Husky Energy's (HUSKF) CEO Asim Ghosh on Q1 2016 Results - Earnings Call Transcript

| About: Husky Energy (HUSKF)

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Husky Energy Inc. (OTCPK:HUSKF)

Q1 2016 Results Earnings Conference Call

April 26, 2016, 10:00 AM ET

Executives

Dan Cuthbertson - Director, Communications and Investor Relations

Asim Ghosh - President and Chief Executive Officer

Jon McKenzie - Chief Financial Officer

Rob Peabody - Chief Operations Officer

Bob Baird - Senior Vice President, Downstream

Analysts

Neil Mehta - Goldman Sachs

Benny Wong - Morgan Stanley

Paul Chang - Barclays Capital

Fernando Valle - Citigroup

Nima Billou - Veritas Investment Research

Jeff Lewis - The Globe and Mail

Nia Williams - Reuters

Rebecca Penty - Bloomberg News

Chester Dawson - Wall Street Journal

Operator

Thank you for standing by. This is the Corus Call conference operator. Welcome to the Husky Energy First Quarter 2016 Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Dan Cuthbertson of Investor Relations. Please go ahead, Mr. Cuthbertson.

Dan Cuthbertson

Good morning, and thanks for joining us. With me are CEO, Asim Ghosh; COO, Rob Peabody; CFO, Jon McKenzie; and Senior Vice President, Bob Baird from Downstream. We will review our first quarter results and then take your questions. Following the call, we will be holding our annual meeting of shareholders in Calgary starting at 10:30 AM Mountain Standard Time. I will direct you to our website at huskyenergy.com for more information and a webcast of the meeting.

Today's call will include forward-looking information. The various risk factors and assumptions are outlined in yesterday's news release, and are included in our annual filings on SEDAR, EDGAR and on our website. All figures are in Canadian dollars and before royalties unless otherwise stated.

Now I’ll give the call over to Asim.

Asim Ghosh

Thanks, guys. We are continuing to deliver against our strategy while positioning Husky as one of the most resilient companies in the industry. You've often heard me talk about the decisions we took six years ago when we established that strategy which included maintaining a diversified portfolio, developing the Lloyd and Sunrise Value Chains and transforming it into a low sustaining capital business.

The output of these decisions has created a pathway to higher quality production to improving margins, reducing cash flow variability and mitigating exposure to commodity price volatility. It is also bringing down our earnings breakeven and sustaining and maintenance costs.

Our business principles include transitioning into a low sustaining capital business and further strengthening the balance sheet. I will speak to the latter point first. During these volatile times, a strong balance sheet is paramount as prices could stay low for an extended period.

Coupled with this unprecedented commodity rout is increased volatility in daily oil trading, the likes of which this industry has not experienced in more than a decade. In response we are set out to reduce our debt levels to about two times debt to cash flow at a current [indiscernible] planning assumptions and indentified several potential levers to get us there.

In very short order we've made significant progress against this objective with the announced sale of proportion of our Lloydminster Midstream assets portfolio which had a high bar for this transaction, it was important to maintain operatorship and an equity interest in order to preserve the tight integration between our heavy oil production and our refining assets.

We have an agreement with aligned partners who share the view that this midstream business has considerable growth potential growth potentials from our expanding Lloyd thermal production and by adding to our existing third-party business. This will support takeaway capacity for an additional eight Lloyd thermal projects. This transition is the first of several value creation initiatives underway and we expect to make further announcements in due course.

With regard to our ongoing transition into our low sustaining capital business, we've continued to advance a rich portfolio of projects resilient to a low oil price environment. In fact this year will be a pivotal year regarding this objective as about 40% of our overall production will come from these types of projects in 2016 compared to just 8% in 2010. This has already delivered two significant outputs lowering our earnings breakeven and continuing to reduce our sustaining and maintenance costs allowing us to do more with less.

So in summary, I mean the nub of this is the objective is not simply to grow the number of balance, but is to improve profitability of every barrel. Case in point, the Lloyd portfolio has undergone a material transformation over the past six years.

If you remember this was a business that was on a treadmill. Today, we have an unmatched plan for the same successful position which will allow us to keep growing the thermal part of the business. Using this thermal technology we've been able to turn our heavy oil business to one that was essentially in decline into one of our strongest growth engines.

These thermal developments represent low risk, short cycle investments with much higher recovery rates than conventional technologies and we obtain substantial expertise in how to develop these projects.

Still in the low sustaining capital bucket a quick common on Tucker and Sunrise. We are making good progress at the Tucker thermal project where total production averaged more than 16,000 barrels a day in the first quarter. And with the recent tapping of the Colony reservoir we are well on the way to achieving about 20,000 barrels a day towards the end of 2016.

Meanwhile production at Sunrise continues to ramp up. As we further develop our thermal businesses at Lloyd, Tucker and Sunrise we will continue to lower costs, grow higher quality production and look to maximize the margins we capture along with every step of our integrated value chains.

To sum up, six years on our strategies stood the test of time. We are improving Husky's resiliency in this low oil price environment by unlocking value and strengthening the balance sheet and we have plenty of running room with a rich and diverse portfolio of high quality opportunities in which to invest.

I look forward to seeing all of you at our Investor Day on June 1, when we will be doing a deeper dive into this high quality portfolio.

Now Jon, you want to take over the Q1 financials?

Jon McKenzie

Thanks Asim. We continue to make progress against our two main financial objectives. Asim spoke to strengthening our balance sheet and I will talk on how we are improving our financial flexibility, which gives us more than adequate room to execute our business plan.

Last month we renewed $2 billion credit facility with our existing lenders, extending the maturity date to 2020. Overall we have 4.6 billion of boring capacity of which 2.6 billion remains available. We have no major long-term debt maturities until 2019 and the Midstream deal will bring in about 1.7 billion with the proceeds being directed towards debt. And finally our investment-grade credit rating was recently reaffirmed by all major rating agencies without any downgrades.

Now back to the Midstream transaction for a moment. The sale proceeds reflect about 13 times expected 2016 EBITDA. As a matter of fact this new joint-venture infrastructure company of which Husky is the operator and owns about 35% is a material business. It will be comparable in size to several North American infrastructure peers from a market cap perspective.

We are very fortunate to have partners with two investment-grade global infrastructure companies like CKI and PAH will bring a great deal of commercial acumen to the table and in addition the new entity is funded within our financing and distributable [ph] cash flow to take care of infrastructure costs and takeaway capacities for the next new or next eight new thermal Lloyd projects.

Now looking at our Q1 results, I'll start with CapEx which was $410 million in the quarter. in accordance with the principle of keeping capital expenditures aligned with operating cash flow that we spoke about in our guidance, cash flow for the quarter was $434 million, slightly above CapEx.

As previously mentioned, our spending is weighted to the first half of this year as we complete construction on three thermal projects, turnarounds and other activities. We expect to remain within our guidance range of 2.1 to 2.3 billion for capital spending.

Average Upstream production was 341,000 boe/day reflecting strong results from our Lloyd thermal projects, added productions from Tucker and ongoing ramp-up at Sunrise. Throughputs at the refineries and the Upgrader averaged 314,000 barrels per day which takes into account an eight-week turnaround of our Lima Refinery that is just now wrapping up.

We are continuing to see strong financial results from our asphalt refinery and particularly good margins from our Upgrader where we averaged $20 and 21% per barrel over the quarter compared to $14.95 a year ago.

Overall operating costs continue to come down and our ongoing focus on higher barrels quality cost-saving initiatives. In the first quarter our up costs were $13.31 per barrel compared to $14.87 per barrel in the first quarter of 2015. In terms of cash flow from operations we realize $434 million compared to $838 million in the first quarter of 2015.

Now this takes into account some of the lowest Chicago crack spreads that we've seen in six years and as a result lower realized U.S. refining margins and a FIFO loss of $21 million after-tax. Other items affecting cash flow in this quarter included persistently low commodity prices and the start of the Lima turnaround.

Cash flows was positively impacted by the current income tax recovery of $92 million and insurance proceeds of $123 million before tax related to the Lima Refinery isocracker. And a note on the Lima isocracker, our first quarter results included that $123 million Canadian pretax that I mentioned in insurance proceeds and we recorded a total pretax number of $358 million in Canadian and insurance proceeds to date.

Earnings were a net loss of $458 million. This included $50 million impact related to the mark-to-market of the hedging program and after-tax FIFO loss of $21 million and an income tax expense $75 million related to prior years.

Now looking at pricing, WTI prices averaged $33.45 US per barrel compared to $48.63 US per barrel in the first quarter 2015. Average realized pricing for total Upstream production was $25.02 per BOE compared to $40.84 in Q1 last year. US refining Chicago crack market spreads averaged $9.23 US per barrel compared to 1614 in the first quarter of 2015. The realize US refining margin averaged $3.76 US per barrel compared to $10.04 per barrel in the prior year's quarter.

As previously disclosed natural gas sales from the Liwan gas project were impacted due to a temporary land-based pipeline outage within the customer's pipeline network. A temporary land-based pipeline has been put in place while the permanent pipeline repairs are underway.

Liwan gross gas sales averaged 207 million cubic feet per day in the first quarter and associated liquids were about 9050 boe/day. Current gross sales averaged about 150 million cubic feet a day and 8000 boe/day of associated liquids.

During the first quarter, full payments were made to Husky for the gas liquid sales; however, payments for natural gas sales were received from the customer only for the actual volumes sold rather than for the full take-or-pay contract volumes. We are pursuing full payments in accordance with the take-or-pay contractual arrangements.

Concurrently, CNOOC officials indicated changes in the Guangdong gas market and consideration for a natural gas price reduction. Husky has an enforceable contract and our position is that a change in any terms if any must be value neutral. We are in discussions with CNOOC to find a solution and will take legal if necessary if a satisfactory outcome is not obtained. We will update you on the progress next month at our Annual Investor Day.

Meanwhile we are well onto a busy turnaround season. Of particular note is the planned maintenance at Lima which is just wrapping up and coming back online with a full suite of process units. We are also beginning work on the first stage of the crude oil flexibility project.

Turnaround will commence at the Toledo Refinery in the second quarter and we expect throughput capacity to be reduced about 25% for the planned 11-week duration. I refer you to yesterday's news release for details on other upcoming turnaround work.

Now I'll turn the call over to Rob to talk about our operations.

Rob Peabody

Thanks Jon. We are continuing to deliver on the transformation that has occurred over the last few years throughout our businesses. Looking first at heavy oil, we were recently at Lloydminster to mark the start of steaming operations at Edam East, a 10,000 barrel per day thermal project in Saskatchewan just a few weeks later the project is on production and ramping up. We have two more thermals coming down the pipe that's Liwan and Edam West.

Once one line these projects are expected to boost our overall Lloyd thermal production to more than 80,000 barrels per day by the end of the year, including Tucker, which now has similar economic characteristics to our Lloyd thermals, our heavy oil business unit, thermal production will be in the range of 100,000 barrels a day by the end of the year.

Our Lloyd thermal business is proving to be remarkably resistant in a low oil price environment. It has some of the lowest operating costs in the industry, advantaged logistics and infrastructure as well as the higher oil price realizations associated with heavy oil compared to bitumen. In fact, in March the thermal business was essentially earnings breakeven despite the current oil price and relatively wide differentials.

Last year our Lloyd Thermal operating costs were $9.53 Canadian per barrel. Today, that has been reduced to $6.63 Canadian per barrel. And as an aside for those South of the border now it is just over $5 a barrel US including energy, inclusive of F&D costs we are at about $15 US per barrel. Hopefully, this will put to rest the myth that all Canadian thermal crude production is amongst the highest cost crude production in the world.

Actually we are realizing significant savings in operating costs across the entire heavy oil business through a variety of initiatives. These include ongoing work with our suppliers, lower trucking costs and most importantly, challenging the economics of every single decision we make. We've also seen an improvement in our total heavy oil operating costs which are currently around $10.80 per barrel including energy compared to about $15.30 per barrel a year ago.

Our Lloyd Thermals are further supported by our tightly integrated Lloyd value chain which maximizes the value of our heavy oil barrels, via the asphalt plant, Upgrader and ultimately our refinery at Lima. Asim spoke up to the steady progress we made at Tucker. It will see us reaching the 20,000 barrels per day mark by the second half of this year. Operating costs at Tucker are now $7.41 per barrel about 60% lower than this time last year. These are expected to further decline as production grows.

In Western Canada we continue to translate this portfolio into a lower-cost, more focused and efficient business. Total resource play production in the first quarter was 40,300 barrels of oil equivalent per day and so continues to be a workhorse in our resource play portfolio producing about 23,000 barrels of oil equivalent per day compared to 17,000 barrels a day a year ago.

Moving to the Downstream, the Upgrader and Asphalt Refinery continue to make a strong contribution to our business. At the US refineries our main task in the first quarter was preparing for the major planned turnarounds at Lima and Toledo. At Lima, work is getting underway on the first stage of the crude oil flexibility project.

Refinery equipment is being modified to allow for the processing of up to 40,000 barrels per day of heavy crude blending starting in the 2018 timeframe. We are also on track to bring the isocracker back into service following the turnaround. We continue to build our capability to capture additional margins along the Lloyd and sunrise value chains.

Work on expanding the Saskatchewan Gathering System is now about 80% complete and on track to wrap up in Q3. This network is a key component in transporting our heavy oil thermal production to our refining and upgrading hub in Lloydminster and as part of the Midstream deal just announced we and our partners are expanding this system to accommodate Husky's future thermal projects and third-party business in this area.

In the Asia-Pacific region as mentioned earlier work is underway on the second deep water pipeline, the Liwan Gas Project. This line will provide additional flow assurance to maintain reliable production later in the fields lives. Offshore Indonesia we're making good progress and advancing several projects in Madura Strait. We are currently drilling four development wells at the liquids rich BD field. Instruction work on the wellhead platform and pipeline infrastructure is about 70% complete and we remain on track to startup operations in 2017.

The combined MDA and MBH fields are in the predevelopment process, as is the MDK field which will be tied into the infrastructure of the other field brought online in the 2018, 2019 timeframe. In total these four products will add about 100 million a day of gas and 2400 barrels per day of associated liquids. This is expected to generate a stable long-term cash flow stream.

The Sunrise Energy project, maintenance on a third-party pipeline was undertaken and completed in late March. As a result, the ten-day planned turnaround for the Sunrise one A plant was brought forward and completed at the same time. During this period, production volumes were temporarily reduced and averaged about 19,700 barrels per day in March. The plant has resumed full operations as scheduled and production of average around 26,700 barrels per day in April to date with recent peaks at 30,000 barrels a day plus.

Finally, in the Atlantic region we saw steady production from the White Rose complex over the quarter. The Henry Goodrich rig is in transit to the region to begin a two-year drilling program. We will be using this rig for further development drilling at the South White Rose extension and to complete the Hibernia formation production well at North Amethyst where first oil is planned for the fourth quarter. In the Flemish Pass Basin, our exploration and appraisal program in the area of the Bay du Nord discovery is moving forward as planned and is expected to wrap up this summer.

Thanks and I'll now turn the call back to the operator.

Question-and-Answer Session

Operator

We will now begin the analyst question-and-answer session. [Operator Instructions] The first question comes from Neil Mehta of Goldman Sachs. Please go ahead.

Neil Mehta

Good morning guys. So I want to kick it off on the asset sales. Congratulations on the $1.7 billion that was announced yesterday. Just can you provide a little bit of update in terms of what do you think is left in terms of the residual portfolio, is there incremental asset sales? How we should think about any tax impact if any and then just in terms of the impact on capital or earnings from this? I am just trying to model out the impact here.

Asim Ghosh

Rob, I think that is one for you.

Rob Peabody

Sure. Thanks. So just in terms of how you should think about this business, this business currently generates about $180 million per year of EBITDA and we're obviously retaining 35% of that. So the intension is to start the joint venture with the two other companies and expand and grow this Midstream business.

Jon McKenzie

Just in terms of tax efficiency I caught that at the end of your questions, one of the key pieces for us was that this was a tax efficient transaction. So without getting into the details the proceeds are 1 point from $7 billion are almost entirely sheltered.

Now in terms of the other pieces that are coming down the track, we did mention this was the first step monetization efforts and then we have two more pieces that we've been working on, this was by far the most material to us. The next piece of business that you'll hear from us is around the royalty and we did receive our bids for that mid last month and we're working through that process and so that would be the next piece of business that we'll turn to and you'll hear from us in the near future and then following that. We've got some other dispositions in our conventional Western Canadian business that is entirely unrelated to the business where we are undertaking here at Lloyd.

Neil Mehta

Got it, now that is helpful and then recognize that it is an ongoing process, but can you provide more background on the source of the dispute with CNOOC around the pricing of Liwan and specifically what is the difference between the payments that you are getting for what you sell versus the take-or-pay payments and then just the path forward in terms of timing of a resolution around the dispute?

Asim Ghosh

So let me address the second part first, but basically, the take or pay volumes are 330 mmcf a day after the pipeline breakdown they've been able to take 150 mmcf a day and there was 80 mm old [indiscernible] as the end of the quarter.

Now overall the first part of your question it is early days. They have indicated a more difficult market in China and our view is that there is no contractual basis to change the price unilaterally. We have a legally binding take or pay contract in place and any change in contract terms our view is that must be value neutral. So the macro picture of course is wow, there may be short term hiccups in China demand.

Overall gas demand will continue to grow in China as it moved towards this economic and importantly emissions targets. And the other context I'd like to place it on this whole thing is look we have a longstanding partnership with CNOOC. We are confident we will get to a satisfactory outcome. And looking at any partners we are talking, but we have outlined our principles that any change in terms must be value neutral.

Neil Mehta

Yes, that's very helpful guys. Thank you, I appreciate the color.

Operator

The next question is from Benny Wong of Morgan Stanley. Please go ahead.

Benny Wong

Great, thanks, good morning. Just over at Lloydminster can you give me a sense of how much running room is there before the Midstream capacity needs to be expanded and does this deal prefund any of that spend?

Jon McKenzie

Yes, that's a great question Benny. It is Jon McKenzie here. So just in terms of the throughput capacity now there are segments of that line that are operating at capacity and there is sort of minimal spare capacity across most of the system. As Rob mentioned we're in the process of expanding the southern leg of the Saskatchewan Gathering System to facilitate the thermals that are coming on later this year.

Embedded in this transaction is funding and commitment to expand the northern leg of the Saskatchewan Gathering System as well as what we call LLB Direct which is a line from Midway down to Lloydminster. That's got about $750 million of capital cost between the two. So the partners have arranged for financing as well as equity contribution to pre-fund those two growth initiatives which will really give us capacity or takeaway capacity for the next eight phases of thermals program as well as additional third-party business.

Benny Wong

Great, thanks, I appreciate that color. And then just jumping over Tucker, is there any more upside to that project beyond the 20,000 barrels per day, but end of the year do you see eventual potential to get the volumes up to the plant capacity which I think is 30,000 barrels per day if I recall correctly?

Asim Ghosh

You want to take that?

Rob Peabody

Yes, thanks Asim. Yes, as we said, our plan is to get it up to 20,000 barrels a day by the end of this year. As I've said before we're a pretty tenacious bunch and we still know that 30,000 capacity is on the plant and we do think we have a roadmap to get there in time.

Benny Wong

Great and just a final question just over the Liwan, so how are you guys thinking about volume and revenue for the remainder of the year and I guess an extension of that like when do you expect volumes to be back up to whole volumes post a turnaround and maybe the remedy of the curtailment?

Rob Peabody

Well, as I said that is the long term outlook it is early days. We are in active discussions and we've outlined our principles, okay which is that any change should be value neutral. So over the long-term modeling point of view I would just model it as value neutrality. But in the short term basically we are receiving 150 million cubic feet a day and I would basically model it around that, but we're getting the full amount of the liquids. So for the year I will kind of model it around that I guess.

Benny Wong

Great, thank you.

Operator

Our next question is from Paul Chang of Barclays. Please go ahead.

Paul Chang

Hey guys, good morning.

Asim Ghosh

Good morning.

A couple quick ones Dan. I am just curious if oil indeed has bottomed as some of us hope and is moving upwards how that may change your CapEx spend and your overall view for 2017 and 2018 comparing to where you are today? You guys have been drawn to manage the business at $40 oil which is commendable, but that if indeed that the price is rising, how that is going to shift your business?

Rob Peabody

Just a couple of points. The nitpicking point Paul, would be remember for those of us who are Canadian dollar reporters, about half of the oil price increase has been used up by the exchange rate move. So while oil has moved favorably exchange has moved unfavorably. This is just a point to bear in mind at the back of one's mind that we must not be, we must not [indiscernible] just by the headline U.S. dollar figure in Canada.

The second point is, honestly, I mean this is a serious [indiscernible] we take every input into account including reading about Prince Mohammed bin Salman's massive reshaping of the Saudi world. So as I had used the words earlier, permit me to repeat it, we really do want to look at trend lines and sort of an underlying state of solidity rather than just short term headlines. But having said that, so once we do get a confidence level that look we are into a new equilibrium and the balance sheet repair which we've given targets of is fully complete and for that we are really targeting two times debt to cash flow at the sort of assumption levels we had seen at.

So really, from our point of view we will, we have told you that our priorities are growth, accretive growth at low oil prices, dividend all in the context of maintaining a strong balance sheet. And I think at the Investor Day we will have a fuller update on the portfolio, possibilities the investor, you know it is at June 1, I believe. Yes June 1, so all parts of our Upstream asset portfolio allows room for investment and our Gulfstream portfolio has very large room for investment. So we will give you a picture on that in the June 1.

Paul Chang

Asim, when you say that you need to have the comfort and does that mean that you want to see oil probably just certain level for X amount of time oil is there and you think that you can quantify for us or not [indiscernible].

Asim Ghosh

I would really like to see the market return into balance. Okay? The market is not yet in balance. Okay? Right now there is a forecast for balance, but there isn’t visibility of balance having returned and I'd like to see some of the surplus inventory that has been built up, used up. That is when we'll say look we are at a safe stage.

Paul Chang

Okay, maybe this is either for Jon or for Rob, if we're looking at from the first quarter as a base line, is that much room to improve or bring down your Upstream unit cost from here or that you are already pretty efficient?

Rob Peabody

We're never efficient enough Paul and we will continue to see further efficiencies having just for example in Lloyd as we continue to ramp up all the new thermal projects we're carrying some of the costs of those, but have yet to innovate, they have yet to ramp up and again at Tucker you know we've seen some great improvements as a result of all our procurement efforts but as we've been ramping up production we've also seen the unit cost decreases and so clearly as we continue to ramp that up to 20,000 and beyond in the future we'll see big improvements there.

And also I get the last thing I that is just remind you about the strategic context for our Western Canada disposition. Ultimately that's always dead getting to a business with a smaller number of more focused more material profit centers where our target again is higher efficiency and lower operating cost. So that's just a few examples, but we think long term.

Paul Chang

Right, Rob is it possible let's say if we in the middle of that ignore the potential impact after you divest some pocket of nonsense and just based on existing portfolio we are seeing potentially and not the 10% 20% or 5% off their potential improvement for the next 12 months or makes it is there anything that you can help us in terms of pay off the quantify yet?

Rob Peabody

Well Paul, what I would say is again a lot of our focus, clearly we worked with suppliers and we've driven cost down, that area I think you will be aware many of the suppliers in the industry are probably given just about as much as they can on rate.

Our focus then shifted to more efficient operations going forward and we made good progress there, but again I'd bring you back to this, the kind of strategic thinking the big cost reductions you are seeing coming through on our operating costs are really coming from structural changes to our portfolio and that's where we're going to continue to focus.

Paul Chang

Okay a final one, maybe I missed it, are you saying that Nima turned the wrong and you are stunned and you are in the pause as although bringing the isocracker backup, when that isocracker will be up and running in full?

Rob Peabody

Well, yes right now we are in the process of starting up the Lima Refinery you have to turn around. So we're in the safety process start up and after the refinery has started up we will then proceed to commence the startup of the isocracker right after.

Paul Chang

Oh okay, so you are not starting it concurrently, you are going to start up after the turnaround and then you bring on the isocracker. So we should not assume that isocracker will be back up probably until say the second half of May if that's the case?

Rob Peabody

Yes, around that time Paul about two to three weeks more.

Paul Chang

Okay, very good, thank you.

Operator

The next question is from Fernando Valle of Citi. Please go head

Fernando Valle

Hi guys, thanks for the call. Just a quick followup on previous questions. The two times debt to the cash flow target is it net debt or gross debt? And then a second question is in light of what's going on in Liwan, how are your negotiations for [indiscernible] extension of the gas supply contract? Thank you.

Jon McKenzie

Okay so, Fern I'll take the first part of that question with regard to debt. So we would anticipate following these monetization opportunities that would be carrying cash on the balance sheet, this is what we talked about and getting down to two times debt to cash flow is net debt.

Bob Baird

[Indiscernible] basically negotiations are ongoing.

Fernando Valle

Okay, so there is no impact from the current situation in Liwan on that contract negotiation. Okay thank you.

Operator

The next question is from Nima Billou of Veritas Investment Research. Please go ahead.

Nima Billou

Good morning. Can you just talk about the interest savings like the average cost of debt right now that you expect from these proceeds just to get a sense from a modeling perspective?

Asim Ghosh

Are you speaking to the debt in the portfolio or are you speaking to [indiscernible].

Nima Billou

The proceeds yes, was there debt in the portfolio right now and you are going to apply $1.7 billion in proceeds to debt. So just what the cost is on that debt and what savings you expect?

Jon McKenzie

So the net interest cost to cost the portfolio of long term debt is above 5% to 5.5%. And what we're going to do with these proceeds when they come in the door assuming we get regulatory approval will be to pay down a substantial portion of our commercial paper program live and then we pay down a substantial portion of our [indiscernible] residual cash would go to the balance sheet.

We do have about US $200 million of maturities coming in the back half of the year that would also be funded through the cash proceeds from this and other monetizations.

Nima Billou

Okay, thank you. And now the other question, can you just refresh on potential asset dispositions in terms of operating properties, these were assets in Western Canada and what the mix was between oil and gas and rough production?

Rob Peabody

Yes, so what we've done is we've divided the assets for disposition into three packages. There was one in Southern Saskatchewan and one Southern Alberta and the other Northwestern Alberta Northeastern BC. The overall mix of those total assets is about 50-50 gas oil.

Nima Billou

And the total production from these assets?

Rob Peabody

Total production about 55,000 barrels a day.

Nima Billou

Okay and do you think that you are still getting obviously positive reception in the market or you figure there is a lot of companies trying to sell assets at the same time, but the market isn’t necessarily saturated because you have partners that may be looking for contiguous lands or the ability drive to down cost? I guess the question is if there is still reception for these assets?

Rob Peabody

Yes, we're still very positive on the initiatives and we're working through the process now that we've received the bids and we'll have more information in due course on this.

Nima Billou

Okay and finally just progress on Sunrise, is it tracking according to plan up to roughly I guess 28,000 barrels a day 14,000 for Husky, at Husky are you still on track for that 60,000 by end of the year?

Rob Peabody

Yes, this is Rob again. Just so I think again I'll just summarize by saying we're seeing good month to month progress with production and we're actually very pleased with the reservoir performance, of course we look at a lot more than just production. And we've learned from other operations and have always planned for this set steady ramp-up, we don't want to damage any of the other wells and we've seen that in some other operation. Sunrise production has averaged as I said about 19,700 barrels a day in March and that did include the impact of about a 10-day outage in late March.

Asim Ghosh

Just a couple of those other things we monitor just to give you a sense of it, we monitor a number of other parameters at Sunrise and all of these are kind of confirming strong reservoir performance. So we look at both the steam oil ratio, the oil cut and these are both consistent with the characteristics of a very good reservoir. The steam oil ratio continues to steadily improve towards the design SOR [ph] of three, it is now below five and the oil cut is in line with the forecast range of about 20% to 23% and is continuing to improve as per plan.

And also another thing we look at is just the individual well performance across the field and we've got some great wells on pretty much every pad out there that are performing very well, so and that's what we'd expect, we expect to range and everything is coming in line with our models for the project.

Nima Billou

Okay, so at worse it may be deferred, but there is no broad concern surrounding the quality of the asset, that's what you are trying to say?

Asim Ghosh

Correct.

Nima Billou

Now Asim, final question. I have taken your time, but you said you wanted to wait for the market to balance. Do you feel that other large producers are behaving in the same manner almost waiting for the evidence of that balance first before bringing world market ahead of time you feel that the industry is kind of gotten religion if you will with respect to CapEx discipline?

Asim Ghosh

Yes, right now I have not been invited to run those other last produces, so I feel I cannot comment on them. I am just doing the boring job of loving Husky. I do love you basically given you out operating principles. I should go back to a comment I made in an earlier call about the asymmetry of consequence and really we have the portfolio. We know that when the cash flow is available we can turn on investment possibilities. So I don't have to be in a panic in getting husky into high risk fund the company sorts of situation. This is that kind of a view of our underlying [indiscernible] if you will.

Operator

This concludes the analyst Q&A portion of today's call. We will now take questions from members of the media. [Operator Instructions] The first question is from Jeff Lewis of the Globe and Mail. Please go ahead.

Jeff Lewis

Hi thanks for taking my question. I just wondered if the transaction announced yesterday requires Investment Canada Review or how are you thinking or whether the approval process whether you foresee it being onerous at all? Thanks.

Asim Ghosh

Yes, the transaction does require Investment Canada Review. I will point out to you that it is money coming into the oil sector at this time and so will it be onerous, I don’t know, we will go through that process.

Jeff Lewis

Okay, thanks.

Operator

The next question is from Nia Williams of Reuters. Please go ahead.

Nia Williams

Hi, thanks for taking my questions. I want to ask you about cost savings. I know you said a lot what to do with social changes in your portfolio, but aside from that the savings made through renegotiation with suppliers, love your trucking cost, do you think they can be maintained when the oil price starts to rise or are they cyclical rather than short savings?

Asim Ghosh

There are three parts to the saving. The simplest part that is easy to say look a cyclical is a long haircut and rates. But more importantly, there are two parts, one is as you said structural to our portfolio and the second part is structural to how we do business. Two of those parts are sustainable and longer term.

Nia Williams

Okay, thanks.

Operator

The next question is from Rebecca Penty of Bloomberg News. Please go ahead.

Rebecca Penty

Thanks for taking my question. I have a question about Liwan, when the project was opened Husky talked about getting gas prices around $11 to $13 per NCS [ph] and I'm wondering as you look at what's going on right now Liwan expansion, how are you looking at that long-term price potential in that market?

Asim Ghosh

So as I said, this is work in progress, but our overall principle is clear that we have a contract and any change must be value neutral and we have a number of plus points in the relationship, we are confident that we will get to a satisfactory outcome on this. But you just got to remember the macro context of the Chinese market which is longer term they have an issue with their emissions targets that they are bent on addressing and so natural gas is fundamentally longer term a growth part of the energy mix in China.

Operator

The next question is from Chester Dawson of The Wall Street Journal. Please go ahead.

Chester Dawson

Yes, thanks. My question is about the divided policy. Can you discuss your plans for resumption of that especially now that oil has gotten back into the $40 range is that something that, I mean what price point would you consider reinstating it at this point?

Asim Ghosh

Well, just as I, the first one I want to make is paying a cash dividend through debt is not sustainable and therefore we do not believe is a good policy. But the overall context is we're focused on strengthening our resiliency that includes a structural change in the business. That is progressing and will continue to progress the base, that includes reducing our earnings breakeven reducing sustaining capital and we believe the steps we have outlined do precisely that.

But we do need to be comfortable that prices have stabilized and that all get strengthening efforts have taken place once we get that then we will take a call on our priorities of measurable of growth and the measure of dividend and we continue to run a balanced view of that. As to the specifics let's get to that position of balance in the market to address that we believe it is project that we believe is premature to address that at this point in time.

Operator

This concludes the time allocated for questions on today's call. I would now like to turn the call back over to Mr. Asim Ghosh for closing comments. Please go ahead.

Asim Ghosh

Thank you, and thank you all for joining us. I'll just sort of summarize the changes we are seeing in the business today didn't start yesterday. There is not a reaction to the fact that we hit a negative patch, slippery patch. Really we have kept on the same strategy over six years now in a bobsleigh improving the quality of our production and our fundamental biggest single part of that quality is along with sustaining CapEx [indiscernible] portfolio. And we are improving margins, reducing cash flow variability and mitigating exposure to [indiscernible] that and at the same time we are bringing down our earnings breakeven and sustaining costs.

And as we all outlined today, we are making substantial progress and material progress with strengthening our balance sheet. And just a reminder, we will be holding an AGM later this morning in Calgary and the presentation will be webcast live on our website. So thank you all for joining us. I appreciate that.

Operator

This concludes today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.

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