CK Hutchison : Husky Energy Reports 2016 Fourth Quarter and Annual Results

"This past year has been challenging for the sector, but by responding quickly to the new pricing environment Husky is well positioned for the next phase of growth," said CEO Rob Peabody. "We have a strong balance sheet and are advancing a deep portfolio of projects.

"From this firm foundation, we will continue to expand margins, further reduce our break-even oil price and increase our ability to generate free cash flow."

Fourth quarter highlights included:

• Net thermal production was 120,000 barrels per day (bbls/day) at the end of December, 2016. This included Lloyd thermal projects, the Tucker Thermal Project and the Sunrise Energy Project. Net production from these projects over the fourth quarter averaged 115,300 bbls/day, an increase of 46 percent over the same period in 2015.

• The Edam East, Vawn and Edam West Lloyd thermal projects averaged 28,500 bbls/day, surpassing their combined design capacity by 15 percent with an average steam-oil ratio of 2.2.

• U.S. refining capacity utilization was 92 percent compared to 84 percent in the third quarter, and 81 percent in the fourth quarter of 2015, reflecting work completed in 2016 to improve efficiencies.

• Capital expenditures in the fourth quarter were $391 million. Including equity accounted entities, total annual capital spending was $1.9 billion. This was approximately $200 million less than the lower end of the 2016 guidance range, reflecting the ongoing cost reduction program and improved productivity. In addition to the savings achieved, an expanded work program was completed.

• Free cash flow was $279 million in the fourth quarter, contributing to annual free cash flow of $371 million.

Upstream production was 327,000 boe/day, compared to 357,000 boe/day in the fourth quarter of 2015. This reflected the asset dispositions in Western Canada, natural declines and planned turnarounds, partially offset by growing thermal production and increased volumes from the Liwan Gas Project.

Upgrading and refining throughputs averaged 351,000 bbls/day, up from 338,000 bbls/day in the fourth quarter of 2015. WTI prices averaged $49.29 US per barrel compared to $42.18 US per barrel in the fourth quarter of 2015.

Average realized pricing for total Upstream production increased to $39.90 per boe from $34.89 per boe in the fourth quarter of 2015. This included average realized gas pricing of $13.10 Cdn per thousand cubic feet (mcf) for sales gas at Liwan.

The Chicago 3:2:1 crack spread averaged $10.59 US per barrel, compared to $13.73 US per barrel in the fourth quarter of 2015. Average realized U.S. refining margins were $9.86 US per barrel, up from $4.51 US per barrel a year ago.

Overall Upstream operating costs were reduced to $13.92 per barrel from $14.51 per barrel in the fourth quarter of 2015. This was in part due to the growing contribution from lower cost Lloyd thermal production and the Tucker Thermal Project, which together represented more than 30 percent of overall production in the fourth quarter at 98,400 bbls/day.

Upstream operating netbacks were $22.30, up from $15.70 in the third quarter of 2016 and $16.19 in the fourth quarter of 2015.

Funds from operations (previously described as cash flow from operations) was $670 million, compared to $640 million in the fourth quarter of 2015, and included a pre-tax FIFO gain of $39 million. This did not take into account $23 million in cash received as pre-payment for future gas volumes at Liwan.

Capital expenditures in the fourth quarter were $391 million, leading to free cash flow of $279 million.

Net earnings were approximately $186 million, compared to a loss of $69 million in the fourth quarter of 2015, and included one-time items associated with the Western Canada asset sales and a net impairment reversal of $202 million. Excluding one-time items, adjusted net earnings were a loss of $6 million.

1. Includes results from Upstream Exploration and Production and excludes Upstream Infrastructure and Marketing.

2. Operating netback, funds from operations, adjusted net earnings (loss), net debt and debt to capital employed are non-GAAP measures. Refer to Section 11.3 of the 2016 Annual MD&A, which is incorporated herein by reference.

   FOURTH QUARTER OPERATIONS SUMMARY Thermal Production

   Average net thermal production from Lloyd thermal projects, the Tucker Thermal Project and the Sunrise Energy Project was 115,300 bbls/day, an increase of 46 percent over the same period in 2015.

   Production from a trio of Lloyd thermal projects at Edam East, Vawn and Edam West averaged 28,500 bbls/day. The projects, which began production in 2016, are currently producing more than 15 percent above their combined design capacity of 24,500 bbls/day with an average steam-oil ratio of 2.2.

   Construction continued to advance on the 10,000 bbls/day Rush Lake 2 Lloyd thermal project, with production on track for the first half of 2019.

   The Tucker Thermal Project averaged production of 20,800 bbls/day, a 38 percent increase over the fourth quarter of 2015. Steaming is now under way at a new eight-well pad, with first production expected in the second quarter of 2017. Drilling has also commenced at a 15-well pad, with first oil planned in the first half of 2018. Production from Tucker is anticipated to ramp up throughout 2017 and 2018 towards 30,000 bbls/day.

   At the Sunrise Energy Project, gross production averaged 33,800 bbls/day. Current production is about 36,000 bbls/day, with production per well pair averaging about 650 bbls/day.

   Western Canada Production

   The Western Canada business is moving ahead with increased capital efficiency and a focus on fewer, more material resource plays. The repositioned portfolio is now more than 70 percent gas-weighted, providing a natural hedge for the Company's energy requirements at its thermal projects and refineries.

   A 16-well program is planned in 2017 targeting the Wilrich formation in the Ansell and Kakwa areas.

   Downstream

   At the Lima Refinery, throughput averaged 165,000 bbls/day compared to 144,800 bbls/day in the fourth quarter of 2015.

   At the partner-operated Toledo refinery, the Company is realizing additional margins from its increased capacity to process high-TAN crude. Throughput averaged 78,800 bbls/day (net to Husky), compared to 73,000 bbls/day in the fourth quarter of 2015. Husky is now lifting and marketing its refined products from Toledo and first deliveries commenced in January 2017.

   Asia Pacific

   China

   At the Liwan Gas Project, gross sales gas volumes averaged 305 million cubic feet per day (mmcf/day), with associated liquids production averaging 17,000 bbls/day. The Company realized pricing of $13.10 per mcf for its sales gas production. Current gross sales gas production at Liwan is about 290 mmcf/day.

   Indonesia

   Construction was finalized at the liquids-rich BD project in the Madura Strait. The shallow water platform and subsea pipeline installation is complete, and the floating production, storage and offloading (FPSO) vessel is on site. The project is expected to ramp up to its full sales gas rate during the second half of 2017, with a net daily sales target of 40 mmcf/day of gas and 2,400 bbls/day of liquids.

   At the MDA-MBH fields, government approval was received for the award of the bid for a leased floating production unit. The engineering, procurement, construction and installation contract has been signed and the platforms are under construction. First gas is expected in the 2018-2019 timeframe, with an additional shallow water field at MDK to be tied in during the same period.

   Total net sales gas volumes from BD, MDA-MBH and MDK are expected to be approximately 100 mmcf/day of gas and 2,400 bbls/day of associated liquids once production is fully ramped up.

   Atlantic

   Overall production averaged approximately 34,300 bbls/day, with high-netback extension projects continuing to mitigate natural declines.

   A new infill well was completed at the South White Rose extension in the fourth quarter and is currently producing 3,000 bbls/day net to Husky and continuing to ramp up.

   The first of two additional White Rose infill wells scheduled in 2017 is now on production and currently producing 8,600 bbls/day net to Husky. All of the wells are tied back to the SeaRose FPSO, providing for improved capital efficiencies.

   The West White Rose extension will be considered for sanction this year. In the Flemish Pass Basin, preparations were finalized for two exploration wells that are scheduled to be drilled beginning in mid-2017.

   2016 ANNUAL RESULTS Financial

   The Company reduced its net debt by 40 percent to about $4 billion and also has $4 billion in undrawn credit facilities and

   $1.3 billion of cash in hand. Highlights included:

   • Funds from operations was $2.1 billion, not including $209 million in cash received as pre-payment for future gas volumes at the Liwan Gas Project.

   • Free cash flow was $371 million.

   • Net earnings were $922 million. Adjusted net earnings were a loss of $655 million.

   • The creation of a new Midstream partnership unlocked $1.7 billion in cash and secured takeaway capacity for at least eight new Lloyd thermal projects. Husky holds a 35 percent equity interest and maintains operatorship.

     Operational

     Average annual production was 321,000 boe/day. This takes into account the sale of approximately 32,000 boe/day of non-core production in Western Canada, including royalty volumes. Annual production did not include 43 mmcf/day of deferred volumes at Liwan, for which cash was received.

     Thermal Production

   • Average annual thermal production from Lloyd thermal projects, the Tucker Thermal Project and the Sunrise Energy Project was 97,400 bbls/day, a 55 percent increase compared to 2015.

   • Construction was progressed on the 10,000 bbls/day Rush Lake 2 Lloyd thermal project, which is scheduled for startup in the first half of 2019.

   • Three new Lloyd thermal developments with a combined design capacity of 30,000 bbls/day were sanctioned. Subject to regulatory approval, first oil from Dee Valley, Spruce Lake North and Spruce Lake Central is expected in 2020.

   • Fourteen additional Lloyd thermal projects with a combined design capacity of 110,000 bbls/day were identified for potential development.

     Western Canada Production

   • Resource play production was 34,500 boe/day, primarily in the Wilrich and Cardium zones.

   • A series of dispositions was completed, representing about 32,000 boe/day of non-core production.

     Downstream

   • Heavy crude feedstock processing capacity at the Lima Refinery was increased to 10,000 bbls/day following completion of the first phase of the crude oil flexibility project. The full scope of the project is expected to expand heavy crude processing capacity to 40,000 bbls/day by the end of 2018.

   • High-TAN processing capacity at the Toledo Refinery was increased to 65,000 bbls/day.

   • Engineering work commenced on a potential 30,000 bbls/day expansion of Lloyd asphalt capacity; the project will be considered for sanction this year.