DBRS Confirms Husky Energy at A (low), Pfd-2 (low), Stable

DBRS has today confirmed the Issuer Rating of Husky Energy Inc. (Husky or the Company) at A (low), along with its Senior Unsecured Notes and Debentures and Preferred Shares – Cumulative ratings at A (low) and Pfd-2 (low), respectively. All trends are Stable. Husky’s ratings are supported by its: (1) conservative financial profile, (2) integrated operations and (3) medium- to long-term exploration and production growth potential.

Husky’s financial profile remained stable in 2012. Husky maintains debt-to-capital and debt-to-cash flow ratios below its targets of 25% and 1.5 times (x), respectively. Integrated operations provided a partial natural hedge against pricing volatility in North American upstream operations. A modest free cash flow deficit in 2012 was largely a result of increased capex spending. Similar free cash flow deficits are anticipated until 2014, when cash flow contributions from growth pillars – namely, the oil sands, Atlantic Canada and Asia-Pacific – commence. DBRS believes the Company’s current liquidity is sufficient to fund cash flow shortfalls over the near term with minimal impact on credit metrics.

Key challenges facing the Company include: (1) managing its high-cost, long-lead-time capital projects, as significant spending is anticipated to fund growth plans (Husky targets 5% to 8% production growth per year through 2017). Incremental cash flow from these projects is not expected in the near term, which could result in pressure on the balance sheet, particularly during periods of significant, prolonged pricing declines. (2) Production is highly weighted toward North American operations (97% at 2012), which subjects Husky to both volatile North American crude oil prices and continued depressed North American natural gas prices (31% of production in 2012). (3) Credit metrics at the high end of Husky’s target ranges are aggressive for the rating category. Should credit metrics deteriorate above 30% debt-to-capital and/or 2.0x debt-to-cash flow, either due to unsuccessful growth in production despite higher capital spending, or prolonged pricing declines, DBRS would consider taking negative rating action.

DBRS also notes that the Company has updated its financial and operational targets from those initially set out in December 2010 (see the rating report for more information). DBRS believes that these targets are largely achievable, contingent upon Husky’s ability to execute its medium- to longer-term growth projects. DBRS expects that the Company will continue to conservatively manage its financial profile in order to achieve the stated targets.

Notes:
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 applicable methodology is Rating Oil and Gas Companies, which can be found on our website under Methodologies.