DBRS Comments on Husky Energy Inc.’s Announcement to Sell a Partial Interest in Select Midstream Assets for $1.7 Billion
EnergyDBRS Limited (DBRS) today notes that, on April 25, 2016, Husky Energy Inc. (Husky or the Company; rated A (low) with a Negative trend by DBRS) announced an agreement for the sale of 65% of its interest in select midstream assets in the Lloydminster region of Alberta and Saskatchewan to Cheung Kong Infrastructure Holdings Limited (Cheung Kong) and Power Assets Holding Limited (Power) for gross cash proceeds of $1.7 billion (the Transaction). Husky will retain a 35% interest and will remain the operator. Husky had previously announced plans to sell interests in the Company’s midstream business, along with plans for the sale of interests in non-core oil and gas properties and production royalty interests. The Transaction is anticipated to close in the second half of 2016, subject to regulatory approvals.
The assets consist primarily of (1) 4.1 million barrels of oil-storage capacity at Hardisty and Lloydminster and (2) approximately 1,900 kilometres of pipeline in the Lloydminster region. The Transaction will create a new limited partnership, in which Husky, Cheung Kong and Power will hold 35.00%, 16.25% and 48.75%, respectively. Both Cheung Kong and Power are related entities as controlling interests in the three companies are held by Li Ka-Shing. In this case, Li Ka-Shing effectively holds a 69.5% common share equity interest in Husky.
DBRS views the impact on Husky’s business risk profile as marginally negative due to a lessening in the integration and diversification of the Company’s asset base. The midstream segment has provided a source of stable cash flow partially offsetting the significant erosion in cash flow from oil and gas production activities. DBRS also notes that the Transaction will result in a minor negative impact on Husky’s cash flow (expected 2016 EBITDA contribution from the assets is approximately $180 million; however, Husky will retain a 35% share of EBITDA).
However, more importantly, the impact on the Company’s financial risk profile is positive. The Company plans to use the proceeds from the sale to strengthen the Company’s financial position and enhance liquidity. At March 31, 2016, Husky’s total debt was $6.98 billion and the Company had no cash on the balance sheet. For the past 12 month ended March 31, 2016, the Company’s total debt-to-cash flow ratio was 2.90 times (x; up from 2.42x at end of 2015) and total debt in the capital structure was 30.2%. On a pro forma basis, assuming proceeds (before transaction costs) of $1.7 billion are applied to debt reduction, DBRS estimates a total debt-to-cash flow ratio of 2.31x and a ratio of total debt in the capital structure of approximately 24.7%.
The Transaction on a stand-alone basis has no immediate impact on the Company’s Issuer Rating and Senior Unsecured Notes and Debentures rating of A (low), the Commercial Paper rating of R-1 (low) and the Preferred Shares – Cumulative rating of Pfd-2 (low). The sale, as noted earlier, of the midstream assets is part of a program of planned asset sales that also includes (1) approximately 55,000 barrels of oil equivalent/day non-core oil and gas production and (2) a minor amount of royalty interest production. The Company is currently evaluating offers for these other asset packages. Based on estimates from sources outside the Company, the asset sales in total (including the midstream sale) could reap in excess of $3 billion of proceeds. The Company has said proceeds from asset sales will be directed to strengthen the balance sheet and improve the Company’s financial risk profile. DBRS at this time maintains a Negative trend on Husky’s ratings as the low oil pricing environment continues to weigh on the Company’s cash flow generation and key credit metrics. However, if the Company successfully completes the asset sale program and/or if oil prices recovery materially, DBRS will review the rating and likely change the trend back to Stable.
Notes:
All figures are in Canadian dollars unless otherwise noted.
The applicable methodologies are Rating Companies in the Oil and Gas Industry (September 2015); DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2015) and Preferred Share and Hybrid Criteria for Corporate Issuers (January 2016).
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