MEG Energy set for a much happier 2014

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MEG Energy Corp. has had a rough run in the market despite its strong financial position among small and mid-size oil sands players. That could be set to change in 2014 as output climbs and heavy-oil market conditions improve, according to RBC Dominion Securities.

In recent weeks, MEG shares have edged up as the discount on Western Canada Select heavy crude has narrowed to less than $20 (U.S.) a barrel under benchmark West Texas intermediate. Longer-term fundamentals point to more gains, RBC analyst Mark Friesen said.

He called MEG the "go-to, pure-play oil sands stock" offering a compound annual growth rate of 45 per cent over the next four years in the dealer's 2014 global energy outlook. That contrasts with many smaller oil sands developers, which have been hampered by tight cash positions, especially with the dropoff in investments by foreign state-owned enterprises.

Mr. Friesen rates MEG as a "best idea" with a 12-month target price of $50 (Canadian), compared with a price on Friday of $31.02 on the Toronto Stock Exchange. The stock has not been above $48 since mid-2011, a period in which Canadian heavy crude prices have at times slumped due to constraints on export pipelines that have created a glut of supplies within Alberta.

Many analysts have predicted a recovery in 2014 with the recent startup of new equipment at the BP PLC refinery in Whiting, Ind., which provides an increase in overall market demand for heavy oil. In addition, MEG is looking forward to the completion by midyear of Enbridge Inc.'s Flanagan South pipeline link in Illinois, which offers more capacity to the Cushing, Okla., storage hub, and twinning of the 450,000-barrel-a-day Seaway pipeline between Cushing and Texas refineries.

Both are expected to let some air out of the so-called bitumen bubble that horrified the Alberta government last year over its potential to sap resource revenue.

MEG has also hedged its bets, with its newly completed Stonefell storage terminal in Alberta and connected oil-by-rail facilities which allow the company's crude to trundle to richer Gulf Coast markets. It is too early to tell if further Canadian or U.S. regulatory moves that might follow the recent string of oil-train accidents this year might restrict the company's ability to transport by rail, or raise the cost of doing so.

Last month it started up the latest tranche of production from its Christina Lake steam-assisted gravity drainage project in northeastern Alberta. The Phase 2B will ramp up to its 35,000-barrel-a-day capacity this year, nearly doubling production to an average of up to 65,000 barrels a day.

In November, private-equity investor Warburg Pincus LLC reduced its stake in MEG to 17 per cent from 19 per cent in a $157-million secondary offering, though the sell-down was related to its fund's schedule for cashing out rather than any concern about the oil sands producer, a source said following the offering.