The Husky Energy board of directors has approved a quarterly dividend of $0.125 per common share for the three-month period ended June 30, 2018. Husky photo.
Husky Energy low net debt, available cash flow reasons for dividend
On Thursday, Husky Energy’s board of directors announced it has approved increasing the quarterly cash dividend to $0.125 per common share.
According to Husky, the dividend increase highlights the company’s low net debt and ability to generate strong free cash flow.
“This dividend level is affordable, and has a yield that is comparable with our peers,” said CEO Rob Peabody. “We can fund the dividend, our sustaining capital requirements and the capital program in accordance with our five-year plan.”
Funds from operations were $1.2 billion, a year-over-year increase of 69 per cent and 35 per cent higher than the first quarter of 2018.
Free cash flow was $500 million, compared to $123 million in the second quarter of 2017. Net earnings were $448 million, compared to a net loss of $93 million in the second quarter of 2017. Adjusted net earnings were $474 million, up from $10 million in the year-ago period.
“Once again, the physical integration of our Upstream and Downstream businesses, including our committed pipeline capacity, shielded us from location and quality differentials, and the stability offered by our term contracts in Asia delivered strong financial results,” said Peabody.
“As we further reduce our cost structure and improve the performance of our assets – including the ongoing ramp-ups of Tucker, Sunrise and the BD Project offshore Indonesia and the early completion of the Rush Lake 2 thermal project – we remain well-positioned to execute the five-year plan we updated at our recent Investor Day.”
Funds from operations and net earnings in the second quarter included approximately $53 million in pre-tax operating expenses associated with the Superior Refinery incident, which are expected to be recovered at a future date from insurance proceeds, less deductibles.
Highlights
Corporate
- Quarterly cash dividend increased to $0.125 per common share
- Funds from operations of approximately $1.2 billion, up 69 percent over Q2 2017
- Free cash flow of $500 million
- Capital spending of $708 million
- Oil exploration discoveries in both the Asia Pacific and Atlantic regions
- Net debt at the end of the quarter was $3.0 billion, representing 0.8 times trailing 12 months funds from operations, well below the Company’s target framework of less than two times net debt to trailing 12 months funds from operations
Integrated Corridor
- Downstream EBITDA of $495 million compared to $188 million in Q2 2017
- Average realized U.S. refining and marketing margins of $16.66 US per barrel, including a pre-tax FIFO gain of $1.72 US per barrel, reflecting Husky’s flexibility to access discounted Midland crude oil barrels
- Infrastructure and Marketing EBITDA of $212 million compared to $47 million in Q2 2017, demonstrating continued margin capture from long-term committed pipeline capacity
- Thermal bitumen production of 123,200 barrels per day (bbls/day, Husky working interest), including Lloydminster thermals, the Tucker Thermal Project and the Sunrise Energy Project
- Rush Lake 2 construction completed, with steaming now under way six months ahead of initial plan
- Completion of a planned turnaround at the Lloydminster Upgrader and seasonal turnarounds at Lloyd thermal projects
Offshore
- Record production at the Liwan Gas Project, averaging 368 million cubic feet per day (mmcf/day), with associated liquids averaging 15,700 bbls/day (180 mmcf/day and 7,700 bbls/day Husky working interest). Month-to-date gross production in July 2018 averaging more than 400 mmcf/day
- Liquids-rich BD Project in the Madura Strait averaged 72 mmcf/day with 4,400 bbls/day of associated liquids production (29 mmcf/day and 1,800 bbls/day Husky working interest) in the second quarter; gas production has now reached expected target of 100 mmcf/day (40 mmcf/day Husky working interest)
- Commercial development plans under way following an oil discovery on Block 15/33 in the South China Sea
- Production Sharing Contracts (PSCs) signed for two exploration blocks offshore China in the Beibu Gulf
- Progressing assessment of the White Rose A-24 oil exploration discovery in the Atlantic region
- Completion of planned turnaround on the SeaRose FPSO (floating production, storage and offloading) vessel
| Three Months Ended | Six Months Ended | |||||
| June 30 2018 |
Mar. 31 2018 |
June 30 2017 |
June 30 2018 |
June 30 2017 |
||
| Daily production, before royalties | ||||||
| Total equivalent production (mboe/day) | 296 | 300 | 320 | 298 | 327 | |
| Crude oil and NGLs (mbbls/day) | 213 | 221 | 234 | 217 | 239 | |
| Natural gas (mmcf/day) | 494 | 477 | 515 | 486 | 529 | |
| Upstream operating netback1,2 ($/boe) | 31.31 | 24.37 | 23.53 | 27.83 | 23.85 | |
| Refinery and Upgrader throughput (mbbls/day) | 355 | 398 | 316 | 376 | 341 | |
| Funds from operations1 ($mm) Per common share – Basic ($/share) |
1,208 1.20 |
895 0.89 |
715 0.71 |
2,103 2.09 |
1,401 1.39 |
|
| Adjusted net earnings1 ($mm) Per common share – Basic ($/share) |
474 0.47 |
245 0.24 |
10 0.01 |
719 0.72 |
83 0.08 |
|
| Net earnings (loss) ($mm) Per common share – Basic ($/share) |
448 0.44 |
248 0.24 |
(93) (0.10) |
696 0.68 |
(22) (0.04) |
|
| Net debt1 ($ billions) | 3.0 | 3.2 | 3.5 | 3.0 | 3.5 | |
| Dividend per common share ($/share) | 0.125 | 0.075 | 0.00 | 0.20 | 0.00 | |
| 1Non-GAAP measure; refer to advisory. 2Operating netback includes results from Upstream Exploration and Production and excludes Upstream Infrastructure and Marketing. |
||||||
Second quarter results
Upstream production averaged 295,500 barrels of oil equivalent per day (boe/day), which takes into account seasonal maintenance and weather-related impacts, the expiry of the Company’s participation in Wenchang in the Asia Pacific region in the fourth quarter of 2017, and the completion of a scheduled three-week turnaround at the SeaRose FPSO in the Atlantic region.
This compared to 319,500 boe/day in the year-ago period, which was prior to asset dispositions in Western Canada during the second half of 2017. Second quarter production also reflects the Company’s ongoing structural transformation to focus on higher margin barrels.
Average realized pricing for Upstream production was $49.74 per boe, compared to $41.58 per boe in Q2 2017. Realized pricing for oil and liquids averaged $53.83 per boe, while natural gas averaged $6.53 per thousand cubic feet (mcf).
Upstream operating costs averaged $14.22 per boe compared to $14.65 per boe in the year-ago period. Upstream operating netbacks averaged $31.31 per boe compared to $23.53 per boe in Q2 2017.
Downstream throughput was 355,000 bbls/day, compared to 316,000 bbls/day a year ago, which included a planned five-week partial turnaround in the second quarter at the Lloydminster Upgrader and the suspension of operations at the Superior Refinery in Wisconsin in late April 2018.
The Chicago 3:2:1 crack spread averaged $18.30 US per barrel compared to $14.36 US per barrel in the year-ago period.
Average realized U.S. refining and marketing margins were $16.66 US per barrel, which takes into account a pre-tax FIFO gain of $1.72 US per barrel. This compared to $8.27 US per barrel a year ago, which included a pre-tax FIFO loss of $1.37 US per barrel.
Upgrading net earnings were $84 million, compared to $5 million in Q2 2017. Upgrading margins were $30.69 per barrel, compared to $22.63 per barrel in the second quarter of 2017.
Net earnings in the Infrastructure and Marketing segment were $154 million, compared to $33 million in Q2 2017. This was partially due to the wider WTI/WCS differential, which averaged $24.87 compared to $14.96 in the year-ago period. Infrastructure and Marketing realized margins were $219 million, compared to $17 million in Q2 2017, reflecting value captured from the Company’s long-term 75,000 bbls/day committed capacity on the Keystone pipeline and 160 mmcf/day in natural gas pipeline capacity to U.S. markets.
Net debt at the end of the quarter was $3.0 billion.
INTEGRATED CORRIDOR
- Upstream average production of 230,500 boe/day
- Upstream operating netback of $21.79 per boe, including an operating netback of $30.58 per barrel from thermal operations
- Downstream throughput of 355,000 bbls/day
- Downstream upgrading/refining margin of $23.75 per barrel
Thermal Production
Thermal bitumen production from Lloyd thermal projects, Tucker and Sunrise averaged 123,200 bbls/day (Husky working interest), compared to 117,400 bbls/day (Husky working interest) in the second quarter of 2017. This takes into account planned seasonal maintenance at several plants.
Overall thermal operating costs were $11.10 per barrel.
The Company is currently developing six 10,000 bbls/day Lloyd thermal bitumen projects, representing a combined design capacity of 60,000 bbls/day.
- At Rush Lake 2, steaming is under way. First oil is expected early in the fourth quarter of 2018 with a ramp-up to its 10,000 bbls/day design capacity anticipated by the first quarter of 2019.
- At Dee Valley, construction of the Central Processing Facility is progressing, with first oil expected in the first half of 2020.
- At Spruce Lake Central, site clearing is complete and module fabrication is under way. At Spruce Lake North, site grading is set to begin in the third quarter. Both projects are expected to start production in the second half of 2020.
- Two additional 10,000 bbls/day projects remain on track to be brought online in the second half of 2021.
Production at Tucker averaged 23,400 bbls/day and is continuing to ramp up, with new production from the remaining five wells on a new 15-well pad. Following planned de-bottlenecking work in the third quarter, Tucker is expected to reach a peak daily rate of 30,000 bbls/day by the end of 2018.
Sunrise recorded a peak daily rate of 54,000 bbls/day (27,000 bbls/day Husky working interest) prior to commencing a program of well workovers. Average production in the quarter was 49,400 bbls/day (24,700 bbls/day Husky working interest) compared to 38,200 bbls/day (19,100 bbls/day Husky working interest) in the year-ago period.
Sunrise remains on track to reach a peak daily rate of 60,000 bbls/day by the end of 2018 (30,000 bbls/day Husky working interest).
Resource Plays
The Company remains focused on capital efficient operations in three core hubs in Western Canada at Edson, Grande Prairie and Rainbow Lake. Operating costs decreased five per cent to $13.85 per boe in the second quarter, compared to $14.60 per boe in the year-ago period.
An 18-well drilling program in the Ansell and Kakwa areas of the Wilrich formation is progressing, with seven wells drilled and four completed to date in 2018. In the oil and liquids-rich Montney formation, two wells have been drilled as part of a 2018 program of up to eight wells, primarily in the Wembley and Karr areas.
The new Corser gas processing plant is now under construction by Husky Midstream Limited Partnership in the Ansell area of Central Alberta. It is expected to add 120 mmcf/day of processing capacity when it starts up in the fourth quarter of 2019.
Downstream
Throughput at the Lloydminster Upgrader averaged 72,500 bbls/day, including a planned five-week partial turnaround.
Total U.S. refining throughput was 246,800 bbls/day. At the Lima Refinery, throughput averaged 171,200 bbls/day compared to 174,100 bbls/day in the second quarter of 2017. A crude oil flexibility project to increase heavy oil processing capacity from 10,000 bbls/day to 40,000 bbls/day by the end of 2019 remains on schedule.
At the partner-operated Toledo refinery, throughput averaged 65,500 bbls/day (Husky working interest), compared to 71,100 bbls/day in Q2 2017.
On April 26, 2018, operations were suspended following an incident at the Superior Refinery. An investigation into the cause is ongoing and the Company is making steady progress to secure and stabilize the site. Once the investigation and cleanup are complete, repair work will begin. The refinery is not expected to resume normal operations for at least 18 to 24 months. Husky has insurance to cover business interruption, third-party liability and property damage.
OFFSHORE
- Average production of 65,000 boe/day
- Operating netback of $65.05 per boe
- Asia Pacific operating netback of $68.44 per boe
- Atlantic operating netback of $57.79 per barrel
Asia Pacific
China
At the Liwan Gas Project, gross production from the two producing fields averaged 368 mmcf/day in sales gas volumes, with associated liquids averaging 15,700 bbls/day (180 mmcf/day and 7,700 bbls/day Husky working interest). High gas sales and production rates were achieved as gas demand in China remains strong. The Company realized gas pricing of $13.96 Cdn per mcf with liquids pricing of $71.88 Cdn per barrel.
At Liuhua 29-1, the third deepwater field at Liwan, contracts have been signed for long-lead items, and fabrication and construction of equipment is under way.
Three additional wells are scheduled to be drilled beginning in the fourth quarter of 2018, adding to four previously drilled wells. All three wells will be tied into the existing Liwan infrastructure. First gas is anticipated around the end of 2020, with target net production of 45 mmcf/day gas and 1,800 bbls/day liquids when fully ramped up.
Production will be transported through the existing Liwan subsea infrastructure and processed at the onshore Gaolan Gas Plant, and delivered to buyers in the Pearl River Mouth Basin area.
Husky has a 75 per cent working interest in the development of the field, with its partner CNOOC Limited holding the remaining 25 per cent.
The Company is progressing commercial development plans following the drilling of two oil exploration wells on Block 15/33 in the South China Sea, approximately 160 kilometres southeast of Hong Kong.
The first well showed four oil-bearing zones with a combined net pay thickness of about 70 metres, and had two drill stem tests with a combined rate of more than 9,000 bbls/day. Each drill stem test was flowed for over 22 hours.
A second well drilled on a separate structure did not encounter commercial hydrocarbons. Husky is the operator during the exploration phase, with a working interest of 100 per cent in the wells.
CNOOC may assume operatorship and up to a 51 per cent working interest later in the life of the field, with exploration cost recovery from production allocated to Husky.
At the nearby Block 16/25, a rig is currently on location preparing to spud two exploration wells.
In addition, Husky and CNOOC signed PSCs for Blocks 22/11 and 23/07 in the Beibu Gulf area of the South China Sea.
- Block 22/11 covers an area of 1,663 square kilometres with a water depth of 40-80 metres.
- Block 23/07 covers an area of 1,210 square kilometres with a water depth of 20-40 metres.
Under the PSCs, Husky will act as operator during the exploration period. In the event of a commercial discovery, CNOOC Limited may assume a participating interest up to 51 per cent.
Indonesia
Gross gas sales at the liquids-rich BD Project averaged 72 mmcf/day with 4,400 bbls/day of associated liquids production (29 mmcf/day and 1,800 bbls/day Husky working interest).
BD gas was sold into the East Java market at contracted rates for a realized price of $9.82 Cdn per mcf. Liquids pricing was $98.37 Cdn per barrel.
Current net daily sales gas production has now reached the Company’s target of 100 mmcf/day (40 mmcf/day Husky working interest), with higher than anticipated liquids production.
At the combined MDA-MBH fields in the Madura Strait, the two platforms and topsides have been installed. A rig has been contracted to drill seven production wells beginning in the second half of 2018.
Atlantic
A planned three-week turnaround at the SeaRose FPSO was completed on schedule.
Initial construction work is progressing at the West White Rose Project, with first oil anticipated in 2022. West White Rose is expected to reach peak production of 75,000 bbls/day (52,500 bbls/day Husky working interest) in 2025 as development wells are drilled and brought online.
The Company is assessing a successful exploration well drilled in the second quarter.
The White Rose A-24 well, which is located approximately 10 kilometres north of the SeaRose, encountered a net pay thickness of more than 85 metres of oil-bearing sandstone. Additional delineation of the north White Rose area is planned.
Husky has a 68.875 per cent ownership interest in White Rose A-24, with partners Suncor Energy (26.125 percent) and Nalcor Energy Oil and Gas (five per cent).
A program of infill wells and workover activities at the White Rose field and its satellite extensions is offsetting reservoir declines until the startup of West White Rose in 2022. A well drilled at the North Amethyst field in the second quarter encountered a high water cut and is currently shut-in pending further intervention activities.
2018 Planned maintenance and turnarounds
Integrated Corridor
- A three-week turnaround and de-bottlenecking activities are scheduled at Tucker in the third quarter
- A five-week partial turnaround is planned at the Lima Refinery in the fourth quarter, with throughput expected to average 40 percent during the work period
Offshore
- A four-week turnaround is scheduled to start in early August at the Terra Nova FPSO
CORPORATE DEVELOPMENTS
The Board of Directors has approved a quarterly dividend of $0.125 per common share for the three-month period ended June 30, 2018. The dividend will be payable on October 1, 2018 to shareholders of record at the close of business on August 27, 2018.
Regular dividend payments on each of the Cumulative Redeemable Preferred Shares – Series 1, Series 2, Series 3, Series 5 and Series 7 – will be paid for the three-month period ended September 30, 2018.
The dividends will be payable on October 1, 2018 to holders of record at the close of business on August 27, 2018.
| Share Series | Dividend Type | Rate (%) | Dividend Paid ($/share) | |
| Series 1 | Regular | 2.404 | $0.15025 | |
| Series 2 | Regular | 3.030 | $0.19093 | |
| Series 3 | Regular | 4.50 | $0.28125 | |
| Series 5 | Regular | 4.50 | $0.28125 | |
| Series 7 | Regular | 4.60 | $0.28750 | |
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