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Stock Strategist

MEG Energy Takes a Shortcut to the Gulf Coast

Increased access to the Gulf Coast results in higher realizations.

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 MEG Energy (MEG) reported its worst bitumen price realizations on record in the first quarter owing to wide Canadian heavy differentials. However, we expect realizations to move higher in the future thanks to additional takeaway options that should result in MEG bypassing congested Mid-Continent transportation routes. Ultimately, we expect average realizations (net of transportation cost) of CAD 59/bbl in 2017 versus CAD 53/bbl in our previous forecast and CAD 47/bbl in 2012. After a careful review of MEG’s transportation plans, including a discussion with management, we are maintaining our fair value estimate of CAD 48 per share, which reflects a long-term outlook with improved price realizations.

Supporting its improved realizations will be the Stonefell terminal. Construction is well under way, and we expect it to be on line by September 2013. This facility will provide access to all the major export pipelines out of Alberta, in addition to the Canexus rail terminal. As a result, MEG will be well positioned to export an increasing amount of blended bitumen to the U.S. Gulf Coast by late 2013, using a combination of rail, pipe, and barge. These exports will increase over time, eventually resulting in stronger price realizations, higher netbacks, and material improvements to its return on invested capital, or ROIC. Consequently, MEG can achieve realizations on par with its integrated peers without the need for refining capacity. The improving realizations, thanks in part to ownership of midstream assets, reinforce our view that MEG has a narrow economic moat and stable moat trend.

David McColl does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.