DBRS Comments on Husky Energy’s Agreement to Purchase a 50,000-Barrel-Per-Day Refinery in the U.S. Midwest

DBRS Limited (DBRS) notes Husky Energy Inc.’s (Husky or the Company; rated A (low) with a Stable trend by DBRS) announcement of an agreement to acquire Superior Refinery, a 50,000-barrels-per-day (bbls/d) permitted capacity facility located in Superior, Wisconsin, from Calumet Specialty Products Partners, L.P. for USD 435 million in cash. The deal is subject to customary closing adjustments and is expected to close in the fourth quarter of 2017.

Superior Refinery produces approximately 9,000 bbls/d of asphalt; 17,500 bbls/d of gasoline; and 10,900 bbls/d of diesel as well as heavy fuel oils. The refinery is capable of processing a slate of Canadian heavy- or medium- and light-grade crudes from Canada and the Bakken play. The transaction also includes the acquisition of the refinery’s associated logistics, including asphalt terminals, 3.6 million barrels of crude and product storage and a fuels-and-asphalt marketing business. With the addition of Superior Refinery, Husky’s total refining capacity is expected to increase by 14% to approximately 395,000 bbls/d.

DBRS notes that the acquisition modestly strengthens Husky’s position in the North American downstream business and adds greater diversification overall to, as well as within, its portfolio of refining assets. Moreover, the refinery is directly connected to the Company’s pipeline terminal in Hardisty, Alberta, via the Enbridge Mainline pipeline, allowing further margin capture from the heavy oil/light oil differential. As a result of the acquisition, the investment decision to expand asphalt capacity at the Company’s Lloydminster Refinery will be deferred to post-2020 and will be considered again as heavy oil production grows.

With $2.5 billion of cash and cash equivalents as at June 30, 2017, the Company expects the acquisition to be funded primarily from cash on hand and, if needed, existing credit facilities. After closing, the Company expects the acquisition to be immediately accretive to earnings and cash flow. DBRS anticipates the impact on the Company’s credit metrics to be minimal, and Husky has indicated that at closing, the Company’s pro forma net debt-to-cash flow (12 months trailing) ratio is projected to remain below 2.0 times.

On balance, DBRS is of the opinion that the acquisition is marginally credit positive but not enough to have an impact on the Company’s overall credit ratings. DBRS, at this time, maintains the Company’s Issuer Rating and Senior Unsecured Notes and Debentures rating of A (low), Commercial Paper rating of R-1 (low) and Preferred Shares - Cumulative rating of Pfd-2 (low). All trends remain Stable.

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

The principal methodologies are Rating Companies in the Oil and Gas Industry (September 2016), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2017) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2016), which can be found on dbrs.com under Methodologies.

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