DBRS Confirms Ratings on Husky Energy Inc. at A (low), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Notes and Debentures rating of Husky Energy Inc. (Husky or the Company) at A (low) as well as its Commercial Paper rating at R-1 (low) and its Preferred Shares – Cumulative rating at Pfd-2 (low), all with Stable trends. DBRS believes that Husky is in a good position to ride the challenging commodity price environment among its domestic peers given (a) Husky’s relatively low leverage; (b) reasonable liquidity and no material long-term debt refinancing risk over the next three years; (c) strong earnings and cash flow contributions from the Liwan Gas Project (Liwan) offshore China and the Company’s downstream business, which are not tied directly to oil prices; and (d) the near completion of the major capital-intensive projects – Liwan and Sunrise Energy (Sunrise) – reducing capital expenditure (capex) commitments going forward. The Stable trend incorporates DBRS’s expectation that key credit metrics will weaken materially in 2015, but will remain above average among DBRS-rated investment-grade peers in Canada; however, a negative rating action could be taken if key credit metrics remain under pressure on a sustained basis.

Key challenges for Husky and its peers are executing production growth strategies and sustaining dividend payouts amid weak commodity prices, which could constrain liquidity, leverage and profitability. DBRS projects the Company to incur cash flow deficits of around $1.0 billion per annum in 2015 and 2016, assuming no meaningful recovery of oil prices and no material change in Husky’s financing strategy over the next two years. DBRS acknowledges that new project opportunities (excluding Liwan and Sunrise, which are close to completion) are relatively small in size (5,000 to 10,000 barrels per day) with lower project risk and higher capex flexibility compared with mega projects. As a result, Husky has the ability to further reduce capex should weak commodity prices persist for a longer period. In addition, the principal shareholder, Mr. Li Ka-shing of Hong Kong who owns a majority share in Husky, has supported the Company in the past by reinvesting dividends in common shares.

With the uncertainty about the timing of commodity price recovery, Husky has taken steps to (1) preserve liquidity, (2) focus on both operating and capital efficiency and (3) maintain capital spending flexibility to adjust spending according to changing commodity prices. Husky has bolstered liquidity as the Company increased its committed credit facility by $770 million to $4.0 billion in March 2015. In light of this, available liquidity including cash on hand and committed credit facilities was reasonable at $3.3 billion in June 2015. In addition, Husky issued $350 million in preferred shares so far this year, reducing incremental debt issuances. The Company is on track to achieve approximately $400 million to $600 million in target cost savings by 2016, 70% of which is expected to be related to procurement initiatives with the remaining balance expected to be achieved by corporate, information technology and workforce adjustments.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Oil and Gas Industry, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers and DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.