M E G E N E R G Y C O R P. 2 0 1 0 S E C O N D Q U A R T E R R E P O R T Q2 F O R T H E T H R E E A N D S I X M O N T H S E N D E D J U N E 3 0 , 2 0 1 0 MEG ENERGY CORP. C O R P O R A T E O V E R V I E W MEG Energy Corp. (“MEG” or the ''Corporation'') is an oil sands company focused on sustainable in situ oil sands development and production in the southern Athabasca region of Alberta, Canada. MEG is actively developing enhanced oil recovery projects that utilize SAGD extraction methods. MEG is not engaged in oil sands mining. MEG owns a 100% working interest in over 800 square miles of oil sands leases. At December 31, 2009, GLJ Petroleum Consultants Ltd. (''GLJ''), an independent reservoir engineering firm, estimated that the MEG oil sands leases it had evaluated contained 1.7 billion barrels of proved and probable bitumen reserves and 3.7 billion barrels of contingent bitumen resources (best estimate). The Corporation has identified two commercial SAGD projects, the Christina Lake regional project (the ''Christina Lake Project'') and a second project located 30 miles north of the Christina Lake Project (the ''Surmont Project''). MEG believes, supported by GLJ estimates, that the Christina Lake Project and the Surmont Project (assuming an initial 50,000 bbls/d project size) combined will support 260,000 bbls/d of sustained bitumen production for over 30 years. In addition, the Corporation holds other leases in the southern Athabasca region that are still in the resource definition stage and that provide significant additional development opportunities (the ''Growth Properties''). The Corporation is currently focused on the phased development of the Christina Lake Project. MEG's first two production phases at the Christina Lake Project, Phases 1 and 2, commenced production in 2008 and 2009, respectively, have a combined designed production capacity of 25,000 bbls/d and are complete and on production. Phase 2B, a 35,000 bbls/d expansion, has received regulatory approvals and MEG plans to commence site construction in early 2011. MEG's combined designed production capacity at the Christina Lake Project is expected to reach 60,000 bbls/d once Phase 2B is complete. Phase 3 contemplates a phased development totaling an additional 150,000 bbls/d that would bring MEG's total designed production capacity at the Christina Lake Project to 210,000 bbls/d. MEG anticipates receiving regulatory approvals for Phase 3 in late 2010 or early 2011. In addition, MEG is currently preparing a regulatory application for a multi-phase development of up to 100,000 bbls/d at Surmont and expects to file the application in 2011. MEG also holds a 50% interest in a strategic 215-mile dual pipeline system that connects the Christina Lake Project to a large regional upgrading, refining, diluent supply and transportation hub in the Edmonton, Alberta area (the ''Access Pipeline''). T A B L E O F C O N T E N T S 1 Corporate Overview 3 Letter to Our Shareholders 6 Management’s Discussion and Analysis 25 Consolidated Balance Sheet 26 Consolidated Statement of Operations and Deficit 27 Consolidated Statement of Other Comprehensive Income (Loss) 27 Consolidated Statement of Accumulated Other Comprehensive Loss 28 Consolidated Statement of Cash Flows 29 Notes to Consolidated Financial Statements 38 Corporate Information 1 SECOND QUARTER 2010 REPORT MEG ENERGY CORP. C O R P O R A T E O V E R V I E W MEG’S OIL SAND HOLDINGS AND AREA OF FOCUS T83 REMAINING RECOVERABLE RESOURCE Growth Properties 63 (34% of leases evaluated by GLJ) Surmont 1,481 mmbbl Christina Lake 647 mmbbl Surmont Growth Properties 881 Christina Lake 3,109 mmbbl e n li e ip P s s e c c A T71 R19 R1W4M SECOND QUARTER 2010 REPORT 2 MEG ENERGY CORP. L E T T E R T O O U R S H A R E H O L D E R S This is an exciting time for MEG's shareholders and employees. Production volumes from our commercial operations at Christina Lake, which commenced in August 2009, have safely ramped-up more rapidly than any other steam assisted gravity drainage (“SAGD”) project that we have seen, and with one of the lowest SORs. This demonstrates both the quality of our oil sands reservoir and the high performance of our team. On the Corporate front, MEG has now become a public company with shares listed for trading on the Toronto Stock Exchange under the symbol “MEG”. The very positive results of our operations at Christina Lake, combined with the closing of our IPO in August, now gives us the confidence and financial strength to more than double our production to 60,000 barrels per day at Christina Lake. MEG is well positioned to continue to grow and to increase shareholder value. CHRISTINA LAKE OPERATIONS Christina Lake Phase 1, MEG's 3,000 bbls/d pilot facility, commenced production in 2008 and has been integrated with the 22,000 bbls/d Phase 2 facility that commenced operations in August 2009. Combined design capacity of 25,000 bbls/d was exceeded in June 2010, when bitumen production averaged 26,412 bbls/d from 29 horizontal well pairs. Importantly, the SOR for June was 2.4 and for the second quarter as a whole averaged 2.5, one of the lowest in the Alberta in situ oil sands industry. In the second quarter, MEG commenced circulation of steam into two additional horizontal well pairs and plans to covert these wells to production in the third quarter of 2010. The ramp-up in production volumes over the past year has been better than planned. Bitumen sales over the past four quarters have been as follows: 2009 third quarter 2,493 bbls/d 2009 fourth quarter 5,920 bbls/d 2010 first quarter 13,447 bbls/d 2010 second quarter 24,562 bbls/d Production volumes are anticipated to stabilize in the range of 24,000 to 27,000 bbls/d. Commercial operations at Christina Lake are at an early stage, and production volumes may be volatile as experience shows that unexpected situations often arise during the start-up of SAGD operations. Also note that a planned plant turnaround is scheduled for two to three weeks in September, during which there will be no production. If plant issues are found during this important inspection and maintenance period, operations may be interrupted for a longer period of time than currently scheduled. CHRISTINA LAKE EXPANSION Christina Lake Phase 2B, a 35,000 bbls/d expansion, received regulatory approvals in 2009. Detailed engineering and the procurement of major equipment is underway. Field construction and the drilling of horizontal well pairs is planned to commence late this year or early in 2011. Phase 2B is being designed to more than double our production capacity to 60,000 bbls/d and is planned to commence steaming operations in 2013. 3 SECOND QUARTER 2010 REPORT MEG ENERGY CORP. L E T T E R T O O U R S H A R E H O L D E R S MEG's Christina Lake Phase 3 regulatory application, for a total of an additional 150,000 bbls/d of bitumen production, was filed with Alberta provincial regulatory authorities in 2008. MEG received a completeness decision in May 2010 from Alberta Environment in respect of its Phase 3 Environmental Impact Assessment application and made a formal request to the Energy Resources Conservation Board for a decision regarding the project application in June 2010. MEG anticipates the receipt of approvals late in 2010 or 2011. FINANCIAL RESULTS Prior to December 1, 2009, the financial results from operations were capitalized as commercial production had not commenced. Therefore, revenue prior to December 1, 2009 consisted primarily of interest earned on cash balances. Effective December 1, 2009, the Corporation commenced planned principal operations and ceased capitalizing petroleum and power sales, operating costs and interest costs for the Christina Lake Project. As a result of the commencement of commercial operations, revenue, net of royalties, increased to $210.5 million in the second quarter of 2010, compared with $0.5 million in the second quarter of 2009. Cash flow from operations for the three months ended June 30, 2010 totaled $45.3 million, an increase of $59.3 million from the same period in 2009. MEG's long-term debt of US$1.0 billion is denominated in US dollars. At the end of each reporting period, the loans are translated into Canadian dollars at the period-end exchange rate. The effect of exchange rate changes is recorded as a gain, if the Canadian dollar strengthens, or a loss, if the Canadian dollar weakens compared with the previous period. Exchange rate fluctuations can have a large impact on net income each quarter, but are not considered by management to be indicative of operating results. The Cdn/US$ exchange rate was 1.0606 on June 30 2010, compared with 1.0156 on March 31, 2010, 1.1625 on June 30, 2009 and 1.2602 on March 31, 2009. As a result, the foreign exchange loss on the translation of US dollar denominated debt, net of US dollar denominated cash and our debt service reserve, was $37.5 million in the second quarter of 2010, compared with a gain of $64.9 million in the second quarter of 2009.