Husky makes bet on natural gas

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Five months after promising that he was "not here to stand still," the new head of Husky Energy unveiled a multibillion-dollar spending plan designed to stir growth and restore investor confidence.

In what it called a series of "major strategic growth initiatives," Husky is giving the thumbs-up to a major new oil sands project, abandoning plans to spin off some Asian offshore gas assets, and spending $860-million to buy oil and gas production from Exxon Mobil Canada.

The company also launched a $1-billion equity financing to fund both the acquisition and an ambitious capital plan that will see it spend $4.86-billion in 2011, a 20-per-cent increase over 2010, as it aims for 3- to 5-per-cent annual growth in production. RBC Dominion Securities analyst Greg Pardy called the moves "bold steps" to sharpen the company's focus, "following a long stretch in which its strategy was unclear."

Yet despite the optimism that has greeted Asim Ghosh, the Husky chief executive officer who was installed in June amid promises of a change in course, markets greeted the moves with skepticism, knocking down Husky shares by 3.7 per cent, to $24.57, on a day when other big energy companies were moving higher. Husky is Canada's sixth-largest oil and gas producer by market capitalization.

Prominent in the company's plans is a substantial bet on natural gas, which accounts for the bulk of its land purchases in recent months, including the Exxon acquisition. Since September, the company has bought 33,000 barrels per day of oil-equivalent production - of that, more than 80 per cent has been natural gas, which continues to trade at around $4 (U.S.) per thousand cubic feet. That's a price so low that many companies have struggled to turn a profit.

"Husky didn't pay a lot for the assets today, but I think that their challenge is going to be for them to show that they've actually got growth on these newly acquired lands that is economic in the context of a weak natural gas price," said Chris Feltin, an analyst at Macquarie.

Mr. Ghosh declined interview requests Monday, although he will speak at a company investor day Wednesday. Husky spokesman Graham White said the company's pursuit of natural gas makes sense given that 74 per cent of the Exxon lands fall within areas that Husky already operates.

"Husky has a proven expertise and existing infrastructure in [these]areas," he said. "The deal makes sense under today's natural gas pricing environment and offers significant upside potential as prices recover."

Exxon already made its own major gas bet on U.S. shale plays, which are a massive source of cheap supply, when it spent $31-billion to buy XTO Energy last year. That opened the way for Husky to place a counter-cyclical bet on the cheap.

"Properties sell for better prices when rates are low," Mr. White said.

The Exxon properties may also offer a unique chance to squeeze more profit from producing land, since Exxon is not known for investing heavily in its property. "Exxon typically doesn't develop its assets aggressively," Mr. Feltin said. "So, many operators look at there being quite a bit of meat on the bone for some of the assets, if they can get them out of Exxon's hands."

Analysts said confidence has not yet returned to a company that has disappointed investors. Husky stock continues to trade below its levels before of the fall, 2008, market crash, production remains at 2002 levels, reserves are only just now rising above 2001 levels and, outside of more acquisitions, the company has shown few prospects for more growth before 2013.

"They've got to show that they can deliver," BMO Nesbitt Burns analyst Randy Ollenberger said. "If they just buy these properties and it's the same old Husky that doesn't execute well, then all they did was destroy some capital."

Mr. Ollenberger attributed the fall in Husky shares to a "a typical selloff on the back of an equity offering. I would also assume that there had been an expectation of some value being created by the Asian spinoff - so that's been eliminated."

It is, however, positive that billionaire Li Ka-shing, who owns 70.5 per cent of Husky, will take commensurate stake in the $1-billion financing, Mr. Ollenberger said.

Still, shareholders said a history of unfulfilled pledges from the company - including, on Monday, the backtracking on the Asian asset spinoff - has undermined faith in Husky.

"We've heard lots of talk from the company over the years and that talk has been, in my opinion, primarily unfilled," one investor said. "For those that have suffered over the long term with the stock, it's going to take a little bit more than talk. We're going to have to see something tangible."