With oil prices on a stable footing, Robert Peabody, who has just moved into the president and CEO job at Husky Energy Inc., is priming the integrated oil company for cautious growth.
Heavy oil projects in Western Canada, opportunities in Asia and in the Atlantic region, even a new $800-million asphalt refinery in Lloydminster are on the horizon after a long stretch of belt tightening, debt reduction, and the suspension of its dividend.
“We are now in a position to transition from this tough couple of years and getting the company fit to move forward, to actually moving forward,” Peabody said in an interview.
“It’s going to have a different feel. We can make money at a lower oil price, and that generates more free cash flow, which allows us to invest more money … and allows us to simultaneously start returning money to the shareholders.”
In December, Husky, which is 70 per cent owned by Hong Kong tycoon Li Ka-Shing, picked Peabody, 60, to replace Asim Ghosh, 69, who retired.
Peabody is the first native Canadian in a couple of decades — he was born in Moncton, New Brunswick — to run Husky. He earned a degree in mechanical engineering at UBC in Vancouver, and moved to Calgary at the start of his career to work on the commercialization of the oilsands. Before joining Husky a decade ago as chief operating officer, he held senior positions at BP PLC in the U.S. and Europe.
The oilsands are “the jewel of the Canadian innovation story”
The oilsands have overcome many challenges since those days and those that remain — reducing carbon emissions and costs — are minor in comparison, Peabody said. They are “the jewel of the Canadian innovation story, the Canadian innovation that has probably delivered the most value to the country in the last four decades.”
Peabody developed the strategy that re-focused the company on higher quality projects that require less capital so it can sustain itself even at low oil prices.
Husky said in December it’s planning to increase capital spending in 2017 to between $2.6 billion and $2.7 billion, up from about $2 billion this year. The company is expected to report results for the fourth quarter on Feb. 24.
Meanwhile, the market is awaiting news on whether it will re-instate its dividend. In a recent report to clients, RBC Dominion Securities analyst Greg Pardy said “our outlook for Husky reflects the resumption of its common share dividend in mid-2017 at an annualized rate of $0.25 per share (1.5% yield).”
It’s unlikely there will be substantial hiring or spending for a while, whether by Husky or across the Canadian sector, Peabody said.
Oil price uncertainty continues, and on top there are new uncertainties related to the new administration of Donald Trump.
“We have to be prepared for the possibility that oil prices are going to remain lower and more volatile for an extended period of time,” he said, noting US$30 a barrel oil is barely in the rear view mirror.
“Companies will be relatively careful, certainly about taking on permanent staff. As activity ramps up, you are going to see more people employed in drilling and completing wells and work out in the field, but in the head office area, it’s going to be slow to see numbers increase.”
Peabody said Canadian operators will be watching over the next 12 months how they stack up against American competitors. The new president has promised an American first energy plan that will boost domestic production by cutting red tape, taxes and open new areas for exploration.
So far Trump has shown some support for Canadian energy by inviting TransCanada Corp. to re-apply for a permit for the the Keystone XL pipeline, but there is concern he’ll also implement a border adjustment tax on Canadian imports.
“If Canada keeps pace and remains competitive, I think this will all be good for Canadian workers, the industry and our economy,” Peabody said. “But there are enough changes going on down there, if we are slow to respond and complacent and become uncompetitive, the opposite of this could be true.”
Still, with refining interests in the U.S., Husky could benefit from lower corporate taxes, which could also come with U.S. tax reform, as well as from higher demand for asphalt as Trump increases spending on infrastructure.
It’s the reason Husky could sanction at the end of the year a 30,000 barrels a day refinery that would double its asphalt production in Lloydminister, to 60,000 bpd. Whether the refinery can be built on the Alberta or Saskatchewan side of the border would be a test of the two provinces’ relative competitiveness.
The new refinery would also accommodate its growing production of heavy oil and could either be located in Saskatchewan, adjacent to Husky’s upgrader, or in Alberta, adjacent to its existing asphalt refinery, depending on economics and regulatory requirements, Peabody said.
“Asphalt is a very specific and a wide-use utilization product, and the future looks really good given the U.S.’s declared focus (on) the need to upgrade U.S. roads and bridges,” Peabody said. “All of that requires a lot of asphalt — even a Tesla runs on asphalt.”
With operations in Alberta’s oilsands, a large presence offshore the East Coast, heavy oil in Western Canada, natural gas in Asia as well as its refineries, Husky has $20 billion worth of projects to pick from for future growth as acquisitions have not been as attractive so far, Peabody said.
“We will continue to look at opportunities, but the bar is pretty high,” he said. “It’s like the old adage, maybe marrying for money is not such a bad idea, but not necessarily a good one if you are already rich.”