The smallest of Canada’s five integrated oil companies might be on the path to a break up.
Convinced that it is not getting a fair shake out of investors, Husky Energy plans to embark on a full-scale strategic review of its upstream, midstream and downstream operations this fall, which could result in some of its assets being spun off.
However, Husky will remain the controlling shareholder to utilize its knowledge as a mega-project manager, company executives said during a flurry of interviews and announcements.
Co-chairman Canning Fok dismissed relentless rumors that Li Ka-shing, Husky’s 70.8 percent controlling shareholder, wants to unload his direct and indirect stake.
Fok, executive director of Hutchison Whampoa, the Hong Kong-based conglomerate which had turnover last year of US$23 billion and which is chaired by Li, said he was authorized by the Li family to say: “Read my lips. Not for sale.”
Smoke signals keep rising
It is rare that many weeks pass without stirrings about the future ownership of Husky, some of them initiated by Husky itself.
They reached fever pitch three years ago when the Calgary-based company confirmed it was in discussions with PetroChina and “other parties in respect of potential transaction.”
That fizzled when the state-controlled Chinese company reportedly decided the price was too high.
Husky shares, worth about C$17 at the time, have more than doubled, putting the market value above C$15 billion.
But the smoke signals keep rising, stoked last year by indications Li was starting to end his 30-year relationship with Canada when he dumped his 4.9 percent stake in the Canadian Imperial Bank of Commerce, coupled with a wave of possible Chinese investors (including PetroChina and Sinopec) descending on the oil sands.
Early this year, Li told a Hong Kong newspaper that he had no immediate plans to divest his Husky holdings.
Company evaluating core areas
Instead, Husky has opted to evaluate its core areas of conventional oil, heavy oil, oil sands and upgrading, trying to get a better handle on the worth of its Tucker Lake and Sunrise oil sands projects, which represent a puzzle to more than just the company.
FirstEnergy Capital has put a price of C$54,000 per barrel on Husky’s production, which is far short of the C$93,000 per barrel assigned to Suncor Energy, which is almost exclusively an oil sands producer.
Chief Executive Officer John Lau said final decisions on the form of any spin-offs — which could range from forming a trust to creating joint ventures and setting up a separate public company — will not be made public until after the Alberta Energy and Utilities Board has approved plans for the 200,000 barrel-per-day Sunrise oil sands project, which now carries a price tag of C$10 billion including an upgrading refinery.
Sunrise will come on the heels of the C$500 million Tucker Lake project, due on stream in 2006 at 30,000-35,000 bpd.
It is planned for a 2009 start-up at 50,000 bpd, growing in stages to 200,000 bpd to develop a 3.2 billion barrel lease.
Third look at expanding upgrader
Meanwhile, Husky is taking a third look at expanding its heavy oil Lloydminster upgrader on the Alberta-Saskatchewan border.
Earlier plans, including a possible C$1.5 billion expansion from the current 77,000 bpd (due to reach 82,000 bpd in 2006) to 150,000 bpd, were shelved for economic reasons and because of uncertainty over Canada’s implementation plan for the Kyoto Protocol.
But the outlook has brightened as the price gap between light and heavy crude has spread to C$40 a barrel from C$30 in the past three months, improving the profitability of the heavy oil feedstock.
“Clearly it looks like we’re going to see some sustained wider differentials,” said Senior Vice President Don Ingram, referring to the anticipated surge in Western Canadian heavy crude output and the lack of refinery capacity to upgrade heavy oil to light synthetic crude.
He said Husky will decide within the next two quarters whether the economic outlook supports an upgrader expansion.
Some Chinese firms could partner
Lau said it is possible some firms from the stable of China’s state-controlled oil companies could become partners in Sunrise, given Husky’s need for partners with expertise in refining and marketing.
He also said China, because of its “huge” energy demand, is certain to buy more Canadian crude, although how much is less clear given that it would need C$30 billion to C$60 billion in capital spending to generate 1 million bpd.
In February, Lau downplayed talk that Chinese companies were scouting for an oil sands takeover, suggesting a joint venture or acquisition of specific assets made more sense.
He said at that time that Husky was “too big” for the Chinese, but “who knows, in the future they may be able to afford to buy big companies.”
On April 21, Lau said he doubted there would be a Chinese partner in any oil sands joint venture established by Husky, although he expects to see China build on its position in northern Alberta.
Analysts figure that a spin off of oil sands property could fetch C$2 billion, a figure that would double if an upgrader were included.
