchases over dividends because the prior provides extra flexibility to the administration. As the overall variety of excellent shares falls, the corporate’s per-share earnings develop, making present shares extra precious. Plus, the buybacks push the share value up within the quick time period.

Curiously, MEG considers allocating 100% of its free money flows to shareholder returns as soon as its internet debt falls under $800 million. The administration additionally goals to introduce a base dividend then.

Valuation and conclusion

Even when oil costs have dropped from final 12 months’s highs, they’re nonetheless increased by historic requirements. In line with MEG’s steerage, it expects to generate an honest $700 million in free money flows at present oil costs. That’s a good-looking 15% yield.

On the valuation entrance, MEG inventory is buying and selling six occasions its 2023 free money flows — a reduction in opposition to the trade common of seven occasions. Larger manufacturing within the sturdy value surroundings will possible drive superior free money circulate development for MEG. Its enhancing steadiness sheet and development visibility make it stand tall within the trade. Furthermore, a WCS-WTI differential tapering might be an enormous development driver for MEG inventory later this 12 months.