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Executives

Patrick Aherne – Manager, IR

John Lau – President and CEO

Terrance Kutryk – VP, Midstream and Refined Products

Rob Peabody – COO, Operations and Refining

Analysts

Terry Peters – Canaccord Adams

Kate Lucas – Collins Stewart

Ravi Parmar [ph] – Contempra Financial [ph]

Carrie Tait – The National Post

Markus Ermisch – Calgary Sun

Husky Energy Inc. (OTCQB:HUSKF) Q1 2010 Earnings Call Transcript April 28, 2010 4:15 PM ET

Operator

At this time, I would like to turn the conference over to Patrick Aherne, Manager of Investor Relations. Please go ahead sir.

Patrick Aherne

Thanks Joe. Good afternoon, everyone. Thank you for joining us today to discuss our 2010 first quarter results. With me today are Mr. John Lau, President and Chief Executive Officer; Alister Cowan, Chief Financial Officer; Rob Peabody, Chief Operating Officer, Operations and Refining; and Terrance Kutryk, Vice President of Midstream and Refined Products.

In today’s call, John will discuss Husky’s financial results and give an overview of the operational highlights. Terrance Kutryk will provide an update on the Midstream and Downstream divisions. John will then conclude, at which time, we will open the call up for questions, starting with analysts, followed by the media.

Please note that today’s comments contain forward-looking information. Actual results may differ materially from expected results because of various risk factors and assumptions that are described in our quarterly release and in our annual filings, which are available on SEDAR, EDGAR and our website.

I’ll now turn the call over to John.

John Lau

Thank you, Patrick, and good afternoon to everyone. Results in the first quarter of 2010 reflect a stronger commodity price environment, although partially offset by a stronger Canadian dollar and lower product margins in Downstream. Cash flow from operations was up 58% to $895 million or $1.05 per share, from $565 million or $0.67 per share in the same quarter of 2009.

Earnings were $345 million or $0.41 per share, up from $328 million or $0.39 per share in first quarter of 2009. Sales and operating revenues were $4.47 billion, compared with $3.65 billion in the first quarter of 2009.

Husky’s total production in the first quarter averaged 296,000 barrels of oil equivalent per day, compared with 2009 first quarter production of 342,000 barrels of oil equivalent per day. This is up from 292,000 barrels of oil equivalent per day in the prior quarter.

Total crude oil and natural gas liquids production was 209,000 barrels of oil per day in the quarter compared to 250,000 barrels per day in the first quarter of 2009, and up from 203,000 barrels per day in the fourth quarter of 2009.

Liquids production in the first quarter was lower compared to the same quarter in 2009, primarily due to peak production rate decline from the White Rose oil field. Total production levels at the White Rose field will ramp up when the North Amethyst satellite begins production in the second quarter of 2010.

Average natural gas production was 524 million cubic feet per day, down from 551 million cubic feet per day in the first quarter of 2009. Natural gas production is tracking within guidance, however some production may be shut in later this year if gas prices weaken further.

The company remains in a strong financial position. Total debt at March 31, 2010, net of cash and cash equivalents, was $3.34 billion. Debt to cash flow and debt to capital employed ratios at March 31, 2010, were 1.4 times and 21% respectively on the trailing 12 month basis.

We are pleased to advise that Husky’s Board of Directors has approved a quarterly dividend of $0.30 per share, payable on July 2, 2010, to shareholders of record on May 21, 2010.

During the first quarter, Husky made significant progress on several mega projects, in line with our medium and long-term growth plan. On the East Coast of Canada, drilling, completion and tie-in operations resumed for the North Amethyst project. The first well is being completed and is expected to be on production in the second quarter. Production will ramp up as additional wells are drilled and brought on stream, reaching gross production rates of 37,000 barrels per day in 2011; 25,000 barrels per day Husky’s share.

During the quarter, Husky and its partners extended the agreement with the GSF Grand Banks offshore drilling rig. This will enable Husky to continue the development of the White Rose and adjacent oil fields through January 2013. In February, Husky and its partner were granted a Significant Discovery License for the Mizzen discovery in the Flemish Pass Basin.

In China, the Overall Development Plan for the Liwan 3-1 field is being finalized, with expected submission to partner and regulatory authorities later this year. Gas marketing arrangements are in progress, with agreements targeted for completion in time for project sanction later in 2010. Block 29/26 in the South China Sea continues to show excellent exploration potential.

In February, Husky announced another significant discovery with the Liuhua 29-1-1 exploration well. Currently, an appraisal well is being drilled to delineate the new discovery. The new field will be tied into the planned infrastructure for the Liwan 3-1 field.

At the Sunrise Oil Sands Project in northern Alberta, major contracts have been tendered for the Phase One project plant and field facilities. Construction work continues on the East Athabasca highway and with plant site preparation. A decision on project sanction is expected by the end of the year, with first oil in 2014. In the first quarter, three additional well pairs were drilled at the Tucker Oil Sands Project. Steaming is expected by the third quarter with production by year end.

In Western Canada, Husky continued to build its position in a number of gas resource plays and now holds more than 946,000 net acres around established assets in the Alberta foothills and northeast British Columbia.

Terrance will now talk about the Midstream and Downstream divisions.

Terrance Kutryk

Thanks, John. Husky’s midstream business operated at a high level in the quarter. Upgrader throughput averaged 82,100 barrels per day and operating costs were $1.11 per barrel lower than in Q1 of 2009. However, earnings were down as a result of upgrading differentials that were $4.20 per barrel lower than in the same period in 2009. The Upgrader is scheduled for a 60-day turnaround in the third quarter of this year to undergo maintenance and enhancements.

Husky’s downstream operations performed well in the first quarter of 2010 compared to the same period in the prior year. Total U.S. and Canadian refinery throughput was 246,400 barrels per day compared with 236,600 barrels per day in 2009. Financial results were impacted by lower product margins as a result of lower market crack spreads.

In the first quarter, Husky moved forward to integrate its 98 retail locations in southern Ontario. Re-branding is underway and the first station was opened in early April. The remaining locations will be brought into the Husky network over the coming months.

I will now pass the call back to John for his concluding remarks.

John Lau

Thank you Terrance. Husky produced solid financial performance in the first quarter of 2010, while making good progress on its strategic projects. Husky has exciting major projects, including the Liwan discovery in the South China Sea, the Sunrise Oil Sands Project in Alberta, and White Rose and its satellite developments on the East Coast of Canada. The Company also has an extensive portfolio of heavy oil, light oil and natural gas assets in Western Canada.

Husky enters the decade positioned to create shareholder value with a strong core asset base and plans to grow in the near, medium and long term. In February, the Board of Directors announced my intention to step down as the President and Chief Executive Officer of Husky Energy. I am firmly committed to managing Husky until a successor has been appointed, and to ensure an orderly transition.

Back to you, Patrick.

Patrick Aherne

Thank you John. That concludes the formal part of the call. We would be pleased to answer any questions you might have. And I will now turn it back to the conference operator.

Question-and-Answer Session

Operator

Thank you, Patrick. (Operator Instructions). The first question is from Terry Peters of Canaccord Adams. Please go ahead.

Terry Peters – Canaccord Adams

Thank you. Good afternoon. I wanted to talk a little bit about White Rose and about North Amethyst and I just wonder if you indicated that you would expect to see a ramp-up as you drill and/or connect wells from North Amethyst. What is the base production at White Rose? How is that holding up and could you just indicate how you see that progression over the balance of the year in terms of tying in wells? Is it fairly steady per quarter or is it going to be biased to the year-end? I'm just trying to get an idea as to how that whole complex is going to perform this year in terms of production.

Rob Peabody

Terry, this is Rob Peabody. Yes, I mean – okay, so looking at East Coast production for the rest of the year, current production to date gross at White Rose is between about 55,000 and 60,000 barrels a day post the turnaround. That's actually quite stable at the moment. You may have noticed – I mean, we did see a reduction in production just after turnaround and since then, we've seen pretty flat production. So we saw that kind of main decline being arrested and we've seen pretty flat production since then.

I think as we kind of look forward in the year, that's – we are anticipating that production to – in fact, at the moment – it's gradually increasing at the moment. So we – at the moment, we are still anticipating that production to hold pretty well throughout the year, although clearly it's something we are watching.

North Amethyst production is – will start ramping up with the wells. Basically, if you draw a line between the next quarter and the end of the year, as we add wells, we see that production increasing as we said in this – the transcripts to 37,000 barrels a day gross. Does that answer your question, Terry?

Terry Peters – Canaccord Adams

Yes. And is that you can expect from North Amethyst to hold that rate for a period of time, a couple years, or is that a rather steep decline?

Rob Peabody

Yes. I think you are looking at a similar sort of profile to the original White Rose field, but at a smaller scale-down level.

Terry Peters – Canaccord Adams

Okay. And just one follow-up on the exploration in South China Sea. You had – I guess it's the 34-2 complex, there was a well that didn't encounter the commercial reservoir and does that mean that your development plans there are going to be the Liwan 3-1 and the 29-1 discovery? Are those the two that you will be looking to pair up in a development project?

John Lau

Yes. The exploration program haven't – finished yet, we still have about three to four areas to go. And Liwan 3-1-1 and the subsequent two additional discoveries during the year, plus the three appraisal wells, they were all successful. From the evaluation of the resource base, that has been confirmed our previous prediction about 4 trillion to 6 trillion of gas. So there is no surprise from our reconfirmation.

Terry Peters – Canaccord Adams

Okay. And just if you can remind me that your – the government or I think it's CNOOC or some – has an option to back in and do – on this and have they indicated they would exercise that or at what point do they pay prior exploration costs and then share in future development costs or how – can you just outline briefly how that works?

John Lau

Yes. The CNOOC, actually under the sharing contract, they have a right to farm-in for 51%.

Terry Peters – Canaccord Adams

Right.

John Lau

Our timing, original gas price is already reported to government in December. The overall development plan is ready to submit to CNOOC and also to the – to government. Once there is an ODP being submitted and revealed, then CNOOC will exercise, I have been advised they will be looking at the project. Once they propose or farm-in decide [ph] their projects, the cost sharing will straight away be on that basis. For the gas production, we expect we are still on target for 2013.

Terry Peters – Canaccord Adams

Right. Okay, so do they pay any of your back exploration costs or no?

John Lau

Yes, and not straight away. They pay through – the previous one back through their production. But all the going – ongoing costs will be shared straight away.

Terry Peters – Canaccord Adams

Right. Okay. Thanks, John. That's good.

Operator

(Operator Instructions). The next question is from Kate Lucas of Collins Stewart. Please go ahead.

Kate Lucas – Collins Stewart

Hi, good afternoon. Thanks very much.

John Lau

Hello, Kate.

Kate Lucas – Collins Stewart

Hi. Could I just get a quick clarification on the turnaround scheduled during the third quarter? How long is that scheduled for?

Rob Peabody

Is that the Upgrader turnaround?

Kate Lucas – Collins Stewart

Yes.

Rob Peabody

Yes, it's 60 days.

Kate Lucas – Collins Stewart

Okay.

Rob Peabody

Just to clarify too, that's a normal turnaround. It's just reached the end where we now have to do a normal standard turnaround on it.

Kate Lucas – Collins Stewart

Okay. Just the maintenance turnaround then?

Rob Peabody

Yes.

Kate Lucas – Collins Stewart

Great. Okay thanks very much.

Operator

The next question is from Ravi Parmar [ph] with Contempra Financial [ph]. Please go ahead.

Ravi Parmar – Contempra Financial

Hi, John, I just have a quick question here.

John Lau

Hi, Ravi.

Ravi Parmar – Contempra Financial

Hi, John. Can you elaborate a bit more on the spin-off that you guys might have of your South Asian assets? And what time frame you have and if you have looked into it, any of the tax simplifications that you would have?

John Lau

Can you say that question again?

Ravi Parmar – Contempra Financial

Oh, sorry. I just wanted to follow up with then to see if you guys could elaborate a bit more on the spin off of your South Asian assets and if you have looked into any of the tax simplifications and any of that and give us sort of the clarification on that.

John Lau

Yes. The Asia asset proposal has now been reviewed by the Board and we are looking to make sure that asset will be practically independent basis once we put the valuation in place. So we are now (inaudible) evaluate all the resource base and look at the future exploration potential. Our schedule will still be the same and the Board actually will try to announce as soon as they finish the independent review before the end of the year.

Ravi Parmar – Contempra Financial

Okay, great. Thank you, John.

John Lau

Thank you.

Operator

The next question is from Carrie Tait of The National Post. Please go ahead.

John Lau

Hello, Carrie.

Carrie Tait – The National Post

Hello. Thanks for taking my question. I am wondering if you have any idea on a timeline on when we might see the new Canadian leader.

John Lau

You want to ask – your – actually, your question is answer when is the decision plan or the announcement of the leader for the position of new President and CEO? Carrie?

Carrie Tait – The National Post

Yes.

John Lau

Okay. And our Board is actually doing quite a thorough looking for a successor for the company. That has been done and now, they want to tidy up some of the professional side, make sure we – will be reviewed by the Board members. So as soon as the Board of Directors confirm the appointment, we will make the news. And of course, I expect and I understand that the Board will be try – will try to announce by, the say, at the end of second quarter or early third quarter.

Carrie Tait – The National Post

So you have somebody selected and you are just sort of finishing up the final negotiations, is that right?

John Lau

That's right. Yes – yes.

Carrie Tait – The National Post

Okay. Thank you.

John Lau

Thank you.

Operator

Next question is from Markus Ermisch of Calgary Sun. Please go ahead.

Markus Ermisch – Calgary Sun

Yes. Actually it's just a follow-up to what Carrie just asked. Are you going to select somebody a successor for CEO from within your own ranks? Can you tell us that or is it somebody from outside of the company?

John Lau

That is a Board of Directors' privilege. I can't speak on their behalf, but I think they did quite a thorough search, internal, external and even within the Group. So you have to be – sorry, you have to be a bit patient and as soon as we decide by the Board, we will announce. Of course, there is a lot of market speculation, but I prefer to say – let the Board make the announcement themselves.

Markus Ermisch – Calgary Sun

Well, fair enough. Thank you.

John Lau

Thank you.

Operator

There are no more questions at this time. I'd like to turn the call back to Patrick.

Patrick Aherne

All right. Thanks, Joe. Thank you for your participation in our call today. But if there are any remaining questions, please contact myself or Graham White, our Media Relations contact offline. Thank you.

Operator

Ladies and gentlemen, the conference is now concluded. You may disconnect your telephone. Thank you for joining and have a pleasant day. Good-bye.

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