DBRS Updates Report on Husky Energy Inc.

DBRS has today updated its report on Husky Energy Inc, (Husky or the Company), reflecting operating performance and corporate developments for the six months ended June 30, 2012.

Husky’s credit quality is supported by its conservative financial profile. Husky targets total debt to capital and total debt-to-cash flow in the ranges of 25% to 35% and 1.5 times (x) to 2.5x, respectively, and has been successful in maintaining metrics below these ranges in the recent past. The Company’s commitment to maintaining balance sheet flexibility was evidenced by the primary shareholder’s agreement to receive $1 billion worth of stock dividends (as opposed to cash payments) in an effort to conserve cash. The flexibility afforded by the Company’s financial profile also enabled it to navigate the economic crisis in 2009 with limited negative impact on credit metrics.

Husky also benefits from its joint venture (JV) agreements with BP (rated “A” by DBRS). The JV provides Husky with an integrated solution for its heavy oil production, as well as reducing Husky’s capital expenditure (capex) requirements in developing Sunrise. Through its downstream JV, Husky has a more diversified product mix, which acts as a natural hedge and provides stability to earnings and cash flow during periods of lower commodity pricing.

The rating is limited, however, by weaker reserve replacement metrics. Although the Company has made progress towards an improvement in reserve replacement metrics, they remain below average, as compared to peers. Earnings are likely to be impacted by below-average metrics until successful execution of growth projects is achieved. In addition, capex levels have increased to fund the Company’s growth plans, which are focused on long lead-time projects. As incremental cash flow from these projects is not expected in the near term, this increased capex could pressure the balance sheet, particularly should there be a recurrence of the pricing decline in the latter half of Q2 2012. DBRS expects Husky to maintain its conservative financial profile, with only modest weakening of its key credit metrics expected during the high growth period through 2015, as well as making significant progress on its upstream operational targets over the period in order to maintain the current ratings.

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.