July 27, 2011 / 12:57 PM / 6 years ago

UPDATE 3-Husky sees 4-5 year payback on $6.5 bln Luwan plan

* Signs Liwan supply deal at $11-$13 per mcf

* Q2 EPS C$0.72 vs est C$0.69

* Production up 10 percent (New throughout with CEO comments. In U.S. dollars unless noted)

By Jeffrey Jones

CALGARY, Alberta, July 27 (Reuters) - Husky Energy Inc HSE.TO expects to recoup its investment in a $6.5 billion Asian offshore gas project in four to five years after agreeing on a rich gas sales deal, executives at Canada’s No. 3 oil producer and refiner said on Wednesday.

Husky, which reported a higher-than-expected second-quarter profit on Wednesday, said it and its partner, Chinese state-owned CNOOC Ltd 0883.HK, expect first production from the Liwan Gas Project in the South China Sea by late 2013 or early 2014.

Under a deal with CNOOC Gas and Power Group, Guangdong Trade Branch, output from the Liwan 3-1 field will be sold into the grid in China’s Guangdong Province at a price of $11-$13 per thousand cubic feet, Husky Chief Executive Asim Ghosh told analysts.

That is in sharp contrast to weak market conditions in North America, where the current New York Mercantile Exchange U.S. gas price is around $4.40 a thousand cubic feet.

“That’s a real cornerstone development for Husky as we look to build a substantial energy business in Asia and we are very pleased with the progress so far,” Ghosh said.

The company’s share of spending is pegged at $3 billion. Its share of production is 49 percent.

The next step is to file a development application with the Chinese government. Plans call for the first two fields to produce 300 million cubic feet a day, then rise to 500 million a day with the addition of a third field in 2015.

After Ghosh took the helm as CEO last year, Husky made an about-face on plans to spin off its Asian operations into a separate publicly traded entity, saying that they are key to the company’s future.

Husky, controlled by Hong Kong billionaire Li Ka-shing, recently said it may seek a secondary listing on the Hong Kong Stock Exchange, but Ghosh said he has yet to make a decision.

In the second quarter, Husky earned C$669 million ($709.0 million), or 71 Canadian cents a share, compared with C$179 million, or 19 Canadian cents share, a year earlier.

On an adjusted basis, it earned 72 Canadian cents a share, beating the average analyst forecast of 69 Canadian cents a share as compiled by Thomson Reuters I/B/E/S.

Husky shares were up 5 Canadian cents at C$26.73 on the Toronto Stock Exchange on Wednesday afternoon, while the market’s energy subgroup was down 1.7 percent.

The company’s results were bolstered by high benchmark oil prices and fat margins at its refineries at Lima and Toledo, both in Ohio, where it took advantage of discounted heavy crude.

The margin, which is the difference between the cost of crude in the U.S. Midwest and price of wholesale gasoline, rose by 155 percent in the quarter to $28.90 a barrel.

That helped push earnings from Husky’s refining and processing division to C$165 million from a year-earlier loss of C$14 million.

Husky is also known for its exploration, production and processing in Western Canada and offshore Newfoundland, where it operates the White Rose oil field.

Its overall production rose 10 percent to 312,000 barrels of oil equivalent a day, despite northern Alberta wildfires that shut down Plains All American Pipeline LP PAA.N Rainbow oil pipeline and restricted production by 13,600 bpd.

Cash flow, a glimpse into the company’s ability to find its drilling, more than doubled to C$1.5 billion, or C$1.67 a share, from C$1.2 billion, or C$1.30 a share.

$1=$0.94 Canadian Additional reporting by Aftab Ahmed and Bhaswati Mukhopadhyay in Bangalore; Editing by Saumyadeb Chakrabarty, Maju Samuel and Peter Galloway

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