Husky Energy asset sales will be a gauge of sector’s recovery hopes

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Husky Energy's $1.7-billion sale of interests in its pipes, vessels, nuts and bolts is a hefty deal for a market that's been creaking under heavy pressure for a year and a half.

Anyone looking for clues into whether it will spur a free-for-all on oil and gas assets could be disappointed, though. The deal is unique in more than a few ways, not least because it's all being done within the empire of one guy – Hong Kong tycoon Li Ka-shing.

But hold on. Some other sales Husky hopes to complete in the coming weeks will offer a much more accurate glimpse into what buyers want and how much they're willing to pay as crude prices ascend ever so gradually.

Those include producing properties that together would form an impressively sized company in its own right, as well as a swath of royalty land – the kind of fee-generating properties that Encana, Cenovus Energy and Canadian Natural Resources have all spun out for lucrative proceeds in recent years. FirstEnergy Capital analyst Michael Dunn estimates that Husky could garner $300-million to $400-million for those.

Is there a spring thaw for deals? In the first couple months of this year, the energy industry's outlook was dour. Dozens of exploration and production companies sought to unload assets to raise cash, but would-be buyers were skittish. Layoffs were the order of the day, as were trips by anxious executives to their lenders, seeking breathing room on debt terms.

It's no secret why. When crude collapsed to just above $26 (U.S.) a barrel in January and February, some in the industry contemplated an extended trough at that level, one in which almost no company can operate profitably. Bankruptcy lawyers began clearing their schedules in anticipation of a rush for their services, and certainly, quite a few have been retained.

Now, with oil having rebounded to about $44, there are audible sighs of relief in downtown Calgary (though they tend to be amplified, reverberating in all of that empty office space). Yes, the price gain for the commodity removes the threat of extinction in many cases, but it's still an industry running on the thinnest of margins.

Indeed, Husky, best known for its Western Canadian heavy oil operations and Husky service stations, reported a $458-million (Canadian) loss for the first quarter of the year, compared to a $191-million year-earlier profit. In February, it cut an undisclosed number of employees from its payroll.

To recap its deal announced on Tuesday, Husky is selling 65 per cent of its oil pipeline and processing assets in the Lloydminster area of Alberta and Saskatchewan, to Cheung Kong Infrastructure Holdings and Power Assets Holdings. Mr. Li owns the majority of Husky's shares, and controls the buyers in the transaction, too.

Husky will operate the new "midstream" entity, which will generate about $180-million a year in pretax operating profit by running all the transport and processing gear between the wellhead and trunk pipeline. It mirrors other ventures, such as Encana's sale of similar infrastructure in the Montney gas region to a partnership of Veresen and KKR & Co. that was set up in late 2014.

These are relatively secure, fee-generating businesses that are far less dependent on commodity prices than oil and gas assets. They attract a specialized buyer.

For producing assets on the Canadian market, it's been a tough slog. By all accounts, there are still some big differences in opinion between what buyers and sellers believe such properties are worth. This has been made tougher, first by the steep drop in crude prices, and now the slow rise.

That's not to say there haven't been any deals. Indeed, Suncor Energy, Tourmaline Oil and Whitecap Resources have bulked up since late 2015.

Husky's coming asset sales will provide a gauge of buyer intentions in what may be the early stages of a recovery. In total, the company is seeking to jettison properties pumping 60,000 barrels of oil equivalent a day. Some estimates peg possible total proceeds at $2-billion to $3-billion.

One well-placed source said about half a dozen companies – all well-known public and private names – are now finalizing deals for various portions of the package, and transactions will be announced over the coming weeks.

Think of them as a barometer of industry confidence in a recovery.