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Good morning. My name is Pam, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the MEG Energy's 2021 Year-End Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session. [Operator Instructions] Thank you.
I would now like to turn the conference over to Mr. Derek Evans, CEO. Please go ahead.
Thank you, Pam. Good morning and thank you for joining us to review MEG Energy's year-end 2021 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'll keep my remarks brief today and refer listeners to yesterday's press releases for more detail.
MEG continues its priority of maintaining safe and reliable operations as we work within 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'm proud to say that we had no lost time incidents for our employees or contractors in 2021, a testament to the dedication and diligence of our team.
We exited the year with strong financial and operational results. Our team's focus on safety, plant reliability, steam utilization, and ongoing well optimization have contributed to MEG's strong 2021 results. Highlights from our year-end results include: adjusted funds flow of CAD 799 million or CAD 2.57 per share for the year; record free cash flow of CAD 468 million in 2021; we completed or announced the repayment of $325 million of outstanding indebtedness; record bitumen production volumes for the fourth quarter of 100,698 barrels per day as well as for the full year of 93,733 barrels per day.
Total capital expenditures of CAD 331 million, approximately 2% lower than the July 2021 increased budget, were primarily directed towards sustaining and maintenance activities and additional drilling to return bitumen production to 100,000 barrels a day. Net operating costs averaged CAD 6.60 per barrel, including record low non-energy operating costs of CAD 4.24 per barrel. Power revenue offset energy operating costs by approximately 52%.
We released our second ESG report with a new 2030 greenhouse gas intensity target to complement our 2050 net zero greenhouse gas target and improved alignment on disclosure of climate-related risks with SASB and TCFD guidance.
MEG realized an average AWB blend sales price of $57.59 per barrel during 2021 compared to $28.07 per barrel in 2020. The increase in the average AWB blend sales price year-over-year was primarily a result of the average WTI price increase of $28.51 per barrel. MEG sold 42% of its sales volumes in the premium priced US Gulf Coast market in 2021 compared to 40% in 2020.
MEG invested CAD 331 million of capital in 2021 compared to CAD 149 million in 2020. Majority of the capital was focused on sustaining and maintenance activities as well as incremental well capital to fully utilize the Christina Lake's oil processing capacity of 100,000 barrels per day. As we disclosed last year, the total investment for this initiative is approximately CAD 125 million, of which CAD 50 million is being invested in the first half of 2022. MEG expects full facility utilization in the second half of 2022 post our planned turnaround in Q2 of this year.
I'm proud of the efforts and the advancements in our ESG activities from our teams across the organization. In June 2021, MEG along with four other oil sands operators, created the Oil Sands Pathways to Net Zero Alliance with the objective to achieve net zero emissions from our operations by 2050. In the fall, a sixth company joined the alliance, which now represents approximately 95% of operated Canadian oil sands production. Our collective purpose is to position Canada as the preferred global supplier of net zero crude.
Pathways' vision is anchored by a major carbon capture and storage system with a CO2 pipeline connecting oil sands facilities from Fort McMurray and the surrounding region to a carbon sequestration hub near Cold Lake. We continue to work with the federal and Alberta governments in support of this emissions-reduction project and infrastructure as well as advancing development of new and emerging technologies.
2021 also saw the release of our second ESG report, which outlines the meaningful progress we've made in our priority topics: climate change and greenhouse gas emissions, water and wastewater management, health and safety, and indigenous relations. In addition, the report contains our new 2030 greenhouse gas intensity target that complements our 2050 net zero target and improved alignment on climate-related risks with SASB and TCFD guidance. The report is available on our website at www.megenergy.com, and I really encourage listeners to take the opportunity to read it in some detail. It's a fabulous report.
As we exit 2021, MEG is well-positioned to continue to deliver on its deleveraging and shareholder return strategy. Yesterday, MEG issued a notice to redeem the remaining $171 million of MEG's outstanding 6.5% senior secured second lien notes due January 2025. This brings MEG's total debt repayment to approximately $2 billion since the beginning of 2018. Continued debt reduction remains a core focus of the company.
As MEG expects to soon reach its previously announced near-term debt target of $1.7 billion, yesterday, MEG's board of directors approved the filing of an application to allow MEG to initiate a share buyback program, whereby 10% of the corporation's public float may be brought back – bought back up to a maximum of approximately 27.2 million common shares of MEG. MEG intends to allocate 25% of free cash flow generated to share buybacks, with the remainder being allocated to debt reduction.
Once MEG reaches its $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 further debt reduction.
In closing, we continue to enhance our competitive position with our work on several priorities, including our debt repayment and shareholder return strategy, plant optimization and reliability, cost management, and advancement of our ESG-related activities. I'm pleased with the more favorable outlook for commodity prices as well as the ongoing global recovery from the impact of the COVID-19 pandemic.
I want to extend my thanks to our team for their performance and contributions to our success in 2021. I'm proud of what we've been able to accomplish and confident in our future and our commitment to sustainable, innovative, and responsible energy development.
With that, I'll now turn the call to our operator to begin the Q&A.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Phil Gresh with JPMorgan. Please go ahead.
Yeah. Hey. Good morning, Derek. And thanks for taking the questions. First one just on the takeaway situation for 2022. Can you give us any updated thoughts on your ability to use the full contracted amount as the year progresses?
Absolutely. Phil, I think you're referring to our Flanagan South Seaway capacity. I think we fully expect to be able to use the majority of that 95% of that throughout the year, primarily driven by the fact that the Enbridge apportionment we expect to see in that sort of 0% range through the summer and maybe a little bit of maybe 5% apportionment in some of the shoulder seasons. But effectively, we're going to have a full access to that capacity now.
Got it. So even here in the first quarter, you feel comfortable with that?
Well, I mean, apportionment was higher in January and February. But I mean, March's apportionment, I believe, is zero. And we fully expect that to continue as we drive forward now.
Got it. Okay. Good to hear. And then any updated thoughts around the timing of moving to post payout in this type of macro environment? Obviously, it's extremely volatile right now, but just curious how you would frame the way we should think about that?
Yeah. Phil, it's Eric. Probably the best way to think about that is to think about the effect of royalty rates for 2022 and 2023, so at the prices we're seeing today, the oil prices we're seeing today. And as you know, like, there's a bunch of factors that go into calculating the payout, oil prices, diluent costs, foreign exchange, capital, all that needs to be put in to determine payout timing. But the effect of royalty rates we're seeing for 2022 is probably in the 10% to 15% range. And then we'd see that – at current pricing, we'd see that going to 20% to 25% for 2023. So that's probably the best way for us to frame that for you.
Okay. Perfect. Thank you. I'll turn it over.
Thanks, Phil.
Your next question comes from Neil Mehta with Goldman Sachs. Please go ahead.
Hey. Good morning. This is Nicolette Slusser on for Neil Mehta. Thanks for taking the time. So the first would just be on costs. Non-energy OpEx continues to come in lower versus our estimates and also in recent guidance. How should we be thinking about non-energy OpEx going forward? And is it safe to say the fourth quarter's non-energy OpEx per barrel could be used as a sort of run rate?
Great question. I think, after six years of continuing to reduce our non-energy OpEx, I think this is the year where due to inflationary pressures, pressures on labor, pressures on fuel, pressures on services, we could see that start to move up. Obviously, we'll continue to focus on that. But I think the guidance we've got out there includes all of those impacts. So I think our guidance range is probably the best view of where we think non-energy OpEx costs are going to be on a go-forward basis.
Okay. Great. That's helpful. Thank you. And then the follow-up, we're just curious on your outlook for WTI/WCS this year as global demand for Canada heavy crude may pick up and with Line 3 on line. And then in the medium term, how are you thinking about differentials following the recent announcement to bring TMX on line in 3Q 2023? Thanks.
So it's interesting. Obviously, there's a lot of focus on where WTI today is. But the second part of your question, I think, is the really interesting one is where do we see differentials. I mean, today, differentials are trading in the US Gulf Coast for WCS or AWB in that CAD 2 to CAD 3 range, which is showing the tremendous demand, worldwide demand for this product. And obviously, with some of the challenges that we're seeing in terms of energy supply coming out of Europe, we expect to see very low WCS/AWB differentials on a go-forward basis.
Obviously, we can't predict where WTI prices are going. But we do believe that if we look at sort of the amount of underinvestment in the global oil and gas business and the continued focus of investors on return of capital and no growth from oil and gas companies, we think this is going to create an environment where you're going to see much – you're going to see strong WTI prices for an extended period of time.
Great. Thanks for the color.
Thank you. [Operator Instructions]
Your next question comes from Patrick O'Rourke with ATB Capital. Please go ahead.
Hey. Good morning, guys. Thanks for taking my questions. Just looking at the net debt target and the NCIB that you're putting in place, our model kind of has it you getting to that $1.7 billion threshold at some point in Q2. But is it safe to assume that as soon as you get the approval here, you can start executing on that?
I guess the way that we're thinking about that, Patrick, is we want to make sure we have the cash in the door before we start doing buybacks. So you should expect to see us start that very soon. But we want to make sure that we have all the cash in the door after redeeming the second lien notes we announced yesterday. But we'll start it as quickly as we can when the cash is in the door.
Okay. And then a little bit of an improvement on the SOR in the quarter relative to Q3 here. Wondering after coming out of the turnaround here and you get to the steady state nameplate capacity, how you guys see the SOR trending going forward here.
I think the – Patrick, it's Derek. Obviously, the steam-oil ratio is a function of where we put the steam to work and what stage in maturity the wells are at. So part of the reason you saw the steam-oil ratio coming down in the last part of the year is we were bringing new well pairs on, well pairs that we had been steaming and warming up, but not actually seeing the production from. So I think you'll – should expect to see that, that steam-oil ratio over the year will continue to come down gradually.
Okay. And then just one last sort of final question for me. In terms of time lines for the Pathways project, it's something that's – the Pathway is really intriguing for us, and I think a lot of investors out there, especially in terms of the oil sands story. Can you maybe give us an outlook for sort of the timing when we could see sort of more material news on this project?
Absolutely. Listen, the Pathways project is exciting on a bunch of different fronts. Not only is it really Canada's only big project to help meet its 2030 aspirations to reduce its greenhouse gas emissions, Pathways project represents obviously 10% of Canada's emissions. And we're excited to be able to get that potentially up and running sooner than later.
With respect to your question, we are currently awaiting some news on the investment tax credit, which we hope will be in the next federal budget. And that will provide us with some clarity on the important financial support that we need to undertake this project.
The other part of this, though, that is equally and as important is the pore space application. So we are very interested in getting our pore space application in with the province of Alberta for that area around Cold Lake area. I saw something come out yesterday that said there was an opportunity or there were requests for proposals on that front that has sort of a May deadline and a October-type of timeframe with respect to when we potentially could find out, but we'll work on that.
But those are sort of the two key deadlines we're working with at the moment, when could we see some sort of indication of federal support and when could we achieve some sort of certainty with respect to pore space in the Cold Lake area.
Okay. Thank you very much.
Thank you, Patrick.
Your next question comes from Dennis Fong with CIBC World Markets. Please go ahead.
Hi. Good morning. And thanks for taking my question. The first one that I have here is just with respect to the term notes. You've obviously now retired your – well, soon to have retired the entire 6.5% senior secured second lien. How should we be thinking about the next tranche, the 2027, as well as just kind of expectations around capital allocation policies and maybe ideal capital structure? Thanks.
I guess, I'll take the second question first, which is the capital allocation strategy. I don't think – we've been very clear on the allocation of free cash flow to buybacks and to debt reduction, and that the $1.2 billion, we take that to 50/50. So we don't see that changing. We see, obviously, the trading value of MEG shares is well below the intrinsic value. So until that fundamentally changes, you won't see us change our strategy around that.
With respect to the optimum capital structure, we're going to continue to pay down debt once we hit that $1.2 billion. And the $1.2 billion was less than 2 times at a $50 WTI price. We want to get that lower. How much lower, we'll determine that as we get to that $1.2 billion level.
And then the first question – sorry, can you repeat the first question?
Just about the $1.2 billion of term notes for 2027...
Yes. Sorry. Yeah.
... [indiscernible] (00:20:16) generate free cash.
Yeah. Sorry, Dennis. Thanks. Yeah. We're thinking about that the same way we thought about attacking the second liens a few years ago, which is we'll look at the tranches, which debt we buy back based on things like liquidity, tenor, price, the economics to it. So we have a plan around that, and we'll execute that shortly.
Great. Thanks.
Thanks, Dennis.
Your next question comes from Menno Hulshof with TD Securities. Please go ahead.
Thanks. Good morning, everyone. Just one question for me, just a follow-up on shareholder returns. You're clearly about to get really aggressive on the buyback. But what are your current thoughts on why reinstatement of a base dividend isn't a priority?
Yeah. Well, the – but from our perspective, the buybacks, that generates fundamental value for shareholders. It's demonstrable. All else being equal, the cash flow per share shrinks as the – or grows, sorry, as the outstanding shares shrink. And you've got to remember, we're still in a deleveraging mode here at MEG. So from our perspective, that strategy is somewhat incompatible with a fixed charge dividend at this point in time. So that's the reason why we gravitate towards the buybacks.
So potentially, we can start to think about that in 2023 or even further out?
Yeah. I wouldn't say that. We'll decide that at the time. But right now, our approach is buybacks. We think that's the best approach for shareholders. And we'll determine whether we change that once we get through the $1.2 billion target.
Perfect. Thank you.
And Menno, I would just add. I mean, we continue to look at the intrinsic value of the shares, and we still think the best strategy given our high leverage is to continue to buy back those shares. I mean, I'll be quite honest, our concern with dividends is people see it as a fixed part of your cost structure. And we've got to reduce – we need to reduce our debt before we start talking about adding anything else to our cost structure.
Got it. That all makes a lot of sense. Thanks, guys.
Thanks.
Thanks, Menno.
There are no further questions at this time. Please proceed.
Well, thank you, everyone, for joining us for the call today. Appreciate the time you've given us to let us update you on our story. We appreciate your questions, and we appreciate your continued support. Thank you, and have a great day.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines. Have a great day.