Husky achieved strong earnings and cash flow growth in the first quarter of 2011 compared to the same quarter of 2010. Performance was driven primarily by increased production volumes, higher realized crude oil prices for the Atlantic Region and South East Asia, and higher throughput rates and margins within the downstream segment.
"Our first quarter results are in accordance with our execution plan," said CEO Asim Ghosh. "Actions undertaken to grow near-term production have achieved the intended result during a period of strengthening prices. At the same time, our downstream refining segment posted strong performance, with higher throughput enabling us to capitalize on improving market conditions."
"In addition, we have made steady progress in advancing our mid and long-term growth initiatives. Steps taken in the quarter have enabled Husky to achieve important milestones towards progressing the Liwan Gas Project offshore China. This project will create shareholder value by tapping into the fast growing energy markets in Hong Kong and mainland China."
A summary of first quarter results, together with recent key highlights, follows:
First quarter production averaged 310,400 boe/day in line with guidance. Volumes compare positively with 280,500 boe/day in the fourth quarter of 2010 and 295,900 boe/day in first quarter of 2010. Production volumes were driven higher by the February closing of the Western Canada asset acquisition and good performance from White Rose and North Amethyst.
First quarter cash flow and earnings growth were driven by higher upstream production volumes, higher realized light crude oil prices for the Atlantic Region and South East Asia, and stronger throughput rates and margins within the downstream segment. These were partially offset by the impact on Western Canada realized crude oil pricing of higher discounts to WTI, the impact of a strong Canadian dollar, lower throughput at the Lloydminster Upgrader and weak natural gas prices.
Light crude oil prices averaged U.S. $104.97 per barrel for the quarter, 38 percent higher compared to same period of 2010. Of the Company's total production, approximately 20 percent is priced and sold relative to light crude prices (North Sea Brent). U.S. refining market crack spreads were stronger during the quarter with the average Chicago 3:2:1 crack spread at U.S. $16.58 per barrel, compared to U.S. $6.23 in the same period of 2010.
"We continue to prudently manage our financial position and exercise discipline in all aspects of our capital and operating expenditures," said Alister Cowan, CFO.
KEY AREA SUMMARY AND GROWTH UPDATE:
Western Canada - Unconventional and Conventional
The Company continues to maintain production levels from Western Canada and has accelerated development drilling.
Oil Resource Plays
Within the oil resource portfolio, the Company is focused on developing its opportunities in the Lower Shaunavon and Bakken zones in Southern Saskatchewan along with the Viking zone in Southwest Saskatchewan and central Alberta. Husky has approximately 500,000 net acres in its oil resource portfolio. Seventeen wells were drilled during the period with six placed on production.
Gas Resource Plays
Husky advanced development drilling of its liquids-rich gas assets in the Alberta Deep Basin. In the Ansell area, four rigs were active and a total of 20 Cardium formation wells were drilled during the quarter and an additional six exploration and development wells were drilled in Kakwa, Bivouac, the Horn River Basin and on the Cypress acreage.
Through a combination of crown land sales and private purchases, Husky increased its land holdings in its gas resource portfolio during the first quarter by 29,000 acres.
Husky is amongst the industry leaders in heavy oil production and has a significant land and resource portfolio along with a solid integrated infrastructure position. Within its heavy oil operations, the Company's strategy is focused on maintaining production levels, being a low cost producer and continuing to drive new enhanced recovery techniques to sustain production volumes.
Construction of the 8,000 bbl/day South Pikes Peak project was approximately 58 percent complete at the end of the first quarter with production expected in mid 2012. The project continues to progress as expected.
The 3,000 bbl/day Paradise Hill project activity commenced in the first quarter, and will utilize the existing Bolney infrastructure. Production is anticipated in late 2012.
The Company advanced the recently sanctioned Phase I Sunrise Energy Project. Twelve horizontal wells were spud and seven drilled during the quarter. The Company made several significant equipment orders that included the steam generators, vessels, water treating plant and a camp to support the project.
Tucker contributed positive earnings in the quarter with an average production volume of 6,200 bbls/day. Further wells will be brought on production in the second quarter.
Through the first quarter, North Amethyst performed well with average production of 21,400 bbls/day net to Husky. In 2011, Husky expects to tie-in an additional producer and one more injector well.
The West White Rose satellite pilot development is progressing on schedule. These wells will provide additional information on the reservoir to refine understanding of the best development scheme for the full West White Rose field. First production from the pilot is anticipated in the third quarter of 2011.
Husky holds exploration rights to nineteen parcels of land in the area. In 2011, the Company plans to participate in the drilling of an appraisal well at the Mizzen discovery and an exploration well to the south of Terra Nova.
South East Asia
Development of the Liwan Gas Project is progressing in accordance with the Heads of Agreement signed with China National Offshore Oil Corporation (CNOOC) in December 2010. Under the Heads of Agreement, Husky will operate the deepwater portion of the project involving development drilling and completions, subsea equipment and controls, and subsea tie-backs to a shallow water platform. CNOOC will operate the shallow water portion of the project including a shallow water platform, approximately 270 km of subsea pipeline to shore, and the onshore gas processing plant.
Development of the Liwan Gas Project comprises three discoveries on Block 29/26; Liwan 3-1, Liuhua 34-2 and Liuhua 29-1, with first gas production expected in late 2013, ramping up through 2014. Official project sanction is expected later in 2011. It is anticipated the natural gas will be sold under a long-term contract at competitive prices in the Guangdong and Hong Kong markets.
The partnership has made considerable progress in advancing the Liwan Gas Project as the Overall Development Plan (ODP) for Liwan 3-1 has been prepared and is undergoing final reviews with submission to authorities scheduled in the second quarter. Development of the Liwan 3-1 and Liuhua 34-2 fields are proceeding in parallel and will share infrastructure. The ODP for the Liuhua 34-2 field is in preparation and planned for submission to authorities mid-2011. Liuhua 29-1 is expected to be fully delineated later this year with an ODP submission targeted before year end.
All nine development wells for the Liwan 3-1 field have been successfully drilled confirming the quality and extent of the reservoir. Fabrication and construction has begun, and long lead time items ordered in accordance with the schedule. Deepwater installation and pipe lay work are planned to take place in 2012 and 2013.
CNOOC is progressing with the development of the shallow water portion of the project. The infrastructure is designed to allow for the tie-in of incremental wells and fields. Gas from the Liuhua 29-1 field will be processed through the same shallow water platform and onshore gas plant as the other two fields and is expected to come on stream in late 2014.
In Indonesia, Husky and its partners continue to progress and plan for the development of the BD and MDA gas fields with first gas production expected in 2014. The long lead time items for the BD field, including the FPSO, are set to go to tender by mid-year. An appraisal well for the MDA field will be drilled later this year as well as a nearby low risk exploratory well targeting the same type of reservoir.
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