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Husky Energy takes advantage of discounted crude to boost profit, dividend

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Essential Energy Insights - January 2021


Husky Energy takes advantage of discounted crude to boost profit, dividend

Husky Energy Inc., the Canadian oil company controlled by Hong Kong billionaire Li Ka-shing, said access to discounted U.S. and Canadian crude at its North American refineries helped propel a 67% increase in its quarterly dividend.

Husky upped its quarterly cash payout to 12.5 Canadian cents per share after funds from operations, a key financial metric, jumped to C$1.2 billion in the second quarter, a 69% increase year over year. The company benefited from crude discounts caused by pipeline capacity crunches in both the U.S. and Canada.

Husky owns stakes in refineries in Superior, Wis., and Toledo, Ohio. It also has a 50% stake in a refinery in Lima, Ohio, that it owns with BP PLC. "The integrated nature of our business shields us from location and quality differentials in North America," CEO Rob Peabody said on a July 26 conference call. "Our U.S. refining business is well positioned to benefit from discounted Midland [Texas] barrels."

Oil producers have had to sell crude at discounted prices as pipelines have been unable to keep up with growth in North American production. Midland, a component of the larger Permian Basin in West Texas, and heavy oil sands crude from Canada have been particularly hard hit by the lack of transportation options. Husky's refineries in the Midwest are able to take and process crude from both regions.

The company said it has ample pipeline capacity for its own Canadian oil sands production, some of which is processed into refinery-ready crude at an upgrader in Lloydminster, Saskatchewan. It also has an asphalt refinery in Canada that can process tar-like oil sands bitumen into materials for road paving and shingles for roofing.

The company also got a second-quarter boost from its offshore oil production businesses in Asia and off Canada's east coast. The Husky-operated Liwan project, a deepwater natural gas field about 300 miles southeast of Hong Kong, turned in a strong performance in the quarter, and the BD project off Indonesia was ramped up to its production target, Peabody said. Li, one of Asia's richest people, has a majority stake in Husky through his Hutchison Whampoa Ltd. conglomerate and other family holdings.

While refining margins were strong in the quarter, the company's recently acquired plant in Superior has been idled since an April 26 explosion. The cause of the blast is still under investigation, COO Robert Symonds said on the call. "We plan to use insurance proceeds to rebuild the refinery," he said. "While we've yet to establish a timeline for a return to normal operations, today we believe it will be at least 18 months, and we will update you further when we have a firm plan." Husky completed its US$492 million acquisition of the plant in November 2017.

The CEO Peabody said the company has business interruption insurance and Husky will "still get most of the benefits from Superior from a profit standpoint."

Husky on July 26 reported second-quarter net income of C$448 million, or 44 Canadian cents per common share, reversing a loss of C$93 million, or 10 Canadian cents per share, in the year-earlier quarter.