Husky Energy has reduced 2019 budget, production
CALGARY, Alberta -- 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. This is about $300 million less than forecast at the Company’s Investor Day in May 2018, and includes capital spending reductions resulting from Alberta’s mandated oil production cuts.
The Company retains further flexibility to reduce capital spending depending on market conditions.
“Husky continues to attain global pricing for the vast majority of our production. 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. “We built this robust business model to capture value through commodity cycles, whether it comes from refining margins in the downstream or from improved prices in the upstream.
“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.”
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. This does not include any production associated with Husky’s proposed acquisition of MEG Energy.
Fourth quarter operational update
Husky achieved several important operational milestones in the fourth quarter.
- Gas production in the Asia Pacific region continues to benefit from strong demand and is on track to deliver record gross quarterly production in fourth quarter.
- The Sunrise Energy Project achieved nameplate capacity and record rates of 61,900 bpd.
- Following the completion of a turnaround in the third quarter of 2018, the Tucker thermal bitumen project achieved its nameplate capacity of 30,000 bpd.
- The 10,000 bpd Rush Lake 2 thermal bitumen project, 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. Terra Nova has resumed production operations.
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.
The company continues to take advantage of its extensive storage and pipeline connectivity to source discounted feedstocks from the Permian and Bakken basins.
2019 preliminary guidance
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.
Capital spending in 2019, excluding any combination with MEG, is expected to be in the range of $3.3 -$3.5 billion. 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.
Spending is being reduced in areas where Husky has the most capital flexibility, including heavy oil and Western Canada resource plays. The Company retains further flexibility to reduce capital spending, including the ability to pace development of growth projects that are currently in flight.
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 funds from operations.
Growth capital includes spending for development of the Liuhua 29-1 field offshore China, construction of five Lloyd thermal projects in Saskatchewan and the West White Rose Project in the Atlantic region.
Construction at the 10,000 bpd Dee Valley thermal bitumen project in Saskatchewan has been advanced, with first oil now expected in the fourth quarter of 2019.
In addition to the thermal projects under development, the Board has sanctioned a new 10,000 bpd thermal project at Spruce Lake East in Saskatchewan, with first oil anticipated around the end of 2021.
Production guidance and curtailment measures
Excluding any combination with MEG, Husky’s production in 2019 is expected to be approximately 300,000 boed, including reductions associated with Government of Alberta curtailments and suspended operations at the White Rose field in the Atlantic region.
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 continues to engage with the Alberta Energy Regulator and Alberta Government to address the inequities, costs and other unintended consequences of production curtailment.
MEG acquisition update
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.
As was previously stated, the offer announced on Sept. 30, 2018 includes a condition that at least 66 2/3% of MEG shares must be tendered before Husky will take up shares to successfully complete the transaction.
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.
