Husky and Cnooc Resolve Liwan Gas Dispute by Lowering Prices

  • Price reduction far less than feared by investors: FirstEnergy
  • Outcome seen by RBC as positive for foreign operators in China

The end of a dispute over prices from an offshore Chinese energy project resolves an overhang on shares of Husky Energy Inc. and prospects for natural gas development in the Asian nation.

Husky, the Canadian producer controlled by Hong Kong billionaire Li Ka-Shing, on Tuesday announced an agreement that will lower prices paid for gas output from the deepwater Liwan project. That settles a discord with China’s state-owned Cnooc Ltd. that took investors by surprise in April, when Husky said Cnooc was seeking to pay lower prices than stipulated by an existing contract. Husky also said Tuesday that the companies will develop Liuhua 29-1, a field at Liwan, adding to the project’s growth.

The expansion of Liwan and the price reduction of about 13 percent from the prior contract, less than the 30 to 50 percent cut investors had assumed, are both positive for Husky, according to FirstEnergy Capital Corp. analyst Michael Dunn. Foreign operators in China also broadly benefit from the deal, which sends a strong statement about the country’s commitment to growing indigenous gas supplies, analyst Ben Wilson of RBC Dominion Securities Inc. said in a note.

More Clarity

“It’s a lot better than people feared,” Dunn said in a phone interview. Husky’s stock should outperform peers on Wednesday on clarity over pricing and Liuhua 29-1’s advancement, which was uncertain with Asia awash in cheap liquefied natural gas cargoes that compete with domestic supplies, he said. “That project’s fate prior to these negotiations was anything but clear because the need for that gas in mainland China is not clear, either.”

Husky shares rose 7.1 percent to C$16.27 at 11:14 a.m. in Toronto. That compares with a gain of 0.3 percent on the S&P/TSX Energy Index.

The disagreement stemmed from a difficult market for gas producers in China. A rising number of tankers carrying low-cost LNG are being directed at the country, just as the government reduces gas prices to stoke demand and shift consumption away from more carbon emissions-intense coal. Cnooc, which owns 51 percent of a production sharing contract at Liwan and operates the shallow-water facilities and onshore terminal, buys gas from the Liwan joint venture and resells it into the Chinese market. Husky owns 49 percent of the contract and operates the deepwater wells.

Husky said on Tuesday that gas prices paid to the Liwan project are being adjusted down to between C$12.50 ($9.54) and C$15 per thousand cubic feet of gas, in a new contract that’s back-dated to take effect in November 2015. That’s about 13 percent less than the $11 to $13 Husky was guaranteed under a previous contract.

‘Undue Attention’

The new rate is higher than the most negative possible scenario for Husky’s stock outlined by Benny Wong, an analyst at Morgan Stanley in New York, in a July 22 note. He assumed Liwan gas prices could be reduced to as low as C$5. The issue has been a “near-term overhang” for Husky’s stock and attracted “undue attention” that distracted investors from its operational success, Wong said at the time.

It’s also positive that Cnooc is agreeing to maintain a take-or-pay commitment for the same volumes as the original contract, between 300 and 330 million cubic feet a day, at prices still higher than the market rate, RBC’s Wilson wrote in a note on Tuesday. That bodes well for other foreign operators in China including Australia’s Sino Gas & Energy Holdings Ltd., which is working on securing other production sharing contracts in the country, Wilson said.

“The fact that Cnooc remains committed to above-market pricing for Liwan and to the original contract volumes is a strong sign that” China’s national oil companies are prioritizing indigenous gas development over imports, Wilson said.

Less Ambitious

To be sure, the plan for Husky and Cnooc to add about 80 million cubic feet a day of gross gas supplies from Liuhua 29-1, as disclosed on Tuesday, is less ambitious than the 100 to 200 million a day originally envisioned, Dunn said. However, it’s still positive that development of the field will advance, he said.

Husky shares fell the most in almost six months in April when it first disclosed the disagreement with Cnooc. Last month, Husky Chief Executive Officer Asim Ghosh guided investors toward a resolution, noting details were expected “very soon” on a conference call.

“Long term fundamentals remain strong for natural gas demand in China,” Ghosh said in Tuesday’s statement. “The price adjustment will allow Husky and Cnooc to maintain their market share in a competitive gas market.”

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