DBRS Confirms Husky Energy Inc. at A (low), Stable Trends

DBRS Limited (DBRS) has today 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. DBRS believes that Husky has taken meaningful measures to significantly strengthen its balance sheet and adjust to a lower oil and gas price environment. These measures include (1) the sale of a 65% interest in the Company’s midstream business, (2) the sale of non-core oil and gas properties, (3) the sale of royalty interests in Western Canada, (4) the suspension of cash common share dividends, (5) reducing the Company’s overall cost structure and (6) curtailing capital spending. The Company’s financial profile has stabilized and should improve if oil prices continue to gradually increase as per DBRS’s expectations (see DBRS commentary from September 21, 2016, “DBRS Updates its Outlook for the Oil & Gas Industry: Financial Stresses Ease with a Modest Improvement in Market Conditions”). Lending additional support to the ratings is the Company’s transitioning to a business that requires less sustaining capital. The Company has targeted an earnings break-even at a WTI oil price of USD 40/barrel (bbl); based on DBRS’s estimate, Husky reaches cash flow neutrality above USD 45/bbl. The recent change to a Stable trend (from Negative) on October 7, 2016 (see DBRS press release from October 7, 2016, “DBRS Takes Rating Actions on Investment-Grade Oil & Gas Portfolio), reflects DBRS’s expectations that the Company’s key credit metrics are improving and should align with its rating classification at a WTI oil price of USD 50/bbl or higher.

The Company’s rating is further backed by its highly integrated thermal oil and oil sands business, product and modest geographical diversification and portfolio of growth opportunities geared to thermal oil and oil sands development. In addition, the Company has sufficient liquidity. At September 30, 2016, the Company held $1.4 billion of cash, was undrawn on a $4.0 billion credit facility and had no significant long-term debt maturities until 2019. Furthermore, through his related entities, Mr. Li Ka-shing of Hong Kong owns a majority common equity stake in Husky and has supported the Company’s business and financial plans.

Husky has the capital and operational flexibility to adjust to a volatile price environment. DBRS notes that the Company plans to balance capex with cash flow over the near term and not to add to the level of net debt. DBRS further notes that the Company is targeting a net debt-to-cash flow from operations ratio of less than two times. Because Husky has a relatively high percentage of lower margin heavy oil and oil sands production, its cash flow is very sensitive to oil price changes, although the Company’s integrated thermal oil and oil sands operations does help reduce the impact of price volatility. Also, the Company at the current time has no commodity price hedges on the books to mitigate pricing risk. Should oil prices weaken again significantly and remain weak for a period of time, the Company’s credit metrics could erode materially below the prescribed rating range. If such a scenario unfolds, DBRS may 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 applicable methodologies are Rating Companies in the Oil and Gas Industry (September 2016), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2016), DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (January 2016), which can be found on our website 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.