Husky Energy Inc. is warning of a rocky year ahead amid volatile crude prices, ugly natural gas revenues and a spate of planned maintenance.
After a year of strong growth, with production up 9 per cent and earnings up 135 per cent, Husky said 2012 output will be flat to down, as two important offshore oil platforms are taken down for maintenance.
The company is also pointing to a series of issues that portend a more difficult year for the broader industry. The price of Canadian crude, for example, has plunged amid U.S. refinery outages and a growing glut of western oil – from both Alberta and the northern U.S. – that is flooding markets. On Thursday, Canadian heavy oil sold at $33 (U.S.) a barrel below U.S. benchmark prices. The synthetic crude made by companies that process oil sands output into a light product sold at a $23 discount.
Natural gas prices, meanwhile, have fallen to decade lows, bad enough that Husky recorded a $52-million writedown on gas properties, plants and equipment that were losing money in the current environment. The company said it has no intention of slowing down its remaining gas production, which still generates positive returns. But the writedown helped push the company's fourth-quarter earnings below analyst expectations.
And after a year of regaining some investor confidence – this is the first time in five years Husky has made its production forecasts – the company now faces an important test of its operational abilities. It has scheduled major maintenance work at two East Coast offshore platforms, Sea Rose and Terra Nova, in 2012. Sea Rose will be out of commission for 125 days, Terra Nova for 21 weeks. It is also planning three weeks of maintenance at its Lloydminster heavy oil upgrader and a "minor turnaround" at its Toledo, Ohio refinery.
Investors in particular are concerned, since large industrial maintenance projects sometimes drag on longer than expected.
"People are a bit wary of the big Sea Rose turnaround, because that single asset is an extremely important asset to the company in terms of cash flows and financials," FirstEnergy analyst Mike Dunn said.
Husky also faces once again a period of relatively flat output, as it waits until 2013 or 2014 for new oil and gas streams to open up from its Sunrise oil sands and Liwan offshore gas projects.
Still, analysts say the company's performance in 2011 suggests Husky is beginning to turn a corner, after years of missed expectations that had caused investors to largely lose faith.
"So far they've done well on meeting production expectations," said Phil Skolnick, an analyst with Canaccord Genuity. "It's positive in terms of their direction.
Yet Husky is also facing a challenging set of circumstances that face the entire energy sector, which has seen extraordinary business uncertainty on a number of fronts – from swings in the price of Canadian crude, to discounts for North American oil prices in general, to pipeline disruptions, to unusual variations in refinery profits between different geographic areas.
"The oil industry has been facing greater volatilities than at any time in the recent past," Husky chief executive Asiam Ghosh said in an interview.
He credited Husky with maintaining a diversified portfolio of assets that could hedge against some of that volatility. For example, Husky upgrades and refines much of its own crude, a fact that gives it some protection against shifts in profit from oil production to refining.
"It's a satisfaction to me that I was vindicated in my early call to keep this an integrated company and a multi-play company," Mr. Ghosh said. "There was a lot of pressure from a lot of sources, including mutual fund investors, to make it a single play. I think on balance the company is better off because we are multi-play."
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