Husky Energy has reduced 2019 budget, production

Husky Energy is cutting its 2019 capital expenditure budget to $3.4 billion including reduced spending in heavy oil and resource plays in Western Canada.

Husky Energy plans to spend approximately $3.4 billion on its capital expenditure program in 2019 as it continues to invest in a deep portfolio of higher-margin, longer-life projects.

That is about $300 million less than the company forecasted at its Investor Day in May and includes capital spending reductions resulting from Alberta’s mandated oil production cuts.

Despite the revised budget announced on Dec. 20 Husky continues to attain global pricing for the vast majority of its oil and gas production. The Company retains further flexibility to reduce capital spending depending on market conditions.

Including estimated Alberta Government curtailment requirements for the full year, and reduced capital expenditures, Husky’s average annual 2019 production is expected to be approximately 300,000 boed.

“Our low-cost integrated model in North America and high-margin offshore business shield us from the commodity discounts realized by many of our peers,” said CEO Rob Peabody.

“Husky’s portfolio is designed to manage risk effectively and we are disappointed with government intervention given the market’s natural ability to remove uneconomic barrels.

Husky says it retains further flexibility to reduce capital spending, including the ability to pace development of growth projects that are currently in flight and those in the Lloydminster area.

Construction at the 10,000 barrels per day Dee Valley thermal bitumen project near Maidstone Sask.  has been advanced, with first oil now expected in the fourth quarter of 2019.

In addition to the thermal projects under development, Husky has sanctioned a new 10,000 bbls/day thermal project at Spruce Lake East in Sask. with first oil anticipated around the end of 2021.

In an operational update, Husky reports the 10,000 bbls/day Rush Lake 2 thermal bitumen project near Maidstone which came online in October, has ramped up to full production and is seeing sustained volumes at full capacity.

In the Atlantic region, Husky is progressing plans to retrieve a failed flow line connector at the White Rose field and will work closely with the regulator to resume operations. The company expects to be able to resume operations in a phased approach.

The middle of the range is approximately $300 million less than the $3.7-billion forecast provided at the May 2018 Investor Day and includes reduced spending related to Alberta’s curtailment program and lower global oil prices.

Terra Nova has resumed production operations. The Lloydminster upgrader and refinery are also operating at normal rates following turnarounds earlier in the year. Husky’s average annual 2019 production is expected to be approximately 300,000 barrels of oil equivalent per day.

Sustaining capital, the amount required to maintain operations and keep production flat, is estimated at $1.8 billion. The company can fund sustaining capital and the current level of the dividend at about $40 WTI.

In addition, Husky has one of the strongest balance sheets in the industry, with net debt at the end of third-quarter 2018 of $2.6 billion, representing 0.6 times net debt to trailing 12 months.

In the downstream, the company has completed a heavy turnaround season and the Lloydminster Upgrader and all refineries, with the exception of the Superior Refinery, are currently operating at normal rates.

The Lima Refinery 2018 turnaround included work related to the Crude Oil Flexibility Project, which will increase heavy crude oil capacity to 40,000 bpd by the end of 2019. The Superior Refinery is expected to resume operations in 2020.

The company has insurance to cover asset damage and repair costs as well as business interruption. This includes the estimated production curtailment requirements by the Alberta government for the full year but doesn’t include any production associated with Husky’s proposed acquisition of MEG Energy.

The company continues to take advantage of its extensive storage and pipeline connectivity to source discounted feedstocks from the Permian and Bakken basins.

Husky will provide a more detailed 2019 production and capital guidance update in the first quarter, following resolution of the proposed acquisition of MEG Energy.

Husky says it will provide a more detailed 2019 production and capital guidance update in the first quarter of the new year following resolution of the proposed acquisition of MEG Energy.

Husky’s January production cut mandated by the Alberta Government is considerably higher than the 8.7% industry-wide target despite Husky’s ability to process and transport its production to markets unimpeded, and profitably.

Curtailment rules disproportionately impact companies, like Husky, with significant downstream and midstream investments relative to producers who have not made these investments.

Furthermore, the government’s curtailment formula does not consider Husky’s production growth over the year at Sunrise and Tucker, which are now at full capacity, and does not consider costs related to marketing commitments, or the closure, restart or early abandonment of wells and facilities.

Husky recently announced it has met all regulatory requirements for its full and fair offer to acquire MEG Energy, including approval granted under the Investment Canada Act. The company has set a deadline of Jan. 16 for MEG shareholders to accept its cash and shares offer made in September.

Meanwhile Husky says it will continue to engage the Alberta Energy Regulator and Alberta government to address what is perceives as inequities, costs and other unintended consequences of mandated production cuts.

The company says its mandated January production cut is considerably higher than the 8.7 per cent industry-wide target despite Husky’s ability to process and transport its production to markets unimpeded, and profitably.

“Husky’s portfolio is designed to manage risk effectively and we are disappointed with government intervention given the market’s natural ability to remove uneconomic barrels. We are focused on curtailing production in the most efficient and cost-effective way possible,” said Peabody.

He says curtailment rules disproportionately impact companies, like Husky, with significant downstream and midstream investments relative to producers who have not made these investments.

Husky’s offer will be open for acceptance until 5 p.m. Eastern Time (3 p.m. Mountain Time) on Wed., Jan. 16, 2019. Intermediaries likely have established tendering cut-off times that are prior to the offer expiry time. Shareholders must instruct their intermediaries promptly if they wish to tender.

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