Husky Energy Inc. Outlook Revised To Negative From Stable On Weakened Cash Flow Metrics; 'BBB' ICR Affirmed

  • S&P Global Ratings lowered its West Texas Intermediate (WTI) and Brent crude oil price assumptions on March 19, 2020, which initiated a global review of its rated oil and gas issuers.
  • We lowered our 2020 WTI price to US$25 from US$35 and lowered our Brent price to US$30 from US$40.
  • The reduced 2020 price assumptions, in conjunction with the lower 2021 and 2022 prices published on March 9, translate into materially lower revenue and cash flow forecasts for Husky.
  • Our projected three-year (2020-2022) weighted-average funds from operations (FFO)-to-debt and discretionary cash flow (DCF)-to-debt ratios have weakened relative to those we previously forecast.
  • S&P Global Ratings revised its outlook on Husky to negative from stable and affirmed its 'BBB' long-term issuer credit and senior unsecured debt ratings on the company.
  • The negative outlook reflects S&P Global Ratings' view that there is increased risk Husky's cash flow metrics could deteriorate below the minimum level required to support the 'BBB' credit rating.
TORONTO (S&P Global Ratings) March 26, 2020--S&P Global Ratings today took the rating actions listed above. S&P Global Ratings' reduced crude oil and natural gas prices, published March 9 and March 19, have weakened the rating service's projected cash flow metrics for Husky very near the previously published downgrade threshold. While we acknowledge the counterbalancing benefits of the company's downstream segment, including midstream assets, the upstream segment's revenues and profitability continue to dominate the company's credit profile. Moreover, the company's heavy oil-dominant upstream product mix exposes its financial performance to additional volatility, given the persistent weakness of Canadian heavy oil prices.
The material decrease in projected revenues and cash flow from Husky's heavy oil-focused upstream operations in western Canada is the primary factor contributing to our weaker forecast cash flow and credit metrics for the company. With conventional heavy oil and bitumen accounting for about 57% of our forecast 2020 production for Husky, the company's near-term cash flow is materially weaker than our previous estimates for the current year. Nevertheless, the contribution from its downstream segment, with some marginal projected improvement in 2020, serves to temper the upstream segment's revenue and cash flow deterioration. Although we are forecasting weaker three-year, weighted-average ratios for the company during our 2020-2022 forecast period, the scope of ratio deterioration is narrower than our estimates for the pure-play upstream companies, like Cenovus Energy Inc. and Canadian Natural Resources Ltd.
As the projected three-year FFO-to-debt ratio is now marginally above the previously published downgrade threshold, the negative outlook reflects S&P Global Ratings' view that there is increased risk Husky's cash flow metrics could deteriorate below the minimum level required to support the 'BBB' credit rating. Any unanticipated operational issues that create a structural disadvantage, or sustained weakness in crude oil prices, would weaken the company's financial risk profile below the level needed to support the 'BBB' credit rating.
We would lower the rating to 'BBB-', if Husky's weighted-average FFO-to-debt ratio decreased below 30%, and we expected the cash flow ratio would remain at this weakened level for a sustained period. Nevertheless, we believe Husky's participation in several industry sectors, and the integration benefits of its downstream operations, should continue to support an investment-grade rating.
We would revise the outlook to stable, if Husky is able to improve and sustain its three-year weighted-average FFO-to-debt ratio at the upper end of the 30%-45% range. In the absence of material operating efficiency gains, we believe this ratio improvement would only occur in tandem with strengthening hydrocarbon prices.
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