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Global Credit Research - 05 Apr 2011
Approximately $4.4 billion of debt securities affected
Toronto, April 05, 2011 -- Moody's Investors Service confirmed Husky Energy Inc.'s (Husky)
Baa2 senior unsecured rating. This concludes the review of Husky
that began on December 15, 2010. The rating outlook is negative.
"Moody's believes that Husky's principal shareholders
view their investment in Husky as strategic, which is a key consideration
in maintaining the Baa2 rating. Past shareholder support has included
pro-rata subscription of equity issuance and receipt of stock rather
than cash dividends. Moody's expects to see continuing tangible
shareholder support for Husky's multiple long-cycle projects.
Without tangible support that lessens the need to incur additional debt
for these projects, a downgrade of the Baa2 rating would be likely",
said Terry Marshall, Moody's Senior Vice President.
..Issuer: Husky Energy Inc.
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Husky Energy Inc.
....Senior Unsecured Medium-Term Note
Program, Confirmed at (P)Baa2
....Senior Unsecured Regular Bond/Debenture,
Confirmed at Baa2
....Senior Unsecured Regular Bond/Debenture,
Confirmed at Baa2
....Senior Unsecured Shelf, Confirmed
Husky's Baa2 senior unsecured rating reflects a product mix comprised
of approximately 70% oil and liquids (although largely less valuable
medium and heavy oil), integrated operations that provide diversity,
lessen cash flow volatility, and represent meaningful value,
and the likely continuing support from principal shareholders.
The rating also considers the long cycle nature of the company's
principal developments for which multi-year investments are required
before production and cash flow will be produced. Finally,
the rating takes into consideration the very high cash dividends that
will resume when the principal shareholders cease taking their pro-rata
portion of dividends in shares.
The negative outlook reflects the need to fund very material negative
free cash flow through the development period of these long-cycle
Husky faces a high level of capital expenditures and execution risk over
the medium term as it moves forward with its plan to slow production declines
at its Western Canadian conventional oil and gas properties and offshore
Canadian properties, and to grow Canadian heavy oil production and
develop the Liwan natural gas project offshore China. The company
also faces execution risk at its two oil sands properties, as it
moves to ramp-up Tucker and develop Sunrise.
In the near term, Husky is looking to arrest its production decline
through increased capital expenditures at its Canadian conventional properties
and through acquisitions, two of which were announced in 2010 and
should add approximately 30,000 barrels of oil equivalent of production
before royalties per day (boe/d) to Husky's 2011 production platform.
Husky's most significant production adds will come from two long
cycle developments, the Liwan gas field (offshore China) and the
Sunrise Canadian SAGD oil sands project, both of which contain significant
execution risks. The Liwan development is a joint venture with
China National Offshore Oil Company (Aa3, stable), a strong
partner that will manage the sale of off-take in mainland China,
while Husky manages sales in Hong Kong.
The Sunrise oil sands project is part of an upstream / downstream 50-50
joint venture with BP, under which BP funds the first $2.5
billion of capital for the Sunrise project and Husky funds $2.5
billion of expenditures at the Toledo Ohio refinery. Husky believes
that BP's commitment will provide sufficient funding to see Sunrise
through to completion, but we caution that almost all oil sands
projects, both SAGD and mining, run over budget and over schedule,
putting Husky at risk for its 50% share of additional capital beyond
the $2.5 billion capital commitment due from BP.
Sunrise will not be a positive contributor until 2014 at the earliest,
with first steam currently envisioned in late 2013. Additionally,
Husky's commitment to BP with respect to downstream capital also
totals $2.5 billion, which must be paid no later than
The outlook could be changed to stable if it appears that the company's
development program, including full development of Liwan and Sunrise,
can be funded in a manner that will maintain E&P debt to production
and E&P debt to proved developed reserves below $16,000
barrels of oil equivalent per day (boe/day) and $5.00,
respectively. The rating could be downgraded if it appears that
either of these two major development properties are likely to run over
budget or over schedule, resulting in higher than anticipated debt
funding of negative free cash flow. An upgrade in rating,
which is unlikely in the medium term, would be based upon actual
results in the range of $12-14,000 E&P debt/ daily
production and $4-5 E&P debt/proved developed reserves.
The principal methodology used in this rating was Independent Exploration
and Production (E&P) Industry published in December 2008.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
Husky Energy Inc., headquartered in Calgary, Alberta,
is a diversified independent E&P company with principal assets in
North America and Southeast Asia. While Husky is a publicly traded
company, approximately 70% is owned by entities controlled
by Mr. Li Ka-shing of Hong Kong.
Senior Vice President
Corporate Finance Group
Moody's Canada Inc.
Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
Moody's Canada Inc.
Moody's Canada Inc.
Moody's confirms Husky Energy's Baa2 sr unsecured rating; outlook negative
70 York Street
Toronto, ON M5J 1S9
No Related Data.
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