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(Idea) Meg Energy Is Looking Attractive Again
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(Idea) Meg Energy Is Looking Attractive Again

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HFI Research
Jun 14, 2024
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(Idea) Meg Energy Is Looking Attractive Again
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Editor's Note: Starting on July 1, new idea write-ups will be published on Ideas from HFI Research. Meg Energy is not currently in the HFI Portfolio, but following a closer evaluation, we will be looking to add it to our trading portfolio soon. Please watch out for real-time trade alerts. If Meg Energy is in the HFI Portfolio, then all future write-ups on Meg Energy will be published to HFI Research main subscribers as well.

Since its 2024 high in early April, MEG Energy’s (MEG:CA) (OTCPK:MEGEF) shares have declined 18%, the fourth-worst performance among Canadian large and mid-cap E&Ps. Only Baytex Energy (BTE:CA), Obsidian Energy (OBE:CA), and Bonterra Energy (BNE:CA) have performed worse, falling 19%, 19%, and 26%, respectively.

Falling oil prices were the leading factor behind the E&P selloff. Today, however, fears of a weakening economy, the prospect of lower interest rates, and the re-emergence of the buy-tech/short-energy trade are all playing a role. Still, we don't see a convincing fundamental reason for the move.

We sold our long-term MEG holding in our HFI Research portfolio on April 10 at C$33.56 per share. Since then, the shares have retraced 17.7%. We're considering opening a new position, as the shares offer an attractive opportunity over the short and longer term from their current price of C$27.40.

MEG offers investors a refreshingly straightforward story for an E&P. The company operates one large asset where production is stable and poised to grow. Management execution is outstanding, debt is minimal, breakeven cost per barrel is low, and cash flow torque to oil prices is high. It’s difficult to find such an attractive package in a capital-intensive, ever-changing oil and gas industry.

MEG is a candidate for a core E&P holding in any investment portfolio to maintain exposure to oil prices. The company’s stability and high quality put it in the same league as its larger peers Cenovus Energy (CVE) and Suncor Energy (SU).

Lots of Positives and Very Few Negatives

At the end of the first quarter, MEG’s net debt stood C$80 million above management’s C$600 million net debt target, which will trigger 100% free cash flow payout to shareholders. We expect the target to be hit in the third quarter. Until then, the company will allocate 50% of its free cash flow to debt reduction and the other 50% to share repurchases.

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