Husky Energy has concerns about being able to compete in Canada, but more for its industry peers than itself in the short term.
The integrated oil and gas company reported a better than expected net profit of $672 million in the last quarter, and is resuming dividend payments after cancelling them in 2016 to reduce costs.
Husky also produced an average of 320,400 barrels of oil equivalent per day in 2017 despite the sale of 20,200 boe/d of assets.
“The structural transformation of our company is providing for increasing funds from operations and free cash flow, lower operating costs, and better earnings and cash break even,” said CEO Rob Peabody during a quarterly conference call on March 1.
Peabody said Husky’s physical integration and secure transportation access is contributing significant value to the company and has largely limited their exposure to the Canadian differentials.
The heavy oil price differential for Western Canadian Select compared to West Texas Intermediate (WTI) is about $24 in Canada, but the spread is much less in the U.S. where Husky has several refineries to stay profitable.
Peabody said their large U.S. refining business will also benefit from changes to the U.S. tax code on an ongoing basis compared to taxation costs in Canada.
“I am concerned, as many of my colleagues have also said in many ways a tax is a tax is a tax is a tax, and we’re seeing a lot of additional sorts of taxes coming in Canada at the same time the biggest competitor to the south, the gorilla, is dropping taxes,” he said
“So it’s hard to put investment dollars into Canada because ultimately, like all companies, we have to go where the returns are in any given place.”
Peabody added the regulatory side of the business in Canada is just as important as the tax side to the bottom line.
He said it’s not what the regulations specifically say, but it’s, “the amount of flux in the regulatory environment where there’s thing after thing after thing that is under consideration potentially going to get changed.
“There is nothing that stops investment as firmly as just not knowing how you are going to be regulated at the highest level,” he said.
Husky said its integrated upstream and downstream system allow it to get its crude to the U.S. where heavy oil prices are better.
“The heavy differential in the U.S. is quite tight at the moment, partially because it’s hard to get that heavy down from Canada,” said Peabody.
“What we like about our asset base right now is we have the ability to move the crude from Canada into the United States and get through that bottleneck that is causing the problem in terms of price differentials.”
Husky has a fixed long-term commitment of 75,000 barrels of oil per day on the existing Keystone line, as well as access to the Enbridge line accessing their new refinery in Superior Wi.
They also have committed capacity on Enbridge’s Flanagan South pipeline and the southern access line in Illinois.
“This gives us routes to the U.S. market where there are significantly lower discounts to heavy oil,” said Peabody.
“On top of pipelines, we have about five million barrels of crude oil storage capacity along the integrated corridor providing further flexibility to manage the volatility in prices and differentials.”
Peabody says Husky is well positioned to refine and transport its heavy oil to market until 2020-21.
He hopes by then at least one of several federally approved pipelines such as Kinder Morgan’s Trans Mountain pipeline from Alberta to Burnaby British Columbia will be in service to cut the differentials.
He said Canada needs to have more than one customer, noting that would be a smart thing for all the oil that’s produced here.
“We do not have to be as generous as a country to the U.S. as we are currently being—certainly if you’re in Alberta we’re being extremely generous and I don’t think that makes a lot of sense,” he said.
Peabody said he is certainly a strong proponent of getting the pipelines that are currently under considerations built.
“What we’re really talking about here is the royalties and taxes that go into our hospitals, that go into our schools and allow us to take care of elderly—all things are put in jeopardy as a province and as a country when we are willing to discount our product in such a massive way to the customers.
“Canadians are generous, but this is getting a little carried away.”
Peabody also said Husky has the ability to process the growing volume of thermal oil from Lloydminster, including 60,000 bpd of new production coming on line starting with Rush Lake 2 in early 2019.
A decision on expanding the Lloydminster asphalt refinery to process that increase in oil is tied to having additional pipeline capacity.
Peabody said in the next 12 months, it will be much clearer if they need to look at further expansion opportunitiesm which include the Lloydminster asphalt refinery.
“Until about 2020-21 we’re pretty well covered by our own asset base,” he said.