DBRS Confirms Issuer Rating of Husky Energy Inc. at A (low), Stable Trend

DBRS Limited (DBRS) 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 Preferred Shares - Cumulative rating at Pfd-2 (low), all with Stable trends. In 2016, Husky undertook significant actions, including selling assets, suspending cash dividends, cutting capital expenditures and lowering costs, to solidify its balance sheet and adapt to a lower oil and gas price environment. With recovering oil prices and the actions taken, the Company’s financial profile has improved materially. The Company has targeted an earnings break-even at a West Texas Intermediate (WTI) oil price of USD 43.60 per barrel (bbl), and the Company has been free cash flow positive (cash flow after capital spending and dividends) over the past year. The Company’s lease-adjusted debt-to-cash flow ratio has declined to 2.18 times (x; still outside the “A” rating range) as at September 30, 2017, down from 3.08x compared with the same period last year. Net debt-to-cash flow is 0.98x as at September 30, 2017, versus 2.02x in the same period in 2016. If the price of WTI oil remains above USD 50/bbl, DBRS anticipates that the Company can remain in a positive free cash flow position and that key credit metrics should continue to improve and underpin the Company’s A (low) rating.

The Company’s A (low) rating is further supported by its highly integrated thermal bitumen and heavy oil business, product diversification, capital and operational flexibility and portfolio of growth opportunities geared to thermal developments. The Company’s recent acquisition of the 50,000 bbls/day Superior refinery in Wisconsin further strengthens Husky’s position in the North American downstream business, allows additional margin capture in its thermal and heavy oil operations and mitigates exposure to the light/heavy oil differential. Furthermore, through related entities, Li Ka-shing, who resides in Hong Kong, owns a majority common equity stake in Husky and has supported the Company’s business and financial plans.

The Company has sufficient liquidity. As at September 30, 2017, the Company had $2.486 billion of cash, $4.125 billion available on its $4.750 billion of credit facilities and no significant long-term debt maturities until 2019. However, DBRS notes that Husky still has a relatively high percentage of lower-margin heavy oil and thermal oil production in its product mix, although the Company’s integrated operations help mitigate the impact of price volatility and exposure to the light/heavy oil differential. Also, fixed-price contracts for the Company’s offshore gas production in the Asia-Pacific region mitigate further the impact of price volatility. The Company does not have commodity price hedges, and should oil prices weaken again significantly and remain weak for an extended period, the Company’s credit metrics could erode materially below the prescribed rating range. If such a scenario unfolded, DBRS could take a negative rating action.

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.

The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries (August 2017), 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.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.