MEG transporting crude by rail, barge to skirt around pipeline bottlenecks

CALGARY – Oilsands producer MEG Energy Corp. (TSX:MEG) is working around pipeline bottlenecks by using railcars and barges to get its crude to market.

At the heart of what it calls its “hub and spoke” strategy is the Stonefell storage terminal near Edmonton, which MEG expects to complete in mid-2013.

Don Moe, vice president of supply and marketing, says the terminal can serve as a launch point for pipeline and rail connections.

The company has a deal to connect to petrochemical firm Canexus Corp.’s (TSX:CUS) existing rail loading facility, which is being expanded.

The strategy also involves leasing barges from American Commercial Lines Ltd. so that it can ship oil along U.S. inland waterways starting in April. The final destination is the U.S. Gulf Coast, home to a massive refining hub eager to take Canadian heavy oil to displace declining volumes from Mexico and Venezuela.

Burgeoning oil production from “tight” U.S. reservoirs has led to a big oil supply glut in North America that has caused benchmark West Texas Intermediate to trade at a discount to global varieties that can access the most lucrative markets by sea.

To make matters worse, oilsands crude — which is not only landlocked, takes more work to process and is further away from market — has been hit with a roughly $40 discount to WTI, meaning oilsands producers like MEG face a double whammy.

Pipelines are chock full, and though there are expansions in the works, environmental opposition and political wrangling makes their timelines uncertain.

Some help is on the way. The southern leg of TransCanada Corp.’s (TSX:TRP) Keystone XL pipeline from Oklahoma to the Gulf is set to come on stream later this year and a major expansion to Enbridge Inc.’s (TSX:ENB) and Enterprise Products Partners Seaway pipeline will start up next year.

Moe said the rail and barge options will get higher prices for MEG’s crude in the meantime.

Also Thursday, MEG reported a net loss of $18.7 million, or nine cents per share, compared to net income of $91.1 million, or 46 cents per share a year earlier.

Foreign exchange swings had an impact on MEG’s results in both quarters.

MEG’s operating loss, which is a better measure of MEG’s underlying performance, was $500,000, or nil per share, compared to operating earnings of $57.8 million, or 29 cents per share.

Cash flow from operations during the quarter ws $56.1 million or 27 cents per share, versus cash flow of $121.6 million, or 61 cents per share.

MEG attributed the drop in cash flow and operating earnings to lower bitumen realizations and higher costs.

Production was 32,292 barrels per day, up from 30,032 barrels per day and MEG’s highest quarterly volume to date.

MEG shares fell 17 cents to $34.09 on the Toronto Stock Exchange.