DBRS Confirms Husky Energy at A (low)

DBRS has today confirmed the Senior Unsecured Notes and Debentures of Husky Energy Inc. (Husky or the Company) at A (low) with a Stable trend. The rating confirmation is based on the Company’s conservative financial profile, its potential for future growth in both oil sands developments and in Asia, its diverse asset base, and its track record in controlling costs and completing projects on time and on budget. The rating is limited somewhat by Husky’s relatively short reserve life, high replacement costs and the declining production profile since 2007.

Husky benefits both financially and operationally from its joint venture agreement (the Partnerships) with BP plc (rated AA (high)) established in March 2008, for Sunrise, its largest-ever in-situ oil sands project, which is expected to be sanctioned in 2010. The Partnerships significantly reduce the capital requirements and concentration risk for Husky, represent an integrated solution for the development of Sunrise on a more cost-effective basis and, with its refining assets, provide Husky with a more balanced business mix going forward.

Husky has maintained one of the most conservative financial profiles among its peers, despite the substantially lower commodity pricing since Q3 2008 and the global economic downturn. However, these factors, coupled with lower upgrading margins and lower volumes and a turnaround in the east coast, depressed net earnings and cash flow before extraordinary items for the nine months ended September 30, 2009 (9M 2009). DBRS expects Husky’s near-term earnings and cash flow to be affected by the lower commodity price environment (as its production is unhedged), narrowing heavy oil differentials and lower crack spreads.

To enhance its funding position, Husky issued US$1.5 billion in additional debt in May 2009 to support its capex program. Husky also reduced its dividends in Q4 2008 to $0.30 per share (from $0.50 per share in Q3 2008). The Company’s liquidity position remains strong at September 30, 2009, with approximately $1.25 billion in cash balances, $1.4 billion in undrawn five-year credit facilities (to 2012) and no debt maturities due until 2012. Husky maintains its 2009 guidance capex of approximately $2.6 billion ($2.1 billion for upstream) with a potential higher capex level in 2010, as Husky plans to sanction Sunrise then, with first oil production expected in 2014. Should the project proceed, DBRS expects Husky’s estimated $2.75 billion share of the Partnerships’ previously estimated total projected capital investments ($5.5 billion including portions for Phases 2 and 3 developments and previously planned refinery upgrades) over a four-year period to be managed within the parameters of the current rating category.

Regarding operational performance, Husky continues to lag its peers with a smaller proved reserves base (887 million barrels of oil equivalent (mmboe) in 2008, excluding negative reserve revisions) and below-average reserve life, although this improved to 8.5 years (adjusted) in 2008 versus 7.5 years in 2007 (partly due to lower annual production volumes in 2008). DBRS expects Husky’s proved reserve life to improve over time with additional reserves from the North Amethyst field (a satellite field of White Rose), the extension of the Madura production-sharing agreement (Indonesia), and following the sanctioning of Sunrise (1.6 billion barrels of probable plus possible reserves net to Husky), both expected in 2010. Reserve replacement costs on a three-year average basis, adjusted for revisions ($20.54/boe in 2008) are expected to remain high. Husky expects production at the lower end of its guidance of 310,000 to 345,000 b/d (gross) in 2009, mainly due to the shutdown, maintenance, and severe weather during 9M 2009 at its White Rose oil field on the east coast of Canada, and lower natural gas volumes for the reasons mentioned above. Higher production volumes are likely in 2010, when North Amethyst comes onstream (peak production expected at 37,000 b/d gross). Despite completing Tucker, its first oil sands project, on time and on budget in late 2006, Husky has experienced operational problems. Ramp-up of production to its peak capacity of 30,000 b/d (approximately 4,300 b/d in 9M 2009) is now expected over the medium term, rather than by the end of 2008 as originally anticipated. With developments in offshore eastern Canada and internationally (mainly in China and Indonesia), Husky’s asset base remains diversified and poised for growth in the medium to long term.

Husky remains majority-owned (71%) by Mr. Li Ka-Shing and Hutchison Whampoa (which is 51.4%-owned by Mr. Li). The Company deployed special dividends ($1.29 billion from 2003 to 2007) rather than share buyback programs to return value to shareholders, thereby maintaining the ownership structure. The Company continues to operate independently as it moves forward with its strategies for growth.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Oil and Gas Companies, which can be found on our website under Methodologies.

This is a Corporate (Energy) rating.