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Executives

Patrick Aherene - Manager of IR

Asim Ghosh - CEO

Alister Cowen - CFO

Rob Peabody - COO

Terrance Kutryk - VP of Midstream and Refined Products

Analysts

Andrew Potter - CIBC World Markets

Mark Polak - Scotia Capital

Greg Pardy - RBC Capital Market

Mike Dunn - First Energy Capital

Andrew Fairbanks - Bank of America

George Toriolia - UBS Securities

Husky Energy Inc. (OTCQB:HUSKF) Q2 2010 Earnings Call July 28, 2010 11:00 AM ET

Operator

At this time, I'd like to turn the conference over to Patrick Aherene, Manager of Investor Relations. Please go ahead.

Patrick Aherene

Good morning everybody. Thanks for joining us today to talk about our 2010 second quarter. With me in the room today are our new CEO, Asim Ghosh; our CFO, Alister Cowan; our COO, Rob Peabody; and our Vice President of Midstream and Refined Products, Terrance Kutryk.

Today, Asim's going to provide an overview of Husky's strategic direction. And then, Alister will talk about the Company's second quarter performance. Rob will provide an update on the upstream operations, and Terrance will conclude with talking about the Midstream and Downstream activities.

Please note that in today's call there will be some forward-looking information, and actual results may differ materially from the expected results because of various risk factors and assumptions, which we've described in our quarterly release and in our annual filings, and those are available on SEDAR, EDGAR and on our website.

I'll now turn the call over to Asim.

Asim Ghosh

Good morning and thank you for taking the time to join us. I've met a couple of you people before, but I'm sure most of you will be new and sorry for meeting over the telephone, but nice to meet you anyway. I think in the circumstances, given that really I'm newer in the chair. Before I get into a discussion of the second quarter results, it might be worth our while for me to pull up us back and look at the bigger picture from my fresh eyes, so to speak, viewpoint.

I've been in the position actually for less than two months as we speak, but I've been a Board member since May 2009. And I guess what I am going to say today reflects the cumulative learnings over that more intense two months and the Board vantage viewpoint since last May 2009. So, let me start with a look at basically what I'd call, in the non-financial sense, our balance sheet.

And the first thing that strikes me, and I actually sent this to a couple of you whom I've had the opportunity to meet, is the one thing that sticks out when you look at Husky compared to any of our peers, is the completely outstanding resource base that we've got. It's a country to country across a range of types of resources, different levels of maturity, and I'll build on that scene in a minute.

But the simplest quantification I can give of that is that if I take last year's production rate, we got something in excess of 60 years worth of discovered, recoverable resource, and I stress the word recoverable resource, not total resource, available to this company. The second point I just touched on actually deeply is that resource base is very diverse. And therefore, we don't have an exposure to market cycles and market fabs in any single type of play.

We are not an oil sands company. We are not an offshore company. We are not a resource company. We are all of the above. So, that's the second thing that hits me. And then, in the context of portfolio management really what I'd say is conventional assets in Western Canada and our heavy oil assets in the Lloyd complex are basically what I would consider as the company's bread and butter, are providing a solid, sustainable foundation of cash flow.

Then, looking to the growth part of the assets, we have three tremendous pillars. One is our absolutely unenviable position in the oil sands, ranging all the way from technologies to be discovered to capitalize in [Solesky] but we're seeing now types of the top tier resource in Sunrise. Then we got continued growth on our East Coast where we have a very, very strong position. But while this is already delivered, with further investment it still has material long-life and, in fact, upside ahead of it. And finally, of course, we've got our growth opportunity in Southeast Asia.

So that's it for the portfolio part of it. The second part I want to highlight is that sticks out to anybody coming in fresh into this company is a very defined, strong profit culture which has a number of elements that I'll speak to in a minute. But the corporate cultures are intangibles. They cannot be put down on a piece of paper. They evolve over decades, and in this case, they've evolved like seven decades.

So, we got a very talented and dedicated employee base, and the backbone of a company is its middle management. And this company has got middle management that has been with the company for decades that has the depth of knowledge of the business and the commitment to the business. And I'll drill on another very strong part of the culture in my next section.

Secondly, there's a very strong safety culture, and Rob will expand on this later. And we are not talking of this because safety happens to be sort of very top of mind right now. It is something that hit me as soon as I joined this company and got on the Board and actually got on the health and safety committee. So that in itself was symbolic to you that a new director comes in and he gets to the health and safety committee. So it is not something that is flattish for us.

And we have that in the employee base and through our work, skills and technology leading positions in several core producing areas such as heavy oil, such as East Coast, which are great enablers to our business strategies going forward. The third strength I want to mention, and again, this is really an amplification of culture, is our cost consciousness.

I was talking to one of my industry colleagues who has been in this company for a few years, but he has been around and he's been in a number of companies. And when we are doing its fourth analysis of the company, this guy has more perspective than virtually anybody I have met in the oil industry. Hey, where would you rate Husky on cost consciousness, he said immediately, best-in-class.

So by cost consciousness I don't mean cost cutting. I mean basic innate efforts of prudent, disciplined allocation of capital, of budgetary control, of execution, which is deeply engraved in our culture.

The final differentiator I will mentioned again, because this heads up to the point I'm leading up to is our strong balance sheet. And as you know, John and the management team before we have worked diligently to create and maintain a strong balance sheet. And on both relative and I would say absolute basis, we have low debt levels, which would be the key Husky strength. However, a strong balance sheet is only an advantage if we use it wisely to create shareholder value, and that's the topic I will touch on in a minute.

Coming now to the issue of the day; so as I said, the company is extremely well positioned for the long-term. But we do have, and let's call a spade a spade, some short-term issues around production. In 2008, as the economic markets went into a bit of turmoil, we took a very prudent approach in managing the financial position, as you recollect, and we spoke about it at the time. And we have a number of long-term projects which we didn't want to jeopardize, because that would jeopardize the position of Husky in the long-term.

So therefore, we did trade-off some short-term production opportunities, knowing at that point that there would be a price to be paid in the 18 to 24 month period, and we're getting some of that now. So while we have emerged from that recession in a very strong financial position, we are seeing that impact on the current production levels.

And therefore, I would say my single action point at this point in time is while maintaining the integrity of our long-term projects, we are going to rebalance our portfolio, we will direct the measure of our capital to those low-cost, high-return projects which give us a reasonably short-term returns. And by short-term in the oil industry context, this is not like telecom where I just come from. But we are really talking 18 to 24 months from now we'll start to see the impacts of those.

And the goal would be to build a production bridge while maintaining the integrity of our long-term objectives. So how are we going to do this? Well, some of the investment like capital investment will shift toward that bread-and-butter in our core investment kind of areas. And over the next few quarters, we'll be identifying opportunities and taking action to increase that short-term organic growth. And as I just mentioned, we should see the response in 12 to 18 months.

And we will also, more importantly, that's for the organic part but in an organic sense, we will be completely open to acquisitions of properties, which give us currently flowing barrels in an, I'd stress, completely intrinsic to our culture, family conscious way. And to put some further perspective on these acquisitions, we are looking for opportunities with strategic contiguity with what we've got, i.e., acquisitions that are either near or adjacent to our existing operations where we can realize synergies, or acquisitions where you can apply our technical skills to realize value.

You won't see us going off to Afghanistan or offshore India, or other [indiscernible] parts that are there. No, we are going to stick to the knitting because that is what Husky's good at, because this company has a lot of experience in knitting certain things, and it's kind of something that comes historically naturally to me.

So going forward, how will we add more shareholder value? So you've had discussions on this before but it's worth a bit reiteration in the context of a change of guard. The first fill of growth of course is oil sands. And as I said earlier, this company has an incredible oil sands resource base, and those are going to play an increasingly prominent role in our production profile. And as you know, it is an exciting story to tell, because our portfolio includes projects that contain over order of magnitude 50 billion barrels of discovered petroleum initially in place, of which 4 billion are recoverable using today's known here and now technology. And these projects alone when commercialized could double Husky's production in time.

The first major league project of course is Sunrise, which is a top tier resource, and they are making good progress on its development. We should receive the tenders. I think today is the 28th, so the closure date is within this month. And we are on track to sanction the project by year-end. We are confident that these vital resources, and I believe they are vital for the energy needs of today's world, will be developed within the context of our commitment to safety and our focus on responsible environmental stewardship, because that again is something that is core to the heart of Husky's value system.

The second pillar of growth is the leading position we've built already on East Coast. And while White Rose has been very profitable, it will continue production from the main field. And I just want to put some perspective on it. I guess if you take the total amount of money we put out into White Rose, we recovered what 3.5 times, Alister, I'd say over a seven-year timeframe, 3.5 times that. So that's some perspective on where White Rose has been, but this is a decline.

So we believe we can increase resource recovery from White Rose above the 30 to 35% level under the current development scheme. We are assessing development opportunities of other near-field tie-backs and production from other reservoir zones, such as the Hibernia formation. We have been advancing our study of development alternatives for large gas resource in the area, which currently of course as you know we are not harvesting.

It's been pumped back in. And as many of you know, there's I think in excess of 2 Tcf of gas in the White Rose field alone. And our East Coast portfolio basically includes 23 significant discoveries in the offshore Newfoundland and Labrador area. So it's a land position second to none.

The third pillar of growth is the exciting story that competes to emerge from Southeast Asia. The core Wenchang oil field in the Pearl River Mouth Basin keeps contributing to high netback production, and development work is continuing on the significant Liwan gas discovery. Now, some of you are aware, we spoke months before about the possibility of a spin-out.

So we are evaluating in detail whether a spin-out and a separate listing of our Asian assets represents the best way to maximize our value for the shareholders, all our shareholders, minority and significant shareholders. But in any such transaction, it goes without saying that meticulous attention must be paid to legal, to regulatory, to tax considerations in Canada, and also in the countries where these assets are operated.

So, that work is currently underway and we would be in a position to make a definitive recommendation before year-end. And I don't want to preempt any conclusions. As I said, that is something we are simply studying at this point in time.

Coming now to the quarter, I'm going to hand over to my colleagues Rob, COO, whom many of you have met in previous calls, and Alistair, our CFO. But basically, I just want to repeat a couple of highlight points that a key goal at this point for the company is to deliver near-tem production growth. Through that intent, we talked about acquisitions.

So we have actually mentioned this in our press release that we just recently signed a letter of intent to purchase some natural gas producing properties, which are currently flowing barrels, which meets the criteria of synergies with existing processing infrastructure. So we believe it is value accretive and is spot on strategy. And we should be in a position to give you greater details of this once the SPLs are final with , I find them regulatory proven results obtained.

On that note, let me hand you over to Alistair for more a detailed look at the results. Alistair?

Alister Cowan    

Thanks, Asim. I'm going to take the next few minutes and just walk us through the financial results of the second quarter and I do see these clearly reflect the impact of the current economic condition are different the different part of our business. From an overall perspective, we generated cash-flow from operations in the second quarter of $806 million which is comparable to the same period last year and net earning of $266 million where they overload in last year as you seen. There were four key factors which influenced our financial performance and I will give you some more color on victories in a moment.

They were lower product margins in the downstream segment, lower production, higher realize commodity pricing and increase separation expense in South East Asia. If you look at the U.S. downstream business, the result reflect the continued weak economic demand which high tech market transferred similar year-over-year. When you look at our realized refining margin, they are impacted by the product differences from arising as a result of our refinery configuration virtually do in Lima. And the transportation cost, could bring inside helps to those refineries in Ohio .

We have different accounting for all these for the purchase of crude oil compared to the pricing. And we have to translation impact of the stronger Canadian dollar. Looking at our downstream business, you need to understand that our realized refining margins were always be different from the coded bench marks. And I will give you a couple of reasons why. Benchmark prospect such as Chicago 321, a calculated bases of standard ratio of gasoline and diluents products. But our products slate to just to Lima and Ohio refineries contain roughly 10 to 15% of other product which are typically sold but to our market prices compared to gasoline and diluents.

We realize the refining margin is also sighted but we are counting a different kind of treatment for the first to crude oil. We have a time log which between the time we process and deliver the crude oils to the refinery. And we for our purchases on a first in first out basis and that in the column which generally accepted accounting principal in Canada. Benchmark price you may see in the market is however calculated on the last in, first out basis which thankfully reflects market pricing. Overall, the net result is at the financial performance of our downstream business will typically be better in time to rising crude oil.

The absolute price of crude oil is not as important as the trend of pricing, the trend of such performance. If you look at the second quarter of 2010, crude oil prices were relatively stable here for the impact to fight for LIBOR accounting was minimal. However, in the same period of 2009, crude oil rose significantly. There were up 44% from the end of March '09 to the end of June '09. As a result, I realized defining margin in 2009 was slightly that increase due to that six week time lag during the purchase and delivery of crude oil to the refinery.

The strengthening of the Canadian dollar year-over-year which is up 13% against U.S. dollar compared to 2009 also reduced the result of the quarter of our downstream business when we translated them back into Canadian dollars. As the team highlight, the overall production was down in the quarter and is a clear focus of near term.

Our record production in the second quarter was low compared to last year due to peak production we're implying from the White Rose field and lower AVR production resulting from a lower capital expenditures in 2009.

On the east coast, our production was stabilized with North Amethyst distress satellite which commenced production at the end of May this year. Our average natural gas production was so much reliable than the second quarter of 2009. It was impacted by some scheduled plant turn around utilities in the quarter. Bench mark commodity prices denominated in the U.S dollar went up significantly from the same quarter in 2009 as you know for the strengthening of the Canadian dollar did reduce the impact of these higher prices when we try getting them back. That resulted in a 15% increase in trading dollar pricings for commodity prices that is fairly 1% increase in U.S dollar pricing. So, you can see the significant impact there are on our result.

Turning now to South-West Asia, we did have higher depreciation expense during the 2010 on the quarter. And that was a result of a increased activity we continue to execute on our exploration plan as we build on material oil and gas business and the reason which is our strategic objective. Operationally, we announced the successful testing of the first appraisal well whether we drew up 291 discovery above 2926 with encouraging results. And we also made another natural gas discovery at the Liwan, that's a 441 exploration well and that's our fourth discovery envelope 29/26.

As the theme said, we are firmly committed to the development of the oil and gas discovery and we do expect to sanction our project later this year. Turning now to the balance sheet, we remained at a strong financial position. Our total debt at June 30th, net of cash and cash equivalence was $3.9 billion. Our debt to cash flow and debt to capital employment ratios have the same date where 1.4 times and 21.6% despite the work of a trailing 12-month basis.

Both of these ratios remain well and charger we did and they do provide Husky with a flexibility to take advantage of value adding opportunities that may arise. As we announced here this morning, Husky's Board of Directors has approved a quarterly dividend of $0.30 per share. I'm now going to return you to Rob and he's going to give you some more detail on upstream operations.

Rob Peabody

Okay, thanks Alister. I want to start up with some remarks on safety and operational integrality as I always do when I'm talking to my operation steam. A good measure of occupation safety is our total recordable incident rate. Performance for the first half of the year was 1.15 and just to put that in context since we often into lease metrics as apposed to what they actually mean underline. That mean that in 200,000 man hours, we'd expect a medical aid or loss time injury to one of our workers.

I thought about it in other way. It means that if an average worker worked a 100 years, they would expect to have one medical aid or one lost time injury. And this is, in this case, in the last quarter that would be 1.15 in our case. And that's comparable to our performances in 2009. Husky's 2010 target is to be less that one and we're continuing into drive towards that goal. We've also been making good progress in implementing the Husky operation integrating management system known as HOIMS where we first adopted in 2007.

HOINS is the compressive system that integrate elements of process safety, occupational safety and environmental steward ship, all under one umbrella. This is the way forward that will provide for the safety of our employees, our contractors, our neighbors and our assets. I now want to talk about production. We completed a comprehensive review of operational activities in the first half of the year and an assessment of activities on the second half of the year. As a result, we're adjusting our 2010 production guidance to 285 to 295,000 barrels of oil equivalent per day and we expect to exit the year at around 300,000 barrels per day.

The main reason for this adjustment was the delay in the North Amethyst start up and that had an impact of about 10,000 barrels per day versus our original forecast and that was combining with modestly lower production from our heavy oil operations compared to our original forecast. Compared to 2009 as Alister previously mentioned, production for the quarter was impacted by lower rates from the main White-Rose field which is parts of its natural decline and heavy oil production as a results of the reduced capital expenditure as I previously mention. Planned, maintenance turn around looking forward for the remainder of the year, planned maintenance turn around in the remainder of the year that will impact upstream production include a twenty four day shut down, planned shut down of Terra Nova which is currently in progress at a sixteen day shut down at White Rose which is planned for October.

North Amethyst production which is currently around 20,000 barrels per day will ramp up as additional wells are drilled and bought on-stream. Production should reach a gross peak rate of around 37,000 barrels per day in 2011, 25,000 barrels a day of that is net to Husky. Turning job stream growth projects as Asim said earlier, a key goal was to deliver near term production growth. Now, I'd like to update you on some of the steps we are taking to accelerate production growth while continuing to build a foundation for the long term.

First, starting in Western Canada, where the future for Husky in Western Canada is really going to be about developing number of gas resource plays, a number of oil resource plays and applying new technology, new enhanced oil recovery technology to our extensive portfolio of matured fields.

So and just going into some of the specifics of that, at Ansell, two wells were drilled in the quarter to test multi-target zones. In the second half of the year, we are planning to drill an additional 50 gas wells at Ansell, where the economics are supported by high liquid yields that come along with the gas production.

Husky continues to build its position in a number of gas resource plays and now holds more than 952,000 net acres around established assets in the Alberta foothills and northeast British Columbia. In the second quarter, Husky acquired additional land in Bivouac, located in northeast British Columbia, as well as land in the Ansell area.

Oil resource play evaluation and testing activity continued in the quarter. Six Viking wells were placed on production in the Dodsland/Elrose area in southwest Saskatchewan, to bring the total number of producing wells in the play to 11. An additional 15 wells are planned for Redwater in the remainder of the year. Evaluation wells are currently in progress to assess the Cardium at Lanaway, the Lower Shaunavon in southwest Saskatchewan and the Bakken in southeast Saskatchewan.

Moving over to the Heavy Oil segment, we are increasing our drilling activity. In 2010, we plan to drill 291 CHOPS wells and 84 horizontal wells compared to around 175 CHOPS and 27 horizontals respectively in 2009. So you will see that's a significant increase in activity in this critical area. The horizontal wells are interesting because this is a new technique we're using to access our thinner reservoirs in the Lloydminster area, which opens up the potential for an increased recovery.

At McMullen, an additional 32 wells are planned for the second half of the year to further exploit the heavy oil production potential of this lease. And looking at the McMullen, we see potential in thermal development of a lease and we're doing some work on scoping that development now, but we've also found good opportunity in just cold production on the lease, cold production of heavy oil, which of course is something we're very experienced at based on our Lloydminster operations.

We are currently also constructing an 8,000 barrels per day thermal project a South Pike’s Peak, which follows on our very successful and Pikes Peak projects that are currently on production. The project is approximately 30% completed at the end of the second quarter and we're expecting to start that project up in 2012 and this is really the first stage of a successful number these additional thermal project aimed at doubling our current heavy oil thermal production from its current level of around 20,000 barrels per day.

Turning to the East Coast, we've had a very busy quarter at the North Amethyst Field and well as I previously mentioned, we brought the field on about 3 month later than our regional forecast due to availability of drilling rigs over the winter. We actually did get this project on-stream thirty months after sanction then and less than four years after discovery, which is a tremendous achievement by the team out there and I personally am very proud of what they've done.

In the quarter, Husky and its partners also extended the agreement for the Henry Goodrich offshore drilling rig and this will enable Husky to continue the development of the White rose and adjacent oil fields through January 2013 and of course, one of those is the West White Rose pilot which we're looking to get approval from very shortly. We're expecting that from the regulator, so that we could move ahead there.

Now finally moving to oil sands, Husky continues to progress the development of the Sunrise energy project as Asim mentioned earlier and we are just about ready, we expect the tenders in by the end of this month and we expect to get contractor's selection done in over the third quarter and sanction the project before the end of the year.

I also want to update you on some work we have underway at Tucker. As many of you know Tucker's issues are largely related to the sub-surface and we've conducted a detail review of Tucker which started at the beginning of 2009 and the objectives of that study and what we managed to achieve with it was first to optimize the project's forward development.

Second, we wanted to make sure we captured all the learnings from Tucker and then because of those learnings have a applicability both clearly to Sunrise, we wanted to make sure any learnings that were applicable, we're applied to the design of Sunrise. But also to our other oil sands leases because Husky has an extensive portfolio of other leases and so, that's what we did and also critically, we wanted to confirm that our projections for the Sunrise project remain robust going forward and we're confident of that.

So we believe now that the forward plan for Tucker can achieve economics comparable to the original approval case. However, this is only possible because higher oil prices today will offset projected higher steam oil ratios and lower production because of the reservoir quality we see at Tucker.

In the quarter of Tucker, we drilled three new well pairs and tied in and put on, well we actually in the quarter at Tucker, three new well pairs were tied in and put on steam and the additional four well fares were drilled. These wells incorporate a number of design changes and their performance will prove if our revised development plan is on track and we should have good confirmation of that by around the middle of 2011.

Terrence will now talk about the midstream and downstream activities which of course are strongly linked to our heavy oil and oil sand business and growth plans.

Terrance Kutryk

Thanks Rob. As Rob said, besides Husky, does have a strong position in heavy oil and while there is specific market for that product, the reason we are in the midstream business is to maximize its value and capture synergies including transport as upgrade.

To spend to the Upgrader through for the second quarter averaged 73,500 barrels per day with operating cost $6.60 per barrel. The Upgrader is scheduled for its planned five year turn around to begin in September, for approximately 53 days.

Now we'd like to make a few comments on our downstream activities. This sector captures the full value from our heavy oil enrichment production and minimizes incoming cash flow of volatility.

Despite the challenge, you'll find the economic conditions are up in the quarter for US and Canadian refining at 2,53,000 barrels per day compared with 230,000 barrels per day in 2009 and this year's performance reflects the improved operations, that line must, following the very successful turn around in 2009.

Alline is going to complete remaining portion of its 5 year turn around in November of this year. At that time, it's going to operate at reduced rates of approximately 100,000 barrels per day.

To refresh your memory, in our retail area, our retail network extents from British Columbia to Pacific Back Border. Husky continues to progress with our integration of newly acquired 98 retail stations in Southern Ontario and then will continue to provide us with some future optionality for our Ohio refinery production.

Re-branding is underway. We've completely completed 37 sites and the remaining locations will be brought into the network in the last six month of 2010.

I'll now turn the call back to Patrick

Patrick Aherene

Thanks Terrance, that's it for the opening part of the call and now we'd be pleased to have the questions that you might have. So I'm turning it back to Brock for questions from our participants starting with the analysts and then I will take any from media.

Question-and-Answer Session

Operator

(Operator's Instructions) Our first question comes from Andrew Potter of CIBC World Markets. Please go ahead.

Andrew Potter - CIBC World Markets

Yeah, hi guys. Two quick questions, first could you give us a little bit more detail on the land positions in the Bakken/Shaunavon/Viking and then Cardium, or I guess alternatively maybe just talk about kind of the resource potential you see there? And second, maybe if you can jus give a little bit more color on Liwan in terms of kind of what you're currently thinking in terms of cost estimates and gas marketing arrangements and I guess if you can't comment on that when will we start to see that definition? Thanks.

Asim Ghosh

Andrew, I'll take that one. On the oil resource plays as I say, we have positions in the Pembina Cardium in the Bakken and in a number of different areas. We also have positions in the Viking, which is an are we have some fairly. For historic reason as well some pretty good land positions. Husky has a large land position in Western Canada in that course. Occasionally, you got some good overlap for some new place regardless and so we've actually built ourselves a position where in aggregate we think we have some thing in order of 500, over 500, let's go over 500,000 acres of perspective land in oil resource plays and we're still in the process, you can understand what the wells were putting into these resource plays to actually understand the potential of each one of those plays and I don't want to go our only internal assessments at this stage where we think that potential is. But we do think its substantial and certainly as we go forward, where we see it as a key component of our growth plan in Western Canada and I think that the only other thing I'd say is that I think it is the result of new technology we've seen being introduced into the base, both in terms of gas resource plays and oil resource plays and the/or, we now feel that the Western Canada basin, excluding heavy oil and oil sands has the potential for growth over the next five years.

Alister, you may want to take the second one I guess?

Alister Cowan

Yes, thanks Asim. We won from the gulf of offering perspective, the gas will go into the Hong Kong, in the Guangdong area in China and we're certainly in the process of discussions with some key long term buyers in that area and as I would expect which you will able to something to report on that by the end of this year. On the callers side clearly the engineering receipt is done, we're looking at estimates and there is some various contract but we would expect we will able to give you more color on that when we stand in that project later in the scene and we get ODP approval which we'd expect to finalize in the next couple of months.

Andrew Potter - CIBC World Markets

Sure and maybe another way of approaching that question on Liwan that is based on kind of the early indications you've seen on the cost side, maybe what oil or what oil linked gas price would you need to see to make this a viable project? I am just trying to get a sense in terms of how robust the economics are on this project?

Rob Peabody

What I would want to point to you Andrew is if you look at what our LNG prices that are clinical into, that are currently going into that region in Asia and you should expect that we'll be probably something similar to that level without the use very robust project.

Operator

The next question comes from Mark Polak of Scotia capital. Please go ahead.

Mark Polak - Scotia Capital

Just curious on the natural gas acquisition if you could give us what the effective date of that acquisition would be and if those, the 10,000 Boe a day is included in your current guidance.

Asim Ghosh

Well 10,000 BOE is a run rate. Well, the key that is for us that declares as which you we don't control the timings of but we would expect perhaps some of your time the ROI. So somewhere in the overall quarter, to get the all tariff of the 3 to 4 months to get all the clearances.

Mark Polak - Scotia Capital

Okay and then just wondering if you could update us on the sort of the ramp up progress on North Amethyst and when you see that getting up to design rates.

Asim Ghosh

Rob, you know how to speak to that one?

Rob Peabody

Yes, okay. Thanks Asim. North Amethyst, we're currently producing in the range of about 20,000 barrels a day with first the production well. We're looking to bring the second production well on stream in late August, if all the completion operation go to plan, then we have to drill a second water injectors. You can think of these of well pairs into the, into the reservoir. And so, when we bring the bring the first production well on it, it will be at relatively low rates until that water injector come on screen.

And that water injector is that coming on screen is liked to the turnaround we're doing in October at the facility. And then, we'll bring on further wells or will be drilling and completing further injectors and producers as we move into next year. So I hope that did you live good feel for it?

Operator

The next comes from Greg Pardy of RBC Capital Markets. Please go ahead

Greg Pardy - RBC Capital Markets

Just a couple of questions, morning, Asim. Maybe just to go back to Liwan gas, what are the steps that you still need to take in order to sanction the project and then to move to commerciality?

Asim Ghosh

Alister, you take that.

Alister Cowan

Yeah, I'll do that Asim. Thanks. Greg, we need to now a finalize negotiation on the gas contract whether the major off takers as well in hand. We need to just finalize the commercial agreements we're seeing in [Alcapana] on the shallow water facilities and the on shore facilities, the key water facilities that I'll clearly lead out in the production sharing contract. Once we finalize that, we'll file for OGP approval and we'd expect less in a few months then with new sanction the project.

Greg Pardy - RBC Capital Markets

Thanks very much and then maybe just a question for Rob, I mean, you look at where heavy oil differentials have been over the last couple of years and we see the Lloyd numbers well under 100,000 barrels a day now. Within the 300,000 barrels a day exit rate you were talking about how much of that would be Lloyd? Do you think your back up above 100,000 by the end of this year and what kind of running room do you see then in driving the business? I know you've referred to doubling the thermal, which is I think 20,000 now but just wanted to get a broader sense of how big that business will get.

Rob Peabody

Yeah. Okay, thanks, I mean first and foremost, I think yes. If you think about the 300,000 barrels a day or total heavy oil production for Husky is around a 100,000 barrels a day. Some of that comes from outside of the Lloyd complex, a small amount of it. Most of it from within the Lloyd complex. If you know, I think, there's a number of new technologies coming a long to increase recoveries in the heavy oil area. Currently again, just to take you back to the basics, Lloydminster to has about a little over Husky's land in Lloyd minister, a little over 10 billion barrels of oil in place and currently, the CHOPS technology that we've traditionally used on these which gives you about 700 million barrels for recoverable reserves of which around 7% of the total.

Looking forward, we are looking at the number of new technology. Thermal is clearly a technology we used and have proven very well but you can only use it in portions of Lloydminster area. You can think of this as a large deposit of heavy oils but it had channels running though which creates thicker section of the reservoir and that's where we can use thermal techniques and that's where we expect to be able to increase production from the current sort of 20,000 barrels a day up towards something approaching double that number going forward.

But there are other technologies like our horizontal wells allowing to have access inner reservoir and we actually have an number of others including looking further out cold and hands production which we talked about a few times before where we have a number of pilots that have shown very good technical result and we continue to work them to turn that into ultimately commercial results going forward with further development.

So, all those things are giving us a lot of confidence about the very long term future of Lloydminster results and one of the things I like to say I mean there is a lot of interest and excitement about the various resource plays out there at the moment but I like to refer to Lloydminster to as the original player resource play. Its been producing very large volumes for a very long time. And we believe that it has long legs going forward. Now how much growth we'll see coming out of that forward. Our immediate target with all this technology ultimately is to continue to deliver that 100,000 barrels a day over the extended period of time.

We do see the potential for increase in that but that depends on the number of these technologies working out and how rapidly we apply them clearly because we always fighting at the clients but the idea is and again, in my mind, I link quite closely the heavy oil business in the oil business, there's a lot of commonality there. And if we can hold Lloydminster that 100,000 barrels a day, we may be able to do better than that but if we can do that for a long period of times and then, grow our oil sands portfolio as Asim mentioned earlier in his talk where we take back alone excluding heavy oil, the potential had doubled as the current production overtime, we think we got a great business there.

Greg Pardy - RBC Capital Markets

Okay now thanks, Rob. Just a couple of last points then, around the CapEx you're keeping base CapEx unchanged at CAD3.1 billion so are you just more or less just changing the lineup here for the balance of the year? and then to go back maybe to Mark's question, it looks as though like hitting your gas volumes for the year you'd need to more or less hold the volumes flat to a slight incline during the balance of the year, so is the CAD60 million a day acquisition in the numbers, in the guidance numbers?

Rob Peabody

Okay, I'll do the capital. On the capital idea, we've maintained our capitalization at this point. We currently going through an extensive evaluation project on process on various options to accelerate the capital. Once we been through that in the next few weeks, we will don't have a clear picture of fixing that. We was going to shift to write in our portfolio. Some of it will be project you won't do, some of it will be a additional projects, I think in a couple of months, we'll be able to give a much clear picture of how much excess brand use will be in our capital site.

Asim Ghosh

And on the GAAP similar as well. First on guidance maybe coming back, I think we have the question you typed a little bit about is that extra production volume in the guidance and on a run rate basis since we can only sort of go production after that acquisition closes, we're talking a little about of some where between, depending on when you get closure, some time between 2,000 and 3,000 barrels a day or something that would act in terms of an average addition to this year. So I just say we did in a range of guidance we quoted, I think it's not material and its within that range at some point.

In terms of gas production, we certainly expect kind of whole gas flag but well, I think if you look over the year, we'll finish of the little bit of activate 500 million in very close to our originally guidance for the year. I think gas production has been holding up pretty well relative to our original forecast and the work we're doing in the second half of this year should actually if anything slightly increase gas production over the second half of the year and of course as we've previously mentioned too, this quarter was heavily impacted as it is most year buys, turnarounds of our gas plants and pipelines. Some of the pipelines that are servicing our gas plants, the second quarter being the biggest quarter for turnarounds every year.

Operator

(Operator Instructions) The queue is now opened to the media as well. The next question comes from the Mike Dunn of First Energy Capital. Please go ahead.

Mike Dunn - First Energy Capital

Probably a question for Terrance, I'm just wondering if you guys have the numbers on what the FX rates impact was on your U.S. downstream results for the quarter.

Alister Cowan

Well I'll take that one. Well its hard to because the numbers of the underlying business is different. The average Canadian dollar strengthened by 13% year over year in the quarter. As you look at the results we have, its approximately $10 million to $15 million.

Mike Dunn - First Energy Capital

Ok, yes I guess I should have been more clear. Alister, just with respect to your inventory costs in the cycle, not cycle but with respect to your inventory?

Alister Cowan

Well, as I said in my comments. We are a FIFO company. We don't work on a LIFO basis. We do have kind of make some as it is takes to usually the estimates on this. You could never order any number on those but the price in the quarter was relatively flat. Therefore the impact of LIFO in this quarter is quite small. To look at last year, you celebrate these goals from $48 to $65- $69 by the end of June. So maybe it was impacting last years numbers and its relatively straight forward to going to calculate that.

Asim Ghosh

So you're basically trying to bring the differential and you assume an inventory of around 12 million barrels and you do the math but we are not allowed to give you a closer look at the statement because of system captures actual realized grab. We do an estimate on inventory impact but you can do the math on it. I have given you all the components to do the estimate the way we do it.

Mike Dunn - First Energy Capital

Okay yes I guess I should have been more clear, Alister. Just with respect to your inventory costs in the FIFO or not FIFO but with respect to your inventory pricing.

Asim Ghosh

I think all I might get out of this deal is subject to confidentiality and therefore either it takes two in a marriage and husband can't speak without wife's consent but basically what I do want to make the point is it meets our stated strategic criteria. I played in terms of having synergy with our core competences and our core physical capabilities. Even if you swear at me, I think that's all I can say at this point in time.

Operator

The next question comes from Andrew Fairbanks from Bank of America, please go ahead

Andrew Fairbanks - Bank of America

Thanks, good morning guys. Just curious what you've seen in terms of consistency in maybe some of the IP well rates in your Viking tight oil plays.

Asim Ghosh

I'm sorry, can you repeat the, did you say consistency or

Andrew Fairbanks - Bank of America

Yes I just was curious if you had any observations on the Viking [dogland] wells you've drilled, how consistent the results have been as you've begun to roll out that program and then if you had any additional data around those wells that would be helpful also.

Asim Ghosh

Well. I don't really want to go into that right now because I don't know who's on the line. There might someone listening from our competitors or something. But we are seeing very encouraging results in the Viking and we believe we have an economic business that we can develop there.

Andrew Fairbanks - Bank of America

Very good and any other comments on any of your ASP pilot flood activity? Do you see that as perspective?

Alister Cowen

Sorry the ASP?

Asim Ghosh

Yes, no we continue, I mean, I would actually I wouldn't call ASP piloting. I mean we're on the fourth project and we get good results from those projects. Husky is the leader in the application of ASP technology, in certainly in North America if not the world and we're seeing good results, good economics and we have a significant number of projects we indent to apply that technology to going forward. This is not meant to be so complex with your guide. So if there's any lacks, we apologize in what Rob said.

Operator

The next question comes from [Rob Billion] of Concentrata Financial. Please go ahead. Mr. Billion, your line is open?

Unidentified Analyst

Hi. My questions pertain regards to the dividend. When you guys cut the dividend from CAD0.50 to CAD0.30 they said it was goal of the Company to bring you back to CAD0.50. Can you just elaborate a bit on that with the goal now with it to increase production and everything? Thank you.

Asim Ghosh

At this point in time, the dividend is what it is and without no immediate plans to increase or decrease the dividend because as you've indicated I mean at the continuing strategies that we are in an investment mode. And that's where it will be. So the dividend policy of course is reviewed from time to time and just under the view and state where we are.

Operator

The next question comes from George Toriolia of UBS Securities. Please go ahead.

George Toriolia - UBS Securities

Thanks. This question is for Asim. Just in terms of the you talked about your potential M&A transactions, the way you're looking at M&A transactions, just wondering if you can provide a bit more color in terms of scale or the things you look for, production growth. You've talked about production growth in the near term being a key focus. Would that be the driver for any potential acquisitions here or would it be running room or would it be a combination of both? Would it be long life assets? What would you be looking for exactly?

Asim Ghosh

Well good question and its worth putting some clarity on that. The prime focus of acquisitions at this point would be currently flowing barrels. Within the context of strategic continuity and I'll define strategic continuity which is basically stopped us contiguous to where we are geographically or stop us contiguous within our four skills. If as a corollary, we get additional long life assets, that is gravy, but this company has got so many long life access already in this portfolio, that is not the focus for the additional as if we are putting it now.

George Toriolia - UBS Securities

Okay.

Asim Ghosh

Secondly, we are agnostic to oil or gas. It is really a matter of that relation and thirdly, we would like to stay within conventional technologies. Again if there are some additional possibilities coming with the asset in terms of application of unconventional for the longer life, that is crazy but that is not the focus.

George Toriolia - UBS Securities

Okay thanks a lot. What about scale? Are you able to talk about that at all in terms of what the reality to?

Asim Ghosh

When you announced that you are in the acquisition mode, there's already a danger of prices going up and if I start to mention scales, effective it may grow further. So I think at this point in time, I would like to keep our cards closer to our chest but clearly, we are interested in making a material impact on our production in the near term and in the near term I will be defining next so much.

Operator

There are no further questions at this time. I'd now like the conference over to Asim Ghosh for any closing comments.

Asim Ghosh

Bob, thank you. I would like thank you for your questions, thank you for joining us on this my first call. I just will end on a sort of a very simple recap if I may of what I told you earlier. Basically, I feel really good about the very solid resource for this base that this company has. We do have a unique portfolio, we do have a strong balance sheet, our Western Canada has heavy oil asset base, do provide a fairly strong foundation for us to work forward, moving in terms of production, more probably sort of cash flow at short terms, continuous production builds from there, combined with the acquisitions. Mid to long term, we are extremely well positioned on oil sands and we have already taken active steps to commercialize this opportunity.

We continue to have transformational opportunities on the East Coast and they continued to build a material oil and gas business in South East Asia. Again, I do want to say this because actually we've made authentic of saying this in all of our internal operational meetings in the company but it bears reputation in the context of our more public conference call is that whatever we do, will be governed within the four corners of safe work practices. So thank you for your questions, thank you for joining us, much appreciate. Goodbye.

Operator

Ladies and gentlemen, the conference is now concluded. You may disconnect your telephones, thank you for joining and have a pleasant day. Goodbye.

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Source: Husky Energy Inc Q2 2010 Earnings Call Transcript
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