Can MEG Energy Corp. Survive?

What needs to happen for MEG Energy Corp. (TSX:MEG) to avoid bankruptcy?

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Since its IPO in 2010, shares of MEG Energy Corp. (TSX:MEG) have steadily drifted downward from over $30 to an all-time low of $2.60. Now languishing at just $6, things haven’t improved much. The company’s market cap is still just $1.6 billion compared to a crushing debt load of $5.2 billion. This year, analysts expect it to lose $1.82 per share.

In a world of sub-$40 oil, can MEG continue to survive?

A tough price to break even

According to MEG’s management team, it breaks even at US$52.81 a barrel after sustaining capital expenditures are factored in. There isn’t much room left for improvement. Only 12% of capital expenditures are considered discretionary, so any further cuts would hit production. General operating costs are down nearly 40% since 2011 and are already near industry lows.

If it weren’t paying so much interest on its debt, MEG would be able to break even at just US$42 per barrel. 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. If oil prices don’t sustain a rebound above $50 a barrel soon, the company could have serious issues repaying its outsized debt load.

Riskier every year

MEG will likely survive until at least 2020 even without a rebound in oil. It has US$2.5 billion in undrawn revolving credit facilities with no financial maintenance covenants. That line of credit expires in 2019, however, just before the biggest financial headwinds hit. MEG also has $408 million in cash to keep itself afloat, though it will continue to add debt every day until oil spikes.

And because management has focused spending on the lowest-cost production wells to conserve cash, expenses are likely to increase in future years as the company’s production normalizes. For example, sustaining capital expenditures today are just $5 a barrel, which is down from a historical average of $7-8 a barrel.

All of these factors mean that MEG’s breakeven price will likely rise in future years. It’s very possible it will need $60 or more a barrel to turn a profit by 2020. That would represent a 50% rise from today’s oil price. More concerning is that prices would need to be much higher to turn a reasonable profit, let alone pay off its $5.2 billion in debt.

Better options are out there

MEG is in a difficult position. While its stock will surely benefit from rising energy prices, it’s far from guaranteed that it will ultimately be able to profit from improved conditions. Unless we see a return to +$100 oil soon, MEG will face a material restructuring in just a few years. If you’re a long-term oil bull, stick with companies such as Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG), which is set to become a dividend machine once prices improve.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

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