MEG Energy Corp. (TSX:MEG) has been in a downward spiral. Since 2011, shares have fallen consistently, all the way down to its current level of about $6.

Even with rebounding oil prices, the company is facing steep odds of surviving. With a market cap of $1.4 billion compared to a crushing debt load of $5.2 billion, its long-term future is very much in doubt. This year analysts expect it to lose $1.82 per share.

Last week, however, the company managed to post a quarterly profit, surprising most Wall Street analysts. Let’s look at what happened.


Production costs stay low

Even though revenue fell 38% to just $290 million, MEG posted a quarterly profit of $131 million thanks to continued rock-bottom production costs. Net operating costs this quarter were only $8.53 a barrel, a decrease of 19% from the first quarter of 2015 and in line with record-low costs of $8.52 a barrel last quarter. While production fell, it was largely due to one-time outages at the company’s Christina Lake facilities in northern Alberta.

2016 2015 2014
($ millions, except as indicated) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
Bitumen production–bpd 76,640 83,514 82,768 71,376 82,398 80,349 76,471 68,984
Bitumen realization–$/bbl 11.43 23.17 31.03 44.54 25.82 50.48 65.12 72.75
Net operating costs–$/bbl(1) 8.53 8.52 9.10 9.43 10.49 10.13 10.31 14.49

While the surprise profit was positive, it doesn’t fix the severe structural issues MEG faces in the coming years, namely its onerous debt levels. Fortunately, MEG doesn’t face any debt obligations until 2020. If that weren’t the case, the company may have already filed for bankruptcy. In 2020 alone, MEG faces $1.2 billion in debt maturities, nearly its entire present-day market cap.

Management continually points out that it has US$2.5 billion in undrawn revolving credit facilities with no financial maintenance covenants, but those lines of credit expire in 2019, right before the biggest debt maturities hit. With only $125 million in cash on hand versus $408 million last quarter, it’s likely the company will need to dip into this source of capital fairly soon.

Not much room for improvement

The company estimates that it will break even at US$52.81 a barrel after sustaining capital expenditures are factored in. Even if it weren’t paying any interest on its debt, MEG would only break even at US$42 per barrel, around the current trading price of oil. While those numbers seem achievable given rising oil prices, they have virtually no room to improve given that most excess costs have already been eliminated.

This quarter, MEG reduced its 2016 capital budget to $170 million from $328 million and expects its spending to only covering sustaining capital costs. So, if MEG tries to cut more fat, it will only ending up impacting the bottom line.

Today, an investment in MEG Energy is simple. If oil prices don’t materially improve by 2019, the company has very little chance of meeting its outsized obligations. Oil prices likely need to sustain levels much higher than MEG’s breakeven price too, as it needs time to build up the cash necessary to pay back billions in bonds.

While MEG Energy looks enticing for patient investors looking to play a long-term rebound in oil, you have to be a major bull to profit from shares.

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Fool contributor Ryan Vanzo has no position in any stocks mentioned.