DBRS Confirms Husky Energy Inc. at A (low); Assigns Pfd-2 (low) Rating

DBRS has today confirmed the Senior Unsecured Notes and Debentures of Husky Energy Inc. (Husky or the Company) at A (low) and assigned a rating of Pfd-2 (low) to Husky’s Cumulative Redeemable Rate Reset Preferred Shares, both with Stable trends. The DBRS rating is based on the expectation that the Series 1 Preferred Shares will remain the most highly ranked preferred shares issued by Husky.

The rating actions are based on DBRS’s review of Husky’s long-term plans, which incorporate its major strategic growth initiatives, upstream operational targets and financial targets through 2015. DBRS expects the Company to maintain its conservative financial profile with only modest weakening of its key credit metrics during the period of high capex growth through 2015, as well as making significant progress on its upstream operational targets over the period in order to maintain the current ratings.

On November 29, 2010, Husky announced a number of major strategic growth initiatives including: (1) an asset acquisition; (2) capex and production guidance for 2011; (3) sanctioning of Phase 1 of the Sunrise project; (4) retention of its Southeast Asia assets; and (5) the intention of an equity issuance of $1 billion combined with an agreement to pay dividends in shares to Husky’s principal shareholders (approximately 70.5% ownership) from Q1 2011 to year-end 2012.

On December 1, 2010, Husky announced a number of financial targets through 2015 including: (1) an increase of five percentage points in its return on capital employed; (2) total debt-to-capital in the 25% to 35% range; (3) total debt-to-cash flow in the 1.5 times to 2.5 times range; and (4) retention of its investment grade credit ratings.

On that date, Husky also announced a number of upstream operational targets through 2015 including: (1) annual 3% to 5% production growth rate; (2) annual reserve replacement in excess of 140%; (3) overall finding and development costs below $20 per barrel of oil equivalent (boe); and (4) overall operating costs below $15.50 per boe. These initiatives are intended to reverse the decline in Husky’s production in recent years (see below), generate 3% to 5% annual production growth, improve its upstream operational metrics and maintain its relatively strong credit metrics during a planned high capex period through 2015.

With respect to Husky’s business risk profile, DBRS believes that the recent asset acquisitions from Talisman Energy Inc. (closed on November 30, 2010) and ExxonMobil Canada Ltd. (closed on February 4, 2011), which added a combined 33,000 boe/day of gross production (equivalent to 11% of 2010 production), are initial steps in reversing Husky’s declining production trend in recent years (287,100 boe/d gross in 2010 compared with the peak of 376,600 boe/d gross in 2007), which was largely related to much lower production offshore the east coast of Canada (Atlantic Region) and the impact of reduced capex in a lower natural gas price environment in western Canada.

Husky has below average reserve replacement metrics, including: (a) three-year average reserve replacement costs of $27.63/boe from 2008 to 2010 ($23.72/boe excluding the natural gas price related negative revision in 2009) and (b) net proved reserve life index (RLI) of 9.3 years and net proved developed RLI of 5.9 years in 2010. While retention of the Southeast Asia interests and sanctioning of Sunrise provide opportunities for medium-term production and reserve growth, these projects also involve execution risk and the potential for delays and cost overruns. Husky’s reserve replacement performance has historically been poor relative to those of its peers. Whether these projects will contribute to improved reserve replacement and cost metrics will be determined by their successful execution.

With respect to Husky’s financial profile, DBRS notes that Husky has maintained a conservative financial profile over the past several years, including in the weak economic environment of 2009. The Company’s debt-to-capital ratio weakened slightly to 21% in 2010 from 18% in 2009 while its debt-to-cash flow ratio improved to 1.20 times from 1.31 times, both relatively strong levels.

The $1 billion common equity issuance in Q4 2010 offset the impact of the Q4 2010 acceleration in capital investment (total capex and acquisitions of $3.9 billion in 2010 compared with $2.3 billion spent in the first nine months of 2010 (9M 2010). This, combined with the principal shareholders’ agreement to reinvest their dividends, as required, in common shares (which could amount to a further $1.225 billion of retained equity in 2011 and 2012 combined, based on the current dividend) and the pending preferred share issuance, demonstrates Husky’s commitment to maintaining a strong financial profile despite its aggressive growth capex program. The Company has significant liquidity, with $2.7 billion of availability on committed bank facilities, at December 31, 2010. While $778 million (19%) of Husky’s debt matures in 2012 (none in 2011), nearly one-half of this amount consists of borrowings on its credit facilities ($380 million). DBRS views these maturities as manageable.

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

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