Earnings Call Transcript - SU Q4 2022

Operator, Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Suncor Energy Fourth Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. At this time, I would now like to hand the conference over to your host today, Mr. Troy Little, Vice President of Investor Relations. Please, go ahead.

Troy Little, Vice President of Investor Relations

Thank you, operator, and good morning. Welcome to Suncor Energy's fourth quarter earnings call. Please note that today's comments contain forward-looking information. Actual results may differ materially from the expected results, because of various risk factors and assumptions that are described in our fourth quarter earnings release, as well as in our current annual information form, both of which are available on SEDAR, EDGAR and our website, suncor.com. Certain financial measures referred to in these comments are not prescribed by Canadian Generally Accepted Accounting Principles. For a description of these financial measures, please see our fourth quarter earnings release. We will start with comments from Kris Smith, Interim President and Chief Executive Officer, followed by Alister Cowan, Suncor's Chief Financial Officer. Also on the call are three of our senior operating leaders: Peter Zebedee, Executive Vice President, Mining and Upgrading; Shelley Powell, Senior Vice President, In Situ and E&P; and Arnel Santos, Senior Vice President, Refining and Logistics. Following the formal remarks, we'll open the call to questions. Now, I'll hand it over to Kris to share his perspectives on the quarter.

Kris Smith, Interim President and Chief Executive Officer

Thanks, Troy. Good morning, everyone, and thank you for joining us. Since taking on the Interim CEO role at Suncor in July of last year, I have been fully committed to improving the safety and reliability of our operations. We're also maximizing our value capture by leveraging Suncor's difficult-to-replicate integrated model and driving fit and focus across our asset base. I want to begin our discussion today with an update on several initiatives we discussed at our recent Investor Day. First, on safety. As planned, collision awareness systems are scheduled to go live at Syncrude's Aurora mine by the end of the first quarter, and we are on track to complete the implementation of collision awareness and fatigue management technology systems across all nine sites. As well, we continue to drive sharp focus on safety performance across the entire company. To that end, we have doubled the safety component weighting of our 2023 employee annual incentive program to ensure alignment with that focus. Second, with respect to costs. We are making progress on contractor workforce reductions in our mining and upgrading business and remain on track to achieve a 20% reduction by mid-2023. To be clear, these reductions will not be replaced by in-sourced workforce. Third, with respect to reliability. Our upstream assets performed well overall during the very cold weather at the end of Q4. Syncrude achieved the highest full year production in its history, while our Firebag in situ assets had a new quarterly production record. With respect to Fort Hills, while there will be variability between quarters during the next three years, as outlined in our recent Investor Day, our performance improvement plan is progressing as expected. By mid-2023, volumes will start to ramp up, as our mine inventory increases until our planned five-year fixed plant turnaround in July and August. Last, we continue to adjust our asset portfolio to focus more on our core integrated business. We completed the sale of our wind and solar assets and are making progress on the potential sale of our UK North Sea assets. We also closed the acquisition of an additional stake in Fort Hills from Teck Resources. Considering the smaller than expected interest we acquired, we are updating our annual production guidance for Fort Hills to reflect a corresponding decrease of 5,000 barrels per day for an annual range of 85,000 to 95,000 barrels per day. Now on to the quarter. Looking at the fourth quarter results, Suncor generated adjusted funds from operations of $4.2 billion or $3.11 per share. Total upstream production averaged 763,000 barrels per day. 70% of this was Syncrude crude oil or synthetic crude oil, which commanded premium pricing due to higher distillate cut relative to WTI. 20% was non-upgraded bitumen from our In Situ operations in Fort Hills. Lastly, 10% came from our E&P segment and reflects the disposition of our Norway assets, which was completed in the third quarter. Downstream generated $1.7 billion of FIFO adjusted funds from operations with an average refinery utilization rate of 94%, and margin capture was strong at 99%. As previously communicated, our Commerce City refinery was put into safe mode following the impact of the extreme weather in late December. It has begun a progressive restart and we expect it to come back to full production later in the first quarter. For the full year 2022, Suncor generated record adjusted funds from operations of $18.1 billion, which is 67% higher than our previous annual record. We paid down $3.2 billion of debt through the year, further strengthening our balance sheet. At the same time, through dividends and share buybacks, we returned record cash to shareholders of $7.7 billion, representing nearly 45% of adjusted funds from operations for a 13% cash yield. We also continue to drive capital discipline across the company, and our capital expenditures for the year were $4.9 billion, which is at the bottom end of our updated guidance range. Now before turning things over to Alister, I would like to highlight the significant progress we've made to date on the oil sands pathways alliance to net-zero, a key lever in our sustainability leadership and the long-term decarbonization of the oil sands industry. Recently, you have seen that pathways has signed an evaluation agreement with the Province of Alberta, allowing further delineation of our allocated floor space. We hope to advance this further with the formal lease agreement before the end of 2023. The front-end engineering and design of both the pipeline and sequestration facilities progresses as we continue to work with both the Canadian federal and Alberta provincial governments on the required fiscal and regulatory frameworks to enable these important projects. With that, I'll now pass it over to Alister to go through the financial results.

Alister Cowan, Chief Financial Officer

Thanks, Kris, and good morning, everyone. In the fourth quarter, oil sands delivered approximately $2.9 billion of adjusted funds from operations with an average realization of CAD 97 per barrel. The quarterly performance reflects, obviously, lower commodity prices compared to Q3, specifically, a decrease in WTI of US$9 per barrel as well as a US$5 per barrel decrease in the SYN premium. We also saw light-heavy differentials widened by US$6 per barrel, but the upstream impact was offset by a benefit in downstream due to our physical integration. Softening commodity prices quarter-over-quarter were partially offset by higher production following completion of significant turnaround activities at the base plant and Syncrude upgraders. On an annual basis, cash cost per barrel for Oil Sands operations, Fort Hills, and Syncrude came in as forecast, reflecting industry-wide inflationary pressures as well as main progression work that we discussed in some detail at our Investor Day last November. As benefits from our enterprise-wide systems implementation and other digital initiatives start to come through, we continue to focus on employee and contractor workforce reductions over 2023 and 2024. Our E&P segment generated $720 million of adjusted funds from operations in the quarter reflecting average price realizations of CAD 122 per barrel. As Kris said, Downstream generated $1.7 billion of adjusted funds from operations. Excluding a $440 million FIFO loss in the quarter, this would have been $2.1 billion on a LIFO basis. This performance demonstrates the strength and competitive advantage of our integrated model, which enables us to capture robust benchmark cracks and lower feedstock costs with widening heavy differentials. As a result, we achieved margin capture of 99% through the quarter. Suncor returned $1.4 billion to shareholders, including $700 million in dividends and $725 million in share buybacks in the fourth quarter. On a full-year basis, that's 117 million shares repurchased and $7.7 billion of total value returned to shareholders or approximately 13% of our market cap. Our quarterly dividend is now the highest in the company's history after the most recent increase of 11% to $0.52 per share. As Kris said, we continue to strengthen the balance sheet and reduced net debt during the year by $3.2 billion, excluding FX impacts on US dollar-denominated debt. As previously noted, we intend to increase excess funds for buybacks to 75% by the end of Q1. Subsequent to the fourth quarter, the Board approved a renewal of the company's share repurchase program for up to 10% of Suncor's issued and outstanding common shares as of February 3, 2022. This program is planned to begin on February 17, 2023. With that, I'll pass it back to Kris for his closing comments.

Kris Smith, Interim President and Chief Executive Officer

Great. Thanks, Alister. Over my last six months as interim CEO, I've placed my focus on setting the foundation for improved performance through operational excellence and a strong safety and performance culture with focus and follow-through. Our continued focus will be not only to build on that momentum but to accelerate it, driving delivery of safe, reliable operations, capital discipline, reducing our cost structure, and growing shareholder returns. Suncor has an unparalleled set of assets in the Canadian oil sands, coupled with an unmatched integrated model. We see great opportunities ahead for Suncor to leverage those competitive differentiators to drive value for our shareholders in both the short and long term, and that is our focus. With that, I look forward to any questions you may have, and I'll turn it back over to you, Troy.

Troy Little, Vice President of Investor Relations

Thank you, Kris and Alister. I'll turn the call back to the operator to take some questions.

Operator, Operator

Thank you. Our first question comes from Dennis Fong with CIBC.

Dennis Fong, Analyst

Hi, good morning and I appreciate you answering our questions this morning. First and foremost, understanding that there were some comments around margin capture from the refining business. I was hoping that you could outline some of the operational impacts from the supply and trading business unit really given the combination of price volatility and some of the other, we'll call it, items like potentially ramping up Commerce City?

Kris Smith, Interim President and Chief Executive Officer

Yeah. No, thanks very much, Dennis, for that question. We're very proud of our supply and trading organization. That organization has been in place for over 20 years, and we've been putting a lot of work and focus on growing it and creating greater impact from that part of the organization. It's based in Calgary, but we also have significant trading and marketing operations in Houston as well as an office in London, UK. What I'd say is that organization as we manage the operations looks to increase the value capture and maximize that margin by leveraging our logistics positions, working closely with both upstream and downstream, and also ensuring that we're maximizing our asset-backed trading activities around that as well. Examples would be, I mean, obviously, we had the shutdown of the Commerce City refinery that we put into safe mode because of the extreme weather events that happened in late December in the Midwest and Gulf Coast. Our supply and trading organization was able to react quickly to manage both crude feedstock supply into that facility but also product supply into the PADD 4 region. Another example would be with the Keystone outage that occurred at the end of December. We were able to react very quickly and very flexibly to that in terms of looking at our product mix in our oil sands business and using our asset positions, our logistics, our tankage positions to actually mitigate the impact of that and maximize margin through that event. So it's a great part of the organization. Thanks for asking the question, Dennis. I don't think it gets enough attention sometimes because it's a key component of our integrated model and that margin capture that you see in the downstream, but also our margins we see in the upstream.

Dennis Fong, Analyst

Thank you for the information. If possible, I would like to shift to a different topic. You've commissioned and completed the PFT hot bitumen transfer pipeline, which connects Fort Hills to your operating complex and the baseline. I would like to hear your thoughts on the increased flexibility this connection provides, and I understand that the base plant has processed TFT barrels, particularly at the start of Fort Hills. It would be helpful to understand the potential flexibility and advantages this connection might bring.

Peter Zebedee, Executive Vice President, Mining and Upgrading

Yes. Thanks very much, Dennis. So yeah, indeed, you're correct. We have commissioned the TFT jump over line to put Fort Hills barrels over into the base upgrader. We have the flexibility to bring over up to 40,000 barrels per day of Fort Hills bitumen into the upgrader. We have utilized that within the last year. That, of course, just provides additional flexibility for us on bitumen supply sources into the upgrader. I think that particular line in conjunction with the ICP line that we have between both Syncrude and the base plant offers us differentiated flexibility in the region to offset various unit maintenance activities and really extract the highest margin from the barrels that we're producing upstream.

Kris Smith, Interim President and Chief Executive Officer

Thanks, Peter. I'll just add to that. I like the flexibility that Peter is highlighting with Fort Hills, Syncrude, Firebag; we've got all those assets with connectivity into our base plant and into the Athabasca tank terminal. It's creating a tremendous amount of optionality for us to move bitumen around. In the case of Syncrude as well, it's a bidirectional pipeline, and we can move sour gas oils up to Syncrude when we find an opportunity where we've got long hydrotreating in that asset. It's been a real win for Suncor, and we're looking for more and more opportunities to increase that flexibility.

Dennis Fong, Analyst

Fantastic. I appreciate that. I'll turn it back.

Kris Smith, Interim President and Chief Executive Officer

Thanks, Dennis.

Operator, Operator

Thank you. And our next question comes from the line of Greg Pardy with RBC Capital Markets.

Greg Pardy, Analyst

Yes, thanks. Thanks. Good morning. And thanks for the rundown. Wanted to stay maybe just on the operations side right now and two questions there. The first is, Kris, why is a 20% reduction in the contractor workforce? Like, how did you guys sort of land on that as being the right number? And I think you probably accomplished probably half of that already? And are you seeing benefits coming from it?

Kris Smith, Interim President and Chief Executive Officer

Yes. Thanks very much, Greg. And 20%, I wouldn't say is an arbitrary number. It's working in a very focused way to determine how low we can get that contractor workforce down while ensuring we're maintaining safe, reliable operations and getting the work done. Maybe, I'll ask Peter to elaborate a bit. Peter’s obviously been leading this because it's primarily in our Mine and Upgrading business, which is the part of the business that has the largest amount of contract workforce. Peter, do you want to...?

Peter Zebedee, Executive Vice President, Mining and Upgrading

Yes. No, I would say, maybe a couple of things, Greg. First was ensuring that we had the transparency built out across the assets to understand how many contractors we have coming through the gate each and every day. As you can imagine, with these megasites, the scale is quite significant. So we had to get our arms around the numbers. The second was implementing a robust set of controls and work processes to ensure that we're really scrutinizing the release of work to contractors and ensuring that we're maximizing the capacity that we have within our own Suncor workforce first and foremost. We’re also looking to build additional tools to provide our operators with sufficient information to ensure that we're sequencing maintenance activities, in particular in the most cost-efficient way.

Kris Smith, Interim President and Chief Executive Officer

Thanks, Peter. And Greg, I'd add to that as well. We are making good progress, as you just mentioned, and we’re on track. We've got high confidence in driving those reductions. But the thing I'd add to it is that these reductions do two things in our mind. One, obviously, it reduces costs and increases efficiency. But secondly, and as importantly, it actually improves safety because there are fewer people in the field. So we're getting both benefits from these reductions.

Greg Pardy, Analyst

Okay. Terrific. And just really, the second question comes back to the upstream. So as you've maybe had a relook under all the rocks in the upstream, where do you see most of the low-hanging fruit as it relates to either output increases or cost reductions aside from safety? I'm just wondering if there is more to come from MacKay, is there more to come from Firebag and so forth, but where do you see the easy wins that maybe you can achieve in 2023?

Kris Smith, Interim President and Chief Executive Officer

Our focus in 2023 is on the upstream, particularly in the oil sands basin, which allows us to take advantage of the scale associated with regionalization. The reduction of contractors is a prime example, enabling us to optimize across the entire asset base and reduce the contractor workforce. We are actively working on our regionalization strategy concerning services, materials, and supplies. Additionally, as Peter mentioned earlier regarding Fort Hills, we see an opportunity to enhance integration between the assets, improving reliability and management during maintenance events. For example, while managing maintenance at Syncrude, we benefit from not having to slow down the mine if certain operations are down; we can transfer bitumen into the base plant. We will continue to seek opportunities like this. I am pleased with the progress across the assets; Firebag, for instance, achieved a production record in Q4. We are noticing an increase in reliability overall. Our primary focus remains in the mine upgrading area that Peter is leading, as there are significant opportunities for cost management and optimizing production across our assets.

Greg Pardy, Analyst

Thanks very much.

Kris Smith, Interim President and Chief Executive Officer

Thanks, Greg.

Operator, Operator

Thank you. And our next question comes from the line of Doug Leggate with Bank of America.

Doug Leggate, Analyst

Thanks. Good morning, everyone. Guys, I wonder if I could address the dividend. I know you've announced it last quarter, but with the visibility you have today, one of the key things behind the strategy we laid out a few years ago was to drop the breakeven. So with all the moving parts that we've seen with Fort Hills and the kind of reset you've had, where do you think that breakeven progress sits today relative to what you laid out? I guess what I'm asking is, what's the breakeven to cover your dividend today? What's the headroom for additional dividend increases?

Alister Cowan, Chief Financial Officer

Yes, I'll take that one, Kris. Thanks for the question, Doug. Obviously, lots of moving parts here. The dividend has been increasing as we progress improvements in our operations. I would say, as we analyze it today, corporate breakeven for sustaining capital and dividend is in the low to mid $40s WTI. It's higher than obviously we had targeted. But it is competitive among our integrated peers. As we work through our performance improvement plan to drive down costs and improve reliability and production over the long-term, we are focused on driving that back down to our longer-term target in the mid-$30s. The biggest factor in that really and the opportunity is the main improvement plan, particularly in Fort Hills. As we work through those near-term mine constraints and get into the largest and final pit at Fort Hills, we expect to see significant improvements. That will help us drive down the overall corporate breakeven.

Doug Leggate, Analyst

Okay. I will continue to watch it. I guess, my follow-up is buried in the numbers. I guess there was a comment about the increase in decommissioning and restoration provisions. I'm just wondering if you can walk us through what the back story is there, how this has come about, whether we should expect that to continue to evolve.

Alister Cowan, Chief Financial Officer

Yeah. Thanks, Doug. I mean, you've heard us talk about the challenges of water return remediation, which is an industry-wide challenge faced by anyone involved in mining. It’s certainly one we've been discussing. There will be ongoing discussions with the two levels of government in Canada and also the First Nations to resolve. I'd just remind everyone, we're the only industry in the world that is not allowed to return any treated water back to the river, and that includes all the rainfall that falls on our sites. So everyone in the industry is actually focused on resolving this issue. Obviously, we have a larger volume than anybody else because we've been at it for far longer than everyone else. As we go through our normal process In Situ, we update our estimates to manage that water return challenge. Specifically, this year, that would include incorporating higher rates of inflation on future costs in Situ for up to 70-plus years into the future. That is the driver behind the increased ARO liability you see in the financial statements. Everyone in the industry has faced it, and that's why we’re all so focused on resolving that water return challenge with governments and our peers.

Doug Leggate, Analyst

Just to be clear, Alister, for clarification, what's the cash out, the cadence of the cash out for that incremental liability?

Alister Cowan, Chief Financial Officer

Yeah. Most of that, Doug, will come in after mine closure and ranges from the late 2030s to 2070 to 2080.

Doug Leggate, Analyst

So it's very long dated. Got it. Thank you.

Alister Cowan, Chief Financial Officer

That's very long dated, and there's no near-term increase in cash outflow.

Operator, Operator

thank you. And our next question comes from the line of Neil Mehta with Goldman Sachs.

Neil Mehta, Analyst

Good morning team. I'd like to kick off here on capital returns. As you said, the last couple of years you’ve been aggressive in repurchasing shares and reset the dividend. Just as you look at 2023, can you give us a sense of how much capital can be returned to shareholders? And with commodity prices coming off a little bit, what's your confidence interval about making that pivot to 75% from 50% of cash back?

Alister Cowan, Chief Financial Officer

Thanks for the question, Neil. Our view is that we're still in a constructive pricing environment, obviously not going to be what we saw in terms of the records of 2022. But we feel that what we see right now in the pricing environment, assuming it continues to hold through the balance of the year and alongside our operational plans. Our intent is to pivot to the 75%-25% here towards the end of Q1. As we're starting to see debt levels move even closer to those long-term targets that we set quite a while ago. As you know, we've made a lot of progress on those debt targets relative to where we thought they would have been 18 months ago. Right now, our plan is to continue to move to that 75%-25% in that timeframe unless something radically changes in the business environment.

Neil Mehta, Analyst

Yes. Thanks for that. And the follow-up is around the safety journey that you're on. Maybe you could spend some time, Kris, talking about your perspective on that, how can we, as an investment community, evaluate where you are in that movement back towards where you want to be? And any comments around Commerce City as it relates to that as well?

Kris Smith, Interim President and Chief Executive Officer

Thank you, Neil. I am very pleased with how the organization has responded to safety, especially since I took on the Interim CEO role. The entire operations team, many of whom are on this call today, has implemented a clear and focused safety improvement plan. This plan is enhancing our commitment to operational excellence and risk management. We are engaging with our frontline workers and rolling out human organizational performance principles, actively involving the organization in this process over the past few months. Additionally, as Peter has mentioned previously, we are making safety technology investments in specific risk areas that have led to tragic incidents in the last two years. I'm encouraged by the developments over the past six months. Progress is a journey, and it shouldn't be measured in days or months. However, since stepping into the Interim CEO role, I've observed positive changes in safety performance, with a decrease in incidents in both personal and process safety. It is crucial for this focus to be sustained and to remain a daily priority. For our investors, the ultimate measure of this focus will be reflected in our results. I assure you that the operating team is dedicated to prioritizing safety within the organization. Now, regarding Commerce City, your question is very relevant. We experienced an extreme weather incident in December that significantly affected the refining industry. Our facility faced severe impacts from this weather event, resulting in equipment failures and some loss of containment. The team there acted promptly to bring the facility into safe mode and ensured it is in a condition that allows for safe operations moving forward. I am incredibly proud of the team's thorough inspection and repair work. We have already begun the progressive restart of the facility and are on track with our expectations. This demonstrates how an organization can effectively manage its assets with safety as a priority.

Neil Mehta, Analyst

Thanks, Kris.

Kris Smith, Interim President and Chief Executive Officer

All right. Thanks, Neil.

Operator, Operator

Thank you. And our next question comes from the line of Menno Hulshof with TD Securities.

Menno Hulshof, Analyst

Thanks, and good morning, everyone. I'll start with the base mine extension since it ties into some of the other questions that were asked previously. My understanding is that a decision on sanctioning the extension to address mine depletion versus leaning more on in situ production to keep the upgraders full is still expected by 2025. But maybe you could just give us your latest thoughts on the various options and what you consider most likely at this stage?

Kris Smith, Interim President and Chief Executive Officer

Thanks, Menno. Yes, as you point out, our baseline end of mine life is in the mid-2030s. We're working through various options for replacement of that bitumen supply. Our focus is primarily in keeping those upgraders full. We do have a number of options you outlined, and we are continuing to progress our base mine extension application. However, that is not our only alternative. We also have in situ development just east of our base plant, contiguous to our current mine operations, which includes both our Lewis lease and Firebag, both of which have significant resources remaining. It's too early to definitively choose which option is leading, but we are diligently working on both options. The connectivity amongst our operations and our ability to bring bitumen into the upgrader from Fort Hills is significant; it's 40,000 barrels a day of capacity that can be further increased as well. We can bring more Firebag in. We have a lot of flexibility for bitumen supply and the upgrader. The team is diligently assessing all of these options. Over the next 24 months, we expect to start making decisions on the most economic and risk-based options to supply that upgrader.

Menno Hulshof, Analyst

Terrific. And so maybe I'll just pivot to the macro with the question on diesel. We've obviously seen prices come down quite a bit over the last several weeks. So what is your read on this pullback? What are your expectations for Canadian diesel cracks over the midterm? And maybe you could just remind us of how much flexibility you have on dialing the product slate up and down for distillates across your four refineries?

Kris Smith, Interim President and Chief Executive Officer

Sure. And remember too, Menno, when we think about diesel, we consider it in two aspects as well. There's our refining business, which we are tooled for more at 211; we're not a 321 refining network, which is advantageous. It does give us some flexibility to increase diesel production. We think diesel demand won't dramatically drop off, even though it has softened recently. We still see robust demand in the distillate market. The structural foundation for strong distillate prices remains in place through the balance of the year. More context, if you examine global inventories and production and demand, gasoline, too, has actually strengthened a bit recently. It dipped at the end of Q4, which was expected due to seasonal trends. We believe gasoline cracking margins should be around historical norms. However, the focal point for 2023 is going to remain the distillate market, which will support both our downstream business and the diesel produced from our oil sands.

Menno Hulshof, Analyst

Thanks Kris. I’ll turn it back.

Kris Smith, Interim President and Chief Executive Officer

Great. Thanks, Menno.

Operator, Operator

Thank you. And our next question comes from the line of Roger Read with Wells Fargo.

Roger Read, Analyst

Yeah. Thank you. Good morning. Yes. Maybe just dig in a little bit here on an operational question. Looking at two things in the oil sands, your thoughts on what we should expect in terms of royalties? And then, what are you looking at in terms of cash operating expenses? I know higher fuel prices have an impact. But just what are some of the thoughts in terms of cash operating costs, underlying inflation, and what you can do to push back against that?

Kris Smith, Interim President and Chief Executive Officer

Sure. Thanks, Roger. For royalties, I think we're going to continue to see royalties in post-payout on some of the assets, but pre-payout in others, we expect royalties will be less than in 2022 versus 2023, primarily due to where we expect commodity prices to move. However, I expect a healthy royalty remittance back to the province. Regarding cash operating costs, we're highly focused on that area. At our Investor Day, we discussed cash operating costs and the impacts based on our mine plans in 2023, specifically regarding the mine improvement plans for Fort Hills, as well as where we're at in Syncrude's mine cycle, which may add some additional costs this year. Nonetheless, we expect to efficiently manage costs through this year, despite inflationary pressures we anticipated. We set the guidance range for 2023 and communicated that at the Investor Day. We're committed to delivering those costs within that guidance or below. In terms of inflation, while we saw extreme inflation in the second half of last year, we are noticing some recent moderation. We hope to continue seeing inflation temper as we progress through the year.

Roger Read, Analyst

And can you quantify at all what part of that is related to underlying fuel costs or what offset you might get there?

Kris Smith, Interim President and Chief Executive Officer

Yeah, I’d say the inflation we’re facing primarily links to labor and contractors. That's why we've been focused on that area. We have seen inflationary pressures in wages and labor costs alongside some in supplies and materials, but that aspect seems to be easing now. Steel price inflation seems to be calming down, while commodity costs related to fuel have been favorable. Gas prices have lowered considerably from what we anticipated at the year's start. The tailwind from lowering costs should help us overall.

Roger Read, Analyst

Okay. And then the unrelated follow-up, Kris, we're all well aware that you remain the interim CEO. Any updates on the timing for removing that tag?

Kris Smith, Interim President and Chief Executive Officer

Yes. Thanks. I'm not in a position to announce anything on this call. As mentioned previously, the Board is undergoing a diligent process to ensure they make the best decision for the future of this company. Expect a decision very soon. As communicated in the past, the best decision was expected in mid-February. We're sitting here on February 15. I expect an announcement will be coming shortly.

Roger Read, Analyst

Yes, I appreciate that. I'm not real good at math, but it struck me the 15th was mid-February.

Operator, Operator

Thank you. Your next question comes from the line of John Royall with JPMorgan.

John Royall, Analyst

Hi, guys. Good morning. Thanks for taking my question. So just a follow-up on Neil's first question on capital allocation, and I just wanted to make sure I understand. You're at about $13.5 billion of net debt today. Are you talking about possibly going to the 75% tier before you hit the $12 billion level, or is there an expectation that you'll be delevering by $1.5 billion in Q1? If it's the latter, maybe you can go through some of those drivers of deleverage? I know you're closing the wind and solar assets, but then you should have the stake increase in Fort Hills going the other way. So just anything on those drivers. Thanks.

Alister Cowan, Chief Financial Officer

Hey, John, I'll take that one. I said before that I'm going to look through any FX impacts to get to the $12 billion. Included in the $13.4 billion is about $750 million of FX impacts from a weaker Canadian dollar compared to when we set the targets. I would take that also, and we fully expect to be close to the $12 billion or close enough to the $12 billion ex-FX by the end of Q1. This is around the timing of closing Fort Hills; we had assumed it would be early Q2 but are now anticipating it to align with the closure of the UK assets in that quarter. There'll be some noise around that. Obviously, a closer Fort Hills earlier is anticipated, but we expect to move to 75%-25% by the beginning of Q2.

John Royall, Analyst

Okay. That's helpful. And then maybe you could talk about the optimization you guys are doing in retail and specifically the things you're doing around mix for operated versus non-operated stores? Just a little bit of color there would be helpful.

Kris Smith, Interim President and Chief Executive Officer

Sure. Thank you, John. In our retail business optimization, outlined in our Investor Day, we are refining our national network. It's a nearly even mix of control and non-controlled. Our goal is to focus investment on high-volume, high-value sites in core markets. When we put those types of investments in place, we've seen terrific results within the network. At the same time, we're rationalizing non-core sites and moving those non-performing sites out of our control channel into non-controlled channels. This allows us to focus our controlled network on core markets and high-volume sites. The five-year plan is now underway and the team is dedicated to delivering it.

John Royall, Analyst

Okay. Thank you.

Kris Smith, Interim President and Chief Executive Officer

Great. Thanks.

Troy Little, Vice President of Investor Relations

Thank you, operator and thank you to everyone for joining us today. Please don't hesitate to contact us should you have any questions. With that, operator, you can end the call.

Operator, Operator

Thank you for participating. This concludes today's program, and you may now disconnect.