Q3 2020 Husky Energy Inc Earnings Call

Thank you for standing by.

The cost saves operator.

Welcome to the Husky energy third quarter to 2020 conference call and webcast.

As a reminder, all participants are in listen only mode and the conference is recorded.

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After the presentation, there will be an opportunity to ask questions.

Join the question you right. So start one on your telephone keypad.

Chicken little testers during the quarter like coal and they said no one operator by pressing star as well.

I would now like to turn the conference over to Leila.

Got director Investor Relations. Please go ahead Jack.

Hello, everyone and welcome to our third quarter Conference call I'm joined by CEO, Rob Peabody CFO, Jeff Heart and other members of our senior management team will provide an overview of our third quarter results and take your questions. Today's call has forward looking information and includes non-GAAP measures, yeah, I don't execution out of.

Forward looking information and non-GAAP measures the risk factors and assumptions pertaining to the forward looking information and additional information pertaining to the non-GAAP measures in this morning's news release and in our annual filings on SEDAR and Edgar and that's not stated otherwise all numbers Canadian currency and before what things you are welcome to contact.

Our Investor Relations team after the call to answer any modeling questions now I'll turn it over to Rob.

Thanks, Leo and good morning, everyone. A few days ago, we announced that we have entered into an agreement there we'll see how scant synovus combined an all stock transaction and is a great opportunity to join with synovus to create a new integrated energy company.

In closing this will be the third largest oil and gas producer in Canada, and the second largest Canadian based refiner an upgrader.

Yeah, well have an integrated upstream and downstream portfolio that won't provide for free for enhanced free cash flow generation and superior return opportunities for investors.

Combination integrate synovus best in class since it you while sands assets with our extensive upgrading refining and transportation that work at high netback offshore gas production. This creates a low cost integrated competitor, a long life reserve base and a commitment to leading yes.

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I'll now turn to our third quarter results in the third quarter, we took a large non cash impairment, Jeff will speak to the drivers for the impairment shortly.

Over the quarter, we remain focused on reducing costs and limiting growth investments in order to generate free cash flow. Just a quick reminder of our actions. So far this year capital spending has been lowered by more than 1.8 million.

That's about $200 million lower than the last time, we spoke with you we.

We continue to deliver on $150 million and identify cost savings in the third quarter, we completed a $1.25 billion public notes offering at 3.5%, which has further enhanced our liquidity to increase free cash flow, we started up the 10000 barrel.

Per day spruce like Central thermal project insists catch one at the end of August it is already producing about 9000 barrels per day.

We have also increased our overall thermal production at Sunrise production is also being increase towards full capacity in Asia. The new 29, one field. The Li one will begin providing natural gas to customers in southern China within the next few days.

Oh, It's 29, one Bruce like Central were completed safely ahead of schedule and within or below our original budgets and both will generate immediate free cash flow at current pricing turn.

Turning to the downstream throughput up the Lima refinery was about 154000 barrels per day in the quarter up from around 130000 barrels per day in the second quarter demand for refined products has been on a slow and uneven trajectory, we continue to optimize our refining rates and yields.

Changing market conditions at Lloydminster, we have wrapped up a major turnaround at the upgrader. Following the turnaround we have increased our diesel capacity from 6000 barrels per day to nearly 10000 barrels per day. We also strong saw strong demand for asphalt in the quarter, which allowed us to.

Run the Lloyd refinery it all right and then the superior refinery. The pair pairs are continuing with a planned restart in 2022.

Moving to the offshore we had another strong quarter in the Asia Pacific region, which delivered an overall operating margin up 227 million and that will increase of course as we bring 2029, one field bottom line in the next few days and the Atlantic region, along with our partners we have canceled.

The 2021 construction season at the West White Rose project. The project is now being placed into safekeeping.

Project will continue to be assessed as deep as the external environment evolves.

Turning to E. S. G. We realized our annually we released our annual the S.G. report in early August it included clear and achievable targets to reduce our greenhouse gas emission intensity by 25% by 2025, ultimately we aspire to achieve net zero emissions by 2050.

We also set a target to achieve 25% female representation at senior roles in the company.

In the context of the Synovus Husky transaction the commitments of both Husky Cenovus.

It was both of them, but we have made a two world class safety performance on E.S.G. lead leadership will remain core to the combined company.

Now I'll turn the call over to Jeff. Thanks, Rob I'll start with an overview of our financial results. The net loss of 7 billion was impacted by an after tax impairment of 6.7 billion. This.

This was related to lower long term commodity price assumptions reduced capital investment and higher discount rates based off of recent market indicators.

Funds from operations or 148 million up from 18 million in the second quarter and while this reflects gradual improvement in headline crude prices. It was offset by much lower realized U.S. refining margins.

Capital spending was 354 million, which included 79 million related to the superior refinery rebuilt.

Net debt at the end of the quarter was 5.4 billion compared to $5.1 billion at the end of Q2.

This was driven by negative free cash flow and the effects of foreign exchange on U.S. dollar denominated debt.

Could it be at the end of the quarter was 5.5 billion made up of approximately 1 billion in cash and 4.5 billion in available credit facilities.

And as mentioned earlier, we issued 1.25 billion of notes. The net proceeds were used in part to repay our 500 million dollar term loan in early October.

With the completion of spruce like Central 29, one field and the upgrader turnaround our 2020 capital expenditures are trending towards 1.4 billion, excluding the superior rebuilt.

Meanwhile, average overall upstream production in the third quarter, just north of 258000 Mmbtu per day.

Husky working interest.

This takes into account to plant maintenance work on the sea rose up yes, So added Tucker and it outage on a third party pipeline to Sunrise, which had an impact of about 7000 barrels per day for the month of September.

Downstream throughput averaged just over 300000 barrels per day, which included a turnaround at the Lloydminster upgrade.

Thanks, and we'll now go back to the operator for questions.

We will now begin the analyst question and answer session any analysts who wishes to joint task a question Press Star one on your Touchtone phone you.

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But I just think given that he could tell it may be necessary to pick up your handset before pressing.

If you wish to remove yourself from the question queue Mesa jar and two.

One moment, please while we pull for questions.

Our first analyst question is from Chris Schott low with Citigroup. Please go ahead.

Hi, good morning, Thanks for taking the question.

I wanted to start with the offshore performance Yeah pricing, obviously was was held up pretty well.

And just wanted to kind of understand you know there's a lot of that flew on I would imagine you know how with strength of that that margin contribution has has held up and how you're thinking about that I know you said either on an absolute margin basis, what we should be expecting but tend to sort of pricing you know with contract expirations come.

What does that sort of how should we be thinking about the puts and takes there as to sort of the [noise].

Going forward like the through cycle profit profitability on that project seems quite a quite a handsome at accretive.

Segment for you and for the combined entity, mostly maybe a merger goes through so just wanted to get your thoughts on that.

Sure. This is Rob the body.

First of all though it's important to understand that the contracts are not expiring soon there.

There is a the only thing that's happening up in up in about I'm trying to think the exact date 2021 is there is a price adjustment that is that is implemented under term contract and and that the price adjustments in the contract.

Have to happen within a very narrow range kind of plus minus 10%.

The current pricing and they're attached to Guangdong City gate prices, but there is a floor under that the actual gas contracts for the field are for life of field essentially.

So they they continue for the rest of the decade so.

So I hope that helps just understand that in terms of the potential variability there.

Yeah that does thank you and I apologize.

I should have said that the.

Just for to the pricing mechanism not not the expiration of the contracts My my my Miss a mine.

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The other question I had robyn sort of more broadly speaking.

Obviously I heard you on the call on Sunday, but now that we have you alone [laughter] sort of Oh you did.

It's been an interesting you 12 months right trip from from you know the be the bid for magnitude until now with respect to the merger which to news.

Just if you could take us through EBITDA the narrative.

Where how how the how this develops you know where were you. How are you thinking now that we have a deal on the table you know.

Excuse me GAAP went through the past 12 on some through the pandemic.

The broad strokes of how you're thinking might have changed in terms of being bought versus acquiring someone then maybe give a little bit more background on one the conversations really started between you and synovus and picked up would be would be helpful. Trying to just to give us a bit more of a timeline.

Sure I think I mean whats in common with both transactions are all driven by a a kind of sense of consolidation needs to happen in the industry overall and and certainly that was a big driver and of course, you consolidation needs to happen in order to lower the cost base.

For for the industry, but more particularly for us and and and in the case of Synovus. They have the same driver you know again, yeah. We see oil prices are a little further down today, we don't know where they'll be going tomorrow or the day after but what we do know is.

$1.2 billion the synergy that we can deliver makes makes more and more difference as the oil prices lower and and so that desire to create a resilient sort of integrated energy leader with a real low cost upstream platform and a re.

Really you know extensive midstream and downstream network to allow it to be totally integrated was our real you know whether it was a real strong driver in the part of both companies and so so I think that that kind of conversation has been going on for a while of course and of course, there you know there.

Theres a lot of people [laughter] between synovus and ourselves we know each other quite well. So some of those discussions went on for a while but I would just go back to the driver here is we need to consolidate more in this industry I've made that point, a few times before and both of those moves were in that direction in the case of make clearly.

You know in the end there wasn't a lot of desire to complete the transaction on their part.

And so we didn't and and in the case of Snowbirds right from the start up companies could see the compelling logic I'm wondering in this thing together and so it was a great place to go.

Thanks, Rob I appreciate the color I'll turn it over.

The next question comes from Matt Murphy with Tudor Pickering Holt. Please go ahead.

Hi, Thanks. Good morning, just wondering if you could talk about how superiors progressing and given we've now had some progress as you guys are disclosed outlaying capital with appreciation as you've said many times the city largely covered by insurance I guess, if you started to see some dollars trickling in on that yet and apologies if it's in the school.

There has been a bit of a busy morning.

Yeah, No I'll turn it over in a minute.

So too.

Ill turn it yeah.

Just to talk a little bit more but one thing I did want to point out in the quarter was when it came to superior actually its going well a slower than the original plan because a code that we've had to you know kind of recognizing the construction program, but actually it isn't affecting productivity. It's just slowed up the pace a little bit so I'm pretty.

Pleased with that spin.

Specific and again the insurance.

The relationship discussions are going fine, but in this particular quarter. This was a quarter, where you know the difference between the money we put out in superior and the money that came back was in the order of 101 hundred $20 million. So one of the one of the reasons you see a little less of funds.

From operations here in aggregate is kind of a difference between inflows and outflows on superior, but overall, that's going pretty well, but Jeff did you want to add a yeah I know I think Rob hit on it is as you know you think you know we had we spent about 79 million and a in capex for the Q. It and then just ongoing kind of costs at around it.

<unk> for the quarter was about $30 million to Rob's point, we didnt.

I didn't know if insurance proceeds this quarter, we do expect that as as activity levels really start to ramp up on on site to really in line with that start to see insurance recoveries come in and we've collected I think both three although over 300 million on business interruption to Dayton and a little under 200 million on property damage to date, so we'd expect that.

Recoveries to a you know to wrap up with the project and and to Rob's point. This quarter, we didn't and you don't kind of net net a you know a little over a 100 million kind of outflows in it or else.

Yeah I appreciate the color on that maybe on the on the path forward for West White Rose I'm. Just wondering if you could talk from a high level, what sort of costs might be necessary. If the decision ultimately it's taken that.

Going forward not to proceed with it.

Deconstructing, if you will I would have been construction date or or maybe perhaps if you could keep that incubated for some time without having to add to Russia to anything on the on the cost front.

Yeah, I think what I would say there is a first we canceled the construction season or next year of course, you have to try to do this on a seasonal basis, because you can only do the installation on a seasonal basis. So you've got to get the chance once a year and decide whether or not you're going to try to keep it on schedule or deferred a year.

And the other point I'd make again is that looking forward on the project. The project has reasonable economics at quite low oil prices to go forward with however, you know which is quite low oil prices you just only have so much money coming into the company and we need to we're always conscious of protecting the balance sheet and in.

Sharing you know we continue with the investment grade credit ratings and so we just want to pace capital spending very carefully.

So so looking forward on west White Rose you know, we're putting the project into safe keeping both that means with a desire to move it forward again sometime in the future and we're also talking to the new from the lagged government about ways that they can help to ensure that this project ultimately moves forward. So it's a.

Well I'm I'm optimistic, we'll eventually get going again and as far as sort of in that in that in the case where that doesn't happen.

We can kind of.

We haven't gone into all the I don't want to get into all the best scenario at the moment all certain certainly we've we've modeled that and we're happy with that and for the purposes of this transaction I know that we took a very conservative case on this and assumed almost the worst case on west White Rose and still we were able to show in the.

The transaction again with the synergies and everything else that under all price scenarios for both companies. The transaction would result in higher funds flow per share at higher free cash flow per share than either company could generate on it so.

Thanks, guys.

Thanks.

The next question comes from Greg Pardy with RBC capital markets. Please go ahead.

Yeah. Thanks, Good morning, I I guess first is guys. This is probably the last call we are going to be doing for a while so it's been a lot of years and it's been great to work with you and all the very best as you go forward.

Thanks, Greg.

Really it was just kind of an operations call and I'm wondering if we can just maybe just dig into Li one a bit.

If you can just remind us on on 29 one.

Just maybe a bit more on we know it's ramping up as you go to the quarter is that going to be additive do you think to the production profile not going too crazy, but just wanted to better understand Li one and then also.

No I fully recognize there's a merger coming down here, but the other piece of the equation would just be getting a sense just to kind of whats locked and loaded with respect to offshore Indonesia development. Thanks very much.

Okay. Thanks, Greg I'll I think the the good news is 29, one of course as I say is actually came in a reasonable amount under budget and on schedule and it is what it.

It is expected to start up production. It's all ready to go everything has been claim we were just it's just actually but the off taker, taking the gas on the first day and their contractual the contract kicks in on November Onest, and we expect we.

We expect them to start lifting gas on November Onest and it will be you know it will be incremental in the near you know in the near term too.

The base leeway on production of course over the longer haul it over.

A few as as we move forward.

Li one starts coming off this start to being more of an infill, but certainly in the next year or so it's going to be it's going to be incremental to the base load on Lee won so so im pretty you know so that's great to see and it's been a really really solid project and we're in a really good place on Indonesia again, it actually feels like were.

You know, Indonesia is always a place where you have to be patient.

As Bob ankle, who runs that area for us of course, as Indonesia moves slow until it was really fast and so we are getting some very positive indications right now on the next two fields. It looks like all the you know there were issues with some of the contractors involved in putting the.

Yep, so in place and not getting all their proper financing in place it looks like Thats essentially been all tied up out all the permits are in place to move forward. The gas contracts are in place. So thats looking like a we're we're we're now looking much more confident about our start up in about 2022 for for the next.

Just to sort of developments in Indonesia, and its fairly fairly low capex, you're talking I think into your 60 $70 million drilling scrape yep, Okay, and sorry can you just remind us on pricing, it's it's pretty good as ever as I recall.

Yes pricing, yes, typically what we see in.

Indonesia is you know you're at that six dollar and waiting and we sell into industrial users and this is I think more and kind of why closer to seven so it's right in the range of that's us that's a yes, thats U.S. Utica school. Thanks, Rob Okay. Okay terrific. Thanks, very much guys.

Hi, there thanks, Greg.

The next question comes from Mike Dunn with Stifle. Please go ahead.

Well. Thanks, good morning, everyone, I'm, probably not I might have thought.

Hi, Rob, but nothing overly topical question with the quarter, but just thought I'd.

Look for the detail wallet, while I can get you on the phone here, but.

The superior refinery you know coming back on line in 2022.

You know versus I guess, the refinery design pre pre the fire I think there's some enhancements being added.

Can you maybe just frame for us like what you might expect.

You know I guess on the gross margin or operating margin basis, where the you know the the 2022 new refinery will.

The expected the stack up relative to.

Toledo, and and Lima in terms of.

Margin, it's a smaller refineries so I'm I'm assuming the.

The operating costs per barrel higher but.

Sure less pipeline tools and et cetera, So maybe.

Maybe if you could just frame, but for me that would be helpful. Thank you.

I'll, let Jeff Brinker talk to sort of specialties talking talking to what are the capabilities of the refinery and then of course it all depends on the margins on the day and things like that go ahead, Jeff.

Thanks, Rob yet the.

The main thing that we're doing differently with the configuration of the refinery when we started back up again as regard to the refinery will be able to running continuous mode and in the past. This is a refinery that that swung back and forth between heavy mode and light mode, and when you're constantly swinging back and forth between slates like that you get lower utilization of some of the.

New refinery same configurations and processed units roughly the same product slate, but.

But it will be able to run a continuous mode at higher Utilizations and we'll get the same get more throughput on an annual basis, roughly the same size to catch us.

Was that the main difference and in terms of what the margin performance is going to be we like the strategic location of the refinery always have is the first refinery on the Enbridge mainline when you go into the U.S. and so it's really a good location or are both for access to crude and also for a company. The lakes trading along the integrated value chain that we do is it really a very valuable asset.

And what's the so the in terms of margin performance you just got a you've got to just it's going to depend of course on what kind of heavy spreads we get the refinery will be able to run about 25000 barrels a day of heavy out of a total throughput of about 45000 barrels a day. So in terms of just being a heavy refinery is kind of in the range of Toledo in terms of.

Thats heavy in the feed and more heavy than than Lima in Lima is.

That of course is not a fully upgrading refinery outages and asphalt making refinery another coking refineries. So it's a little bit lower margin than if it were a fully upgraded refinery.

I think thats that while they were thinking about it but the value is not it's not going to think about superior and the value. It creates not just inside the refinery gates, but also you know its location in the value chain and what that allows us to do as well.

It's also a great addition for our asphalt business, which is a very consistent earner for us much less variability in the margins there and we're Oh I think as a husky stand lower around 5% of the North American sort of bashful business and this will get us up to sort of 7%.

Something in that range. So it's a it's a nice extension to that business.

Understood. Thanks, that's helpful. You can probably understand.

It's always tough for US you know in our chairs to.

That's a model a lot of those logistical synergies outside of outside of the refinery itself, but we certainly understand that they exist even to start our models might not be a forecasting. Thank you.

Thanks. Thanks.

And.

The next question comes from Benny Wong with Morgan Stanley. Please go ahead.

Hey, good morning, guys. Thanks for taking my question I'm sorry.

Just had a quick question around the synergies I know you guys have the 1.2 billion target as a combined basis and there's potential for upside and one of the things was indicated was potentially running some of the FCCL barrels through your upgrade or administer system.

Is there any way high level way to think about the benefits of that is it just really hedging out the.

The differential volatility or is there any any yield benefit or product benefit that might come from from running those barrels through that system that we have shipped to think about.

Yeah, Benny at you know John and I have had many sort of chats on this and and John Mckenzie at Synovus and of course, he knows our assets very well too. So he's got some pretty clear ideas now some of them are longer term at all require a bit of capital as well. So they are not short term things.

We're doing and that's one of the reasons. We didnt include them in any of the sort of initial synergies. The 600 600 and bought but looking forward a lot of them have to do with the ability to shorten the deal you win loop in North America. He's very conscious of just how much do you when do you have to truck all around North America.

Erika and he sees that Lloydminster site and the equipment, there plus potentially some additions as a really great opportunity to shorten that deal you went loop and take a whole bunch of money out of the out of the cost base over the long haul I think that's that's kind of I would summarize it theres lots of other ideas that they have but.

That's one of the big ideas I think that comes into that thinking.

Great. Thank you very much.

Thanks Bonnie.

This concludes the question and answer your question.

I would like to turn the conference back over to Mr. Rob Peabody for any closing remarks.

Well, thanks, very much I really appreciate everybody who tuned in.

We are certainly looking forward to working with synovus on on the planning to unite our people and the complementary suite of assets to deliver on the full potential of this resilient New company, there's a new chapter for all of US I look forward to working closely with the team in the coming months to complete this transaction. So the combined company conduct.

Continue to responsibly provide essential energy to North America, and the world. Thanks again for joining us today.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant thing.

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