Husky Energy Inc.’s chief executive officer sees the deep discounts on Canadian heavy oil persisting through 2020, a nightmare scenario for the industry but a potential incentive for investors to back Husky’s hostile bid for MEG Energy Corp.
Husky CEO Rob Peabody said the discount on Canada’s thick crude, which recently hit record levels, may not improve markedly after a current round of U.S. refinery maintenance is completed and demand resumes.
Western Canada select, a blend of bitumen from the oil sands and conventional heavy oil, is more expensive to refine and has historically cost between US$10 and US$20 a barrel less than U.S. benchmark West Texas intermediate. It sold for US$44 a barrel less than U.S. benchmark West Texas intermediate light oil on Thursday, according to Net Energy Exchange. While that gap has narrowed somewhat compared with a few weeks ago, it means Canadian crude is selling for just over US$23 a barrel when WTI is above US$67.
Earlier this month, Alberta Premier Rachel Notley complained that widening price differentials are costing Canadian producers and governments upward of $40-million a day.
More export capacity to the U.S. Midwest is due to come online by the end of next year as Enbridge Inc.’s Line 3 pipeline replacement project proceeds, and an increase in oil-by-rail capability is also expected, providing some relief for hard-hit producers, Mr. Peabody told analysts on a conference call to discuss Husky’s third-quarter results.
“The numbers would suggest, by the time that comes on, we still have, net, too much production coming out of Western Canada. So even as we studied this MEG deal, we have taken a fairly conservative [approach],” he said. “We are assuming high differentials continue certainly the rest of this year, all of next year, all of the year after that. And then we start seeing some structural relief from some of these pipelines, if they come on according to the current schedule.”
MEG, the largest pure-play oil sands producer, has rejected Husky’s $3.3-billion cash-and-stock offer, saying it undervalues MEG’s assets and prospects, and that the odds of a richer bid emerging are good.
Husky has offered $11 in cash, or 0.485 of a Husky share, for each MEG share. It would also assume MEG’s $3.1-billion debt, putting the overall value of a deal at $6.4-billion. Husky shares finished up 0.4 per cent at $18.82 on the Toronto Stock Exchange on Thursday, putting the share value of its bid at $9.13.
MEG shares closed up slightly at $10.23, suggesting investors are hopeful a white knight, or sweetened Husky offer, will eventually emerge by the mid-January bid expiry.
Mr. Peabody said MEG shareholders would benefit in a time of poor prices from having access to Husky’s oil upgrading and refining capacity, which removes much of the transport and processing risk, and from an end to concerns about MEG’s sizable debt.
The takeover battle comes as Canadian heavy oil producers struggle with tight export pipeline space and scheduled maintenance shutdowns at several refineries in the key U.S. Midwest market. Also, industry hopes for more access to the Pacific Coast for oil exports in the next few years have been dashed by a federal Court of Appeal decision that reversed an approval for the Trans Mountain pipeline expansion.
MEG vice-president John Rogers declined to comment on whether an extended run of poor oil prices could sway shareholders in Husky’s favour, but he pointed out that longer-term contracts point to far smaller discounts than the current one – in the high- to mid-US$20s for 2019 and ′20.
In the third quarter, Husky, which also has operations in Asia and runs a chain of gas stations in Canada, earned $545-million, or 53 cents a share, quadruple the year-earlier $136-million, or 14 cents a share. Production dipped to 297,000 barrels a day from 318,000.
Jeffrey Jones