DBRS Confirms Ratings of Husky Energy Inc.

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 its Preferred Shares - Cumulative rating at Pfd-2 (low), all with Stable trends. The Company’s A (low) Issuer and long-term debt ratings are supported by its size, highly integrated thermal bitumen and heavy oil business, product diversification, capital flexibility and portfolio of growth opportunities geared to thermal developments. The ratings are tempered by the Company’s concentration of production in Western Canada and relatively shorter proved and proved developed reserve life for a reserve base that is weighted to heavy and thermal oil production. Furthermore, the majority equity stake held effectively by Mr. Li Ka-shing’s family trust and indirectly by CK Hutchinson Holdings Limited has been of strategic importance in the implementation of Husky’s growth plans.

During the oil and natural gas price downturn, Husky undertook a number of measures, including selling assets, suspending cash dividends of common shares, cutting capital expenditures (capex) and lowering costs, to fortify its balance sheet and adapt to a lower oil and gas price environment. With recovering oil prices and the various measures taken, the Company’s financial profile has improved materially. The Company has been free cash flow positive (cashflow after capex and dividends) from 2016 through 2018, and reintroduced payment of common share dividends this year. Based on DBRS’s West Texas Intermediate (WTI) oil price forecast of USD 60/barrel (bbl) in 2019 and 2020, and the assumption of a light-heavy oil price differential of USD 20/bbl, DBRS anticipates that the Company can continue to produce positive free cash flow. Key credit metrics should improve further and underpin the Company’s A (low) ratings.

On September 30, 2018, Husky announced an unsolicited offer to acquire all of the outstanding shares of MEG Energy Corp. (MEG) for an implied total enterprise value as of the offer date of $6.4 billion, including the assumption of approximately $3.1 billion of net debt (gross debt of approximately $3.6 billion). DBRS notes that if Husky’s offer is successful in its current form, the addition of MEG’s assets would be mildly positive for Husky’s business risk profile. DBRS also notes that the impact on Husky’s credit metrics (assuming the offer is successful) is initially modestly negative primarily due to the sizable amount of MEG debt that would be assumed. On a pro forma basis (last 12 months ended September 30, 2018), Husky’s key lease-adjusted debt-to-cash flow ratio rises from ~1.49 times (x) to 2.08x (outside the “A” range). However, Husky has noted that approximately $200 million in synergies could be realized annually from the acquisition of MEG and the combined entity is expected to generate material free cash flow that can be deployed to reducing financial leverage. On balance, DBRS views the proposed transaction, if successful in its current form, as having a neutral impact on the Company’s credit ratings.

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

The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries (August 2018), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2018) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2018), which can be found on dbrs.com.

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 under Related Documents or by contacting us at info@dbrs.com.

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

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