Husky Gets $1.3 Billion Relief From Hong Kong's Richest Manby
Oil company sells pipeline stake, retains 35 percent interest
Cheung Kong Infrastructure, Power Asset Holdings are buyers
Husky Energy Inc., which posted a record loss last year amid the worst oil market downturn in decades, raised C$1.7 billion ($1.3 billion) for some of its Canadian pipelines by keeping them in the family.
The family is that of Li Ka-Shing, Hong Kong’s richest man, who controls Husky. On Monday, Li got a couple of his other units -- Power Assets Holdings Ltd. and Cheung Kong Infrastructure Holdings Ltd. -- to buy 65 percent in the Canadian company’s midstream operations. Husky will keep operating those assets, which include about 1,900 kilometers (1,181 miles) of pipelines and tanks able to store 4.1 million barrels of oil in Hardisty and Lloydminster.
“For a large part, it’s just them moving money around but it helps Husky’s balance sheet,” Michael Dunn, an analyst at FirstEnergy Capital Corp. in Calgary, said Monday in a phone interview.
Energy companies are selling assets, reducing spending and cutting workers as U.S. crude prices hover above $40 a barrel almost two years into a slump. Husky’s sale of the midstream assets announced Monday is part of a plan for divestitures laid out last year that also includes oil and natural gas producing properties across Western Canada and a royalty interest on some of its output that altogether could be worth C$3.6 billion to C$4.7 billion, according to an estimate from RBC Dominion Securities.
Husky fell 4.7 percent to C$16.72 at 10:13 a.m. in Toronto, after earlier dropping the most since Feb. 11.
The sale of Husky’s midstream asset stake as well as a dispute it disclosed with Cnooc Ltd. over the Liwan natural gas project in the South China Sea overshadowed the quarterly earnings results also announced Monday, Chris Cox, an analyst at Raymond James Ltd. in Calgary, wrote in a research note.
Cnooc, Husky’s partner in Liwan, buys gas from the joint venture and sells it to a customer as an agent. During the quarter, gas sales from Liwan were lower due to a temporary land-based pipeline outage within the customer’s network.
Husky said it was only paid volumes sold in the first quarter, rather than the full volumes agreed to under its take-or-pay contract. Cnooc, a Chinese state-owned energy company, indicated that there were changes in the gas market in Guangdong, a coastal province in Southeast China, Husky said. Husky said it’s in discussions with Cnooc to find a solution and will take legal action if it can’t obtain a satisfactory outcome.
“By our estimates, Liwan generated about 20 percent of the company’s operating cash flow last year, so contention with the take-or-pay contract has the potential to meaningfully impact the company’s outlook,” Cox said. “We do not expect this uncertainty to get resolved anytime soon, and equally as important, we believe this sheds light on a growing concern of ours -- the pending expiry of the take-or-pay contract in 2019 and the likelihood that future gas sales are sold or re-contracted at a considerably lower price.”
A Beijing-based spokeswoman for Cnooc didn’t immediately respond to requests for comment.
The sale to businesses controlled by Li, the richest man in Hong Kong, is probably the best outcome for Husky because the offer was presumably the highest bid Husky received and the company might not have wanted to sell such a large stake in the pipelines to anyone other than the majority shareholder, Dunn said. Husky will retain a 35 percent interest in the assets and continue to operate them, according to terms of the deal.
Li and one of his investment companies together own about 69 percent of Husky, according to data compiled by Bloomberg.
“This transaction unlocks significant value and supports our objective of strengthening the balance sheet,” Asim Ghosh, chief executive officer of Calgary-based Husky, said in a statement Monday.
Power Assets fell 1.4 percent to HK$76.60 in Hong Kong. Cheung Kong dropped 1.1 percent to HK$74.10.
RBC Capital Markets and HSBC Securities (Canada) Inc. acted as financial advisers to Husky, while BMO Capital Markets acted as an adviser to a committee of independent directors of Husky and also gave a fairness opinion to the entire board.
Husky posted a loss of C$458 million in the first quarter, or 47 cents a share, compared with a profit of C$191 million or 17 cents a year earlier, the company also said on Monday in a release after North American markets closed. In addition to depressed oil prices and the lowest refining margins in the U.S. Midwest since 2010, the results included losses tied to Husky’s hedging, refining inventories and income tax expenses.
U.S. crude averaged $33.63 a barrel in the first quarter, down from $48.57 a barrel in the same period of 2015.