Husky Energy shuts production to avoid oil market 'train wreck'

Husky Energy is moving quickly to shut unprofitable oil production and shift processing at its US refineries to diesel fuel amid a slump in motor fuel demand caused by the coronavirus pandemic.

The Calgary, Alberta-based company has already shuttered more than 80,000 b/d of heavy crude production and slashed refinery runs to bring more balance to its integrated network of upstream and downstream assets, CEO Robert Peabody said Wednesday.

"It was clear from what we were seeing on the product demand side in North America that we would see supply and demand collide in a very messy way this quarter," Peabody said on an earnings call. "The strategy is to keep as many barrels away from the train wreck as possible to minimize negative cash margins."

In addition to cutting output of unprofitable heavy oil, the company has taken advantage of its "diesel-heavy" refineries in the US to pivot from gasoline production to focus on more-profitable fuels. Husky's combination of upstream, midstream and refining assets has also allowed it to bypass many of the storage woes rivals are facing.

"Our refineries are currently running at minimum rates, with the exception of the asphalt refinery, which is running full out and continues to capture strong margins," Peabody said. "We are also using our flexibility to manufacture more diesel as demand has been holding up better than gasoline or jet fuel. Our midstream infrastructure, including significant blending, storage and committed pipeline capacity, continues to serve us well."

Citing the wild ride that crude prices have already been on in 2020 and an unclear outlook for the rest of the year, Peabody said Husky is not actively looking to hedge its output and will instead focus on driving down costs.

"We're breakeven sort of in the mid-US $30s/b on a cash basis; that feels in a pretty good place," he said. "We might have another look again, but right at the moment, we wouldn't be mindful to jump into hedging future oil prices far out.

"I think we are in the middle of a train wreck right now, and those curves right now are not representative of anything except for that we're in the middle of a train wreck."

Western Canadian Select has averaged just $12.45/b so far in April, down from $29.05/b in the first quarter, S&P Global Platts data shows.

Husky reported a net loss for the first quarter of C$1.71 billion, or C$1.71/share, compared with a net income of C$328 million, or 32 Canadian cents/share, in the prior-year quarter.

The S&P Global Market Intelligence consensus earnings estimate for the first quarter was a loss of 40 Canadian cents per share.

Husky said its net loss included C$1.1 billion of after-tax impairments related to the lowered crude oil price assumptions, as well as an inventory realizable value writedown of C$274 million.