UPDATE 2-Canada's MEG posts record oil output, eyes new export routes

Wed Apr 24, 2013 2:50pm EDT

* First-quarter production hits record high

* Sends oil by barge, plans rail shipments to reach U.S.

* High costs, weak Canadian dollar behind 1st-qtr loss

* Shares up 8 pct, largest single-day gain in a year

By Sandhya Vijayan

April 24 (Reuters) - Canadian oil sands producer MEG Energy Corp posted record quarterly output and opened up new export routes to the United States, putting its shares on track for their biggest one-day percentage gain in a year.

MEG's stock rose as much as 8 percent on Wednesday after the company said it had begun sending crude across the border on barges to avoid congestion in the main pipeline linking the oil sands of Alberta to U.S. refineries.

Chief Executive Bill McCaffrey said MEG also planned to ship "significant" volumes of crude by rail in the second half of the year.

"As we continue through 2013, we expect to deliver increasing volumes to higher-priced markets," McCaffrey said in a statement accompanying first-quarter results.

MEG, whose key operations are in the southern Athabasca oil sands region of Alberta, said expanded steam generation capacity and enhanced reservoir efficiency measures allowed it to bring additional wells into production during the quarter.

The company's average production in the first quarter rose 14 percent from a year earlier to a record 32,531 barrels of oil per day (bopd), overshadowing a quarterly loss driven by higher costs and a weaker Canadian dollar.

"The production numbers ... reinforce the company's ability to bring production on line and continue to ramp up volumes," said Morningstar analyst David McColl.

MEG said it remained on track to achieve production of 32,000 to 35,000 bopd in 2013.

But, like every major mining project in the Alberta oil sands -- the world's third-largest reserve of crude oil -- the company has suffered substantial cost increases.

Net operating costs rose about 31 percent in the quarter to $10.44 per barrel. The company attributed the increase to higher natural gas prices and costs associated with its plans to grow production in the short term.

"The challenge for the company is the pace of capital spending, as well as the pricing they are getting for their heavy oil," UBS analyst Chad Friess said.

MEG posted a first-quarter loss of C$71.3 million ($69.5 million), or 32 Canadian cents per share, compared with a profit of C$53.4 million, or 27 Canadian cents per share, a year earlier.

As well as rising costs, the company attributed the loss to a drop in the value of the Canadian dollar relative to the U.S. dollar, which resulted in unrealized foreign exchange impacts on its U.S. dollar-denominated debt, cash and cash equivalents.

Cash flow from operations fell to C$7.1 million in the quarter from C$72.0 million a year earlier due to lower prices, particularly in the first two months of the quarter.

Despite the fall, cash flow was well within the expected range, Friess said.

MEG's shares were trading up 7 percent at C$29.00 in afternoon trading on the Toronto Stock Exchange.