Oil Patch Insider

Husky turns into a lead dog

Once rated the pooch of Canada’s integrated oil companies (those who produce, refine and market), Husky Energy has been quietly asserting its pedigree over recent years as it has moved to the head of the pack in Alberta’s oil sands and Canada’s East Coast offshore.

Over the past year, its stock has remained a solid performer, ranging from a high of C$83 in August to a low of C$58 in May, currently keeping its nose above C$70.

In the process it has grown its market capitalization to more than C$30 billion, about C$9 billion ahead of Petro-Canada and nipping at the heels of its other peers, Shell Canada (C$35 billion), Imperial Oil (C$36 billion) and Suncor Energy (C$37 billion).

It enters 2007 with a solid endorsement from Merrill Lynch analyst Dennis Mark who said Husky is “the technically strongest big-cap energy name” on the Toronto Stock Exchange for this year.

Often accused in the past of hiding from public view, a habit that was attributed to its controlling owner Hong Kong billionaire Li Ka-shing, Husky now seems more willing to step into the spotlight.

Chief Executive Officer John Lau provided a series of interviews Jan. 8, during which he said:

• The company needs another year to put all of the pieces in place for its oil sands strategy, including the hunt for a possible U.S. or offshore joint venture to upgrade and refine its production, which could include 30,000 barrels per day from the just-completed Tucker project and 200,000 bpd from the Sunrise project over the long haul.

Talks with Marathon Oil are progressing, but other candidates could include BP and possibly Lyondell, with whom Husky has explored a stake in a Texas refinery.

Lau said the failure to conclude negotiations in 2006 stemmed from Husky’s uncertainty over construction costs if it decided to invest C$10 billion to C$15 billion to build upgrading capacity in Canada, and what technology will be used to power upstream oil sands operations in Alberta.

Those options, Lau said, include nuclear power, coal-fired power or bitumen residues, all designed to avoid the high cost of using natural gas.

Grappling with the Sunrise technology is likely to delay initial production from an initial 2010-2012 window to 2012-2015, Lau conceded.

• In laying the nuclear alternative on the table, Husky has joined France’s Total in stoking a debate that is stirring interest in the Alberta and Canadian governments as one of the best methods of reducing greenhouse gas emissions.

Federal Natural Resources Minister Gary Lunn said recently it is just a matter of when, not if nuclear power will be deployed in the oil sands, suggesting it could “play a very significant role.”

Lau acknowledges nuclear will make no headway without government endorsement.

A better current bet could be to burn some of the extracted bitumen, similar to a technology being applied by Nexen and OPTI Canada at their Long Lake project.

But the first real test of the nuclear alternative could be imminent.

Wayne Henuset, a founding partner with Energy Alberta Corp., told the Calgary Herald a proposal for a plant in the oil sands region is almost certain to be unveiled within 90 days.

The privately held company has an agreement to commercialize Atomic Energy of Canada reactors and has been in talks with major oil sands producers, although Husky is not one of them.

It is widely anticipated that at least one scheme will result from a call for proposals by EnergyINet, a government-industry consortium that includes producers such as Nexen, Shell Canada, EnCana and Canadian Natural Resources.

• Lau said Husky has not closed the door to spinning off its oil sands operations as a separate unit, adding that option is still being explored.

• For the East Coast, Husky is seeking permission from the Newfoundland government to hike output at its White Rose project to at least 140,000 bpd from the current maximum average of 100,000 bpd, taking advantage of two new discoveries which could hold an additional 190 million barrels.

Husky also has several trillion cubic feet of gas reserves in the region, which Lau said could be developed with the province as an equity partner in return for some breaks on taxes and royalties.

• Husky’s goal is to almost triple production by 2020 to 1 million bpd from the oil sands, the East Coast, the Northwest Territories and the South China Sea.

• Constantly fingered as a takeover target, some of that speculation has cooled off as Husky has more than doubled its share price over the past two years. Lau also noted that Li has said he has “no intention” of unloading the company at this time.

Besides, Lau asked, where could Li reinvest the proceeds from a Husky sale and gain a better return.

—Gary Park