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Good morning, ladies and gentlemen. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the MEG Energy's 2022 Q1 Results Conference Call. [Operator Instructions]
I'd now like to turn the call over to Mr. Derek Evans, CEO. You may begin your conference, sir.
Thank you, Michelle. Good morning, and thank you for joining us to review MEG Energy's first quarter operating and financial results.
In the room with me this morning are Eric Toews, our Chief Financial Officer; Lyle Yuzdepski, our General Counsel and Corporate Secretary; and Darlene Gates, our Chief Operating Officer.
I'd like to remind our listeners that this call contains forward-looking information. Please refer to the advisories in our disclosure documents filed on SEDAR and on our website. I would refer listeners to yesterday's press release for more detail beyond the comments we've prepared for this morning.
MEG continues its priority of maintaining safe and reliable operations as we work through the ongoing COVID-19 environment. Our teams continue to respond to the impacts of the pandemic, prioritizing the health and safety of our workforce and reliable operations at our Christina Lake facility. I commend our workforce for their efforts over the last few years and look forward to our continued focus on safety as we execute this year's turnaround.
We had a record quarter from both an operational and a financial perspective. We continue to benefit from strong oil prices and low heavy oil differentials. Additionally, our team's focus on safety, plant reliability, steam utilization and ongoing well optimization have contributed to a record quarter in terms of production.
Highlights from the first quarter include record funds flow from operating activities and adjusted funds flow of $587 million or $1.87 a share, record free cash flow of $499 million, record debt reduction having completed or announced the repayment of USD 396 million or approximately CAD 499 million of outstanding indebtedness, record bitumen production volumes of 101,128 barrels a day.
We exited the quarter with USD 1.72 billion of net debt. Total expenditures of $88 million were primarily directed towards sustaining and maintenance activities in the quarter. Net operating costs averaged $8.98 per barrel, including nonenergy operating costs of $4.74 a barrel. Power revenue offset energy operating cost by 38%, resulting in energy operating cost net of power revenue of $4.24 per barrel.
We received approval from the Toronto Stock Exchange on March 7 for a normal course issuer bid, which will allow MEG to buy back up to 10% of its public float as defined by the TSX over a 1 year period. And on March 16, 2022, MEG announced the planned retirement of its Chief Financial Officer, Eric Toews, effective September 1, 2022. MEG is conducting an external search of our next Chief Financial Officer and will provide an update on the successful completion of that search.
MEG realized an average AWB blend sales price of USD 83.55 per barrel during the first quarter of 2022 compared to USD 65.42 per barrel in the fourth quarter of 2021. The increase in the average AWB blend sales price quarter-over-quarter was primarily a result of the average WTI price increasing by USD 17.10 per barrel.
MEG sold 58% of its sales volumes in the premium priced U.S. Gulf Coast market in the first quarter of 2022 compared to 48% during the fourth quarter of 2021 as a result of apportionment on the Enbridge main line decreasing from 21% in the fourth quarter of 2021 to 10% in the first quarter of 2022.
MEG invested $88 million in the first quarter compared to $106 million in the fourth quarter of 2021. Capital invested in the quarter was primarily directed towards sustaining and maintenance activity and included incremental capital to allow the corporation to fully utilize the Christina Lake facility's oil processing capacity of approximately 100,000 barrels a day.
Last month has also provided important developments relating to our continued involvement in the Oil Sands Pathways to Net Zero alliance, which aims to achieve net zero emissions from our operations by 2050. On April 7, 2022, the Canadian federal government announced an investment tax credit for carbon capture and storage projects for industries across Canada. MEG believes this announcement is a positive step in the Oil Sands Pathways to Net Zero alliance efforts to work collaboratively with governments to help Canada achieve its climate goals and ensure our country can be the world's preferred supplier of responsible oil. The Pathways Alliance anticipates that this tax credit, together with support from the Alberta government, will help advance the Pathways Alliance's unprecedented plan to achieve meaningful emissions reductions by 2030 and ultimately the goal of net zero emissions from oil sands operations by 2050.
MEG continues to execute on its deleveraging and shareholder return strategy. MEG's redemption of the remaining USD 171 million outstanding of its second lien notes was completed on April 4. Post this redemption, MEG will have paid approximately USD 2 billion of outstanding indebtedness since 2018. MEG exited the quarter with USD 1.72 billion of net debt.
As MEG expects to soon reach its previously announced near-term debt target of USD 1.7 billion, MEG's NCIB, which became effective on March 10, allows the corporation to initiate a share buyback program, whereby 10% of the corporation's public flows, as defined by the Toronto Stock Exchange, may be bought back up to a maximum of approximately 27.2 million common shares of MEG. MEG intends to allocate approximately 25% of free cash flow generated to share buybacks, with the remaining being allocated to debt reduction until the corporation net debt balance reaches USD 1.2 billion.
In the current commodity price environment, MEG expects to reach its USD 1.2 billion net debt target in the third quarter of 2022. Once MEG reaches its USD 1.2 billion net debt target, the corporation intends to increase the percentage of free cash flow allocated to share buybacks to approximately 50% with the remainder being applied to -- excuse me, to further debt reduction until the corporation reached its net debt floor of USD 600 million, at which time, 100% of free cash flow will be returned to shareholders. Our current production levels of this net debt floor implies a net debt-to-EBITDA multiple of approximately 1x at a long-term USD 50 per barrel U.S. oil price.
As I bring my remarks to a close, I, once again, want to extend my thanks to our team for their commitment and perseverance. I'm proud of what we've been able to accomplished and am confident in our future and our commitment to a sustainable, innovative and responsible energy development. On behalf of the Board of Directors and our management team, I want to thank you all for your support.
With that, I will turn the call to our operator to begin the Q&A.
[Operator Instructions] Your first question comes from Phil Gresh of JPMorgan.
This is John Royall sitting in for Phil. The $600 million net debt for -- I think it's a new concept for you guys in terms of the framework you laid out in the prior quarter. Can you just talk about the decision to put in for and why $600 million is ultimately the right number? I know you talked about 1 time leverage. Maybe just a little more color there.
Sure, John. It's Eric Toews speaking. We spent a lot of time thinking about that net debt floor. The key drivers for us were -- there's basically threefold. One is we've always prided ourselves on financial liquidity. And we think at a USD 600 million floor, when you couple that with the structure of our credit facility, which is a modified covenant light structure which continues to provide us with -- if we needed it, liquidity unencumbered by covenants up to CAD 400 million So that was an important factor.
And then other thing was when you look at our term structure of our debt, we've always tried to maintain a balanced term structure. And in this concept, the first maturity we have is 2029. So that is well out into the future.
And the third piece, which I think is important, is the ability to actually refinance that debt when it came due that USD 600 million. And we think at that level, given the credit quality of MEG, we will not have an issue in enrolling that debt, whether that's in the capital markets, whether it's in the bank market, wherever that market is. So from that perspective, we feel very comfortable that that's sort of a bullet proof debt number and it's the one we want to apply against that 1x at $50 WTI.
Maybe I'd just jump in and say it's entirely consistent with where we were before at 2x net debt to EBITDA at a $50 WTI price. We pointed to that as being one of our first stopping off points. And now we've laid out our final landing spot is $600 million at that $50 WTI price.
That's really helpful. And then if we could switch up, just to speak a little bit to inflationary pressures you're seeing out there. I know you maintained your guidance. But what are you seeing on the OpEx and CapEx side? And how does that compare to what you expected going into the year?
Darlene?
Thanks for starting. We're definitely seeing inflationary pressures. We're continuing to watch the space very closely. We budgeted about 10% in the 2022 budget, but we're seeing pressure -- upward pressure on labor, steel, fuel and chemicals, and this is probably pushing us closer to about 15% as we continue to watch the market and how things are evolving, working very closely with the contractors. We'll see how that evolves through the year.
As we look ahead into 2023, we continue to expect upward pressure on inflation and believe this could translate into an additional 15%. And those perspectives probably will change with time, but just to give you a little bit of what we're seeing, strong dialogue with our community and with our contractors to manage this space.
Your next question comes from Greg Pardy of RBC.
Thanks for the rundown. Derek and Eric, the USD 600 million net debt floor, the trailer on that is shareholder returns as opposed to a buyback, right, which is attached to the other 2. I'm just curious, would that begin to include concept around a dividend or not?
Greg, it's Eric. I think right now, it's too early to tell. From a modeling perspective, that's a ways -- we'll consider all avenues that make sense for shareholders. But right now, our focus is on buybacks.
Okay. And then just a couple of quick ones. Have you moved into turnaround at Christina? And how should we sort of think about the path of utilization on plan against Seaway through the balance of the year?
Darlene, do you want to talk about that?
All right. Thanks. This is Darlene. We have started on April 28. We're in the process of the execution of the turnaround. So far, the team has -- we've got a very experienced team and managing very well. Every day is a new day, but they're prepared and have plans in place to manage the changes that may occur. That's also -- all is going well so far, keep our fingers crossed, but pretty confident in the team, and it's about a 30-day turnaround.
Do you expect to be done in the end of April?
The end of May.
May. Sorry.
On Flanagan -- sorry, Greg, you were asking about the utilization on Flanagan South?
Yes. So you ran 58%, right, in Q1, obviously, with the turnaround, you're not going to have the volumes. But as I sort of think about the back half of the year with very limited apportionment, I'm assuming that you'll be using probably a good chunk or all of your capacity.
Absolutely. Obviously, through turnarounds, we'll be creating -- we'll be pulling volumes out of storage to utilize that space. And we've all made some alternative arrangements to make that space available to other people on a discounted basis. But you should expect us to be running with effectively 0 apportionment through the remainder of the year.
Your next question comes from Neil Mehta of Goldman Sachs.
Congratulations on good results and the continued progress around capital returns. I wanted to get an early flavor. I recognize that we're early here in 2022, but your thoughts around 2023 and whether it makes sense to build out capacity at Christina Lake and have growth be a bigger part of your CapEx budget? Or do you feel like you're still in relative sustaining investment mode as you go into '23 as well? And tying that into your capital budget, which do you see that moving higher as if there is a growth component to it?
So Neil, I mean, I think we should be asking you the question whether our shareholders are -- what you're hearing from our shareholders with respect to growth.
But fundamentally, as we drive forward, we are very, very focused on debt reduction. That is our primary goal and responsibility and return of capital to shareholders. And that has been sort of the major focus. We haven't turned our mind to growth or to optimization other than to say it's an ongoing part of Darlene's responsibility to find ways to make our central processing facility and our capital dollars go further in terms of expanding the capacity and adding to our production capabilities.
I'll tell you, at this point, we have no plans to spend capital above and beyond what we consider our sustaining capital at this point. But I think we've got a strong message from our shareholders that once we were at certain debt levels or whether they were -- they saw the level of commitment to debt reduction and that share buybacks starting to happen, if there was a change in the tone and there was an opportunity to put more capital to work in sort of a small percentage of free cash flow, that's something we definitely look at trying to achieve on their behalf.
And so as you think about the $375 million capital budget next year or this year, what are all the moving pieces as you go into next year? What are the things that are going to be rolling off? And what are potentially inflationary factors we should be watching?
So we haven't talked about this nor have we landed on a number. But if we're thinking about capital for 2023, notionally, I think we're thinking of that sort of in the $400 million range at this point. Obviously, there's a big inflationary impact that we're seeing this year. And as you heard Darlene a little bit earlier, talking about that we expect that inflationary impact to continue. In the $375 million this year, there was $50 million for ongoing sort of facility and well work to keep us at that 100,000 barrels a day. Next year, we've got some fairly significant pipelines that we're going to be moving -- that we've got to be able to move from one of our producing areas into our next. And that likely will take us -- will cost us somewhere in the neighborhood of $30 million to $40 million.
So that $400 million number is not a bad place, but that's right off the top of my head. That is not something that we've got any precision to. And the biggest part of that and the most concerning part is going to be the impact of inflation in 2023, which at this juncture, we're having -- we've talked about it in that 15% range. But -- and we hope that, that's where it's going to land, but it could -- it's obviously been significant this year and could be significant next year.
And then the follow-up is just around royalties. Can you just talk about how we should be thinking about this? It's a good problem to have as the cash flow continues to ramp, but any modeling considerations that we should take into account as we think about when the project goes into post payout?
I think at these sorts of commodity price, we expect to be to -- hit payout some time in the fourth quarter.
Neil, it's Eric. I mean it's consistent with the last quarter. If you assume sort of 10% to 15% for this year and 20%, 25% next year, it affects the royalty rate. That's good from a modeling perspective.
Your next question comes from Menno Hulshof of TD Securities.
So I've just got a 2-part question on CCUS and the Pathways Alliance given the news from the Feds. You mentioned the province. So when can we expect news from the province in terms of what they would be prepared to chip in? And what are you thinking in terms of the possible outcomes there? And the second part of the question relates to the CCUS spend profile over the next several years. When do you expect that to start to show through in your own budget? You mentioned, sort of rough numbers, $400 million for next year. So I don't think it's next year. But is it 2024, 2025? Is that a reasonable expectation?
So Menno, thanks for the question on sort of the -- on pathways. We are extraordinarily pleased that the federal government stepped up with their 50% investment tax credit. That's a huge start to getting us over the line.
We are very interested and awaiting with bated breath when the province is going to step up. We have talked publicly about the need for 75% support at the capital level. So obviously, we'd love to see the province finding a way to bridge that gap. That 75% is not a number we picked out of the air. 75% is sort of -- is a number that other constituencies that we need to be competitive with, be it the Netherlands or Norway or the U.S., have received in terms of capital support for this.
I think that the province is -- we expect to hear from the province sometime before -- in late May, with respect to -- we know they're looking at the various different ways that finance could potentially help to make this happen. But at this juncture, we don't have any firm handle on what the timing would be. But we're very hopeful that they will find a way to step to the table and help us make this happen. On the -- sorry, on the spend profile -- no, I'll stop interrupting you.
No, no, I was just going to follow up on the spend profile, so you already hit it. Apologies.
Yes. So it's very hard to predict what the spend profile is until we know we have project. So obviously, that provincial support is important, but also we don't have the floor space as of yet. The floor space application went in at the end of April. We expect to hear some time throughout the summer, but at the very latest by the end October.
And fundamentally, the most important part for us is once we've got that, then we would go to work on putting the pipeline in. We don't expect that pipeline and floor space or storage facility would be available until likely late 2028. So then you would start to back into your own -- well, obviously, there'll be some capital associated with that.
But I don't think you're going to see significant spending much before 2025, 2026. And when you do see that spending -- that capital spending, we're hoping that it is going to be at -- going to have the 75% sort of investment tax credit type of impact. So our contribution would be in that 25% of the capital.
[Operator Instructions] Mr. Evans, there are no more questions from the phone lines. I'll turn the conference back to you for closing remarks.
Thank you, Michelle, and thank you, everybody, that joined us this morning for our first quarter call. As I said a little bit earlier, we're very excited about what we've been able to achieve and very confident in what the remainder of the year is going to bring forward. We look forward to reporting on that at our next -- when we release Q2 on July 27. So have a great day, everyone. Thank you for your attention.
Ladies and gentlemen, this concludes the conference for this morning. We would like to thank you all for participating and ask that you please disconnect your lines.