MEG Energy Corp (TSE:MEG): Time For A Financial Health Check

Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as MEG Energy Corp (TSX:MEG), with a market capitalization of CA$2.70B, rarely draw their attention from the investing community. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. This article will examine MEG’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into MEG here. See our latest analysis for MEG Energy

How does MEG’s operating cash flow stack up against its debt?

MEG’s debt levels have fallen from CA$5.07B to CA$4.69B over the last 12 months , which is made up of current and long term debt. With this reduction in debt, MEG currently has CA$477.19M remaining in cash and short-term investments , ready to deploy into the business. Moreover, MEG has generated CA$317.94M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 6.78%, signalling that MEG’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MEG’s case, it is able to generate 0.068x cash from its debt capital.

Can MEG pay its short-term liabilities?

With current liabilities at CA$525.46M, the company has been able to meet these commitments with a current assets level of CA$838.49M, leading to a 1.6x current account ratio. For Oil and Gas companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

TSX:MEG Historical Debt May 22nd 18
TSX:MEG Historical Debt May 22nd 18

Is MEG’s debt level acceptable?

With a debt-to-equity ratio of 86.53%, MEG can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In MEG’s case, the ratio of 0.15x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as MEG’s low interest coverage already puts the company at higher risk of default.

Next Steps:

MEG’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how MEG has been performing in the past. I suggest you continue to research MEG Energy to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for MEG’s future growth? Take a look at our free research report of analyst consensus for MEG’s outlook.
  2. Valuation: What is MEG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether MEG is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.