Husky Energy Inc. will increase its downstream capacity and thus “insulate” itself from recent large heavy oil price discounts if it succeeds in its hostile takeover of fellow oilsands producer MEG Energy Corp., CEO Rob Peabody said Thursday.
The Calgary-based company controlled by Hong Kong tycoon Li Ka Shing has more capacity to refine, upgrade or transport heavy oil than it produces, which allows it to profit by buying cheap barrels in Alberta that can’t find pipeline space and selling them in the U.S., Peabody said on a conference call.
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He said MEG, which produces only raw bitumen, is still refusing to discuss the $3.3-billion cash-and-share offer Husky made in September, but he remains optimistic it will succeed by the January deadline for shareholders to tender.
“We’re a little bit short on the upstream now, but we move to be a little bit long on the upstream post the MEG acquisition,” Peabody told a conference call to discuss Husky’s third-quarter results.
“We’re going to have about 400,000 barrels a day of heavy and bitumen blend and about 375,000 barrels between upgrading, refining and committed pipeline capacity to take that away.”
The acquisition could mean revisiting Husky’s deferred plan to double capacity of its Lloydminster, Alta., asphalt plant to 60,000 bpd, Peabody said.
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He added Husky’s Superior, Wis., asphalt refinery — sidelined by an explosion and fire in April — is expected to reopen in 2020 with at least 5,000 barrels per day of extra capacity.
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Meanwhile, Husky’s light oil refinery at Lima, Ohio, is undergoing an upgrade that will allow it to boost heavy oil processing capacity to 40,000 bpd from 10,000 bpd by the end of 2019.
A lack of export pipeline capacity has been blamed for recent spot price discounts of more than US$50 per barrel for Western Canadian Select bitumen blend crude compared with New York benchmark West Texas Intermediate — that’s more than three times the typical difference.
Peabody said the discounts are expected to last for two to three years until export pipeline capacity is expanded. He predicted heavy oil producers will start to shut down wells to relieve the glut of oil.
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He said he agrees with the idea of government aid to increase crude-by-rail capacity from Western Canada, an option called for by Alberta Premier Rachel Notley earlier this week.
Husky reported $545 million in net earnings in the three months ended Sept. 30, up sharply from $136 million in the same quarter last year, as its average realized price per barrel of upstream production rose by more than C$10 per barrel of oil equivalent.
The profit amounted to 53 cents per share for the quarter ended Sept. 30, compared with a profit of 13 cents per share a year ago and analyst expectations of 50 cents, according to Thomson Reuters Eikon.
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Production in the quarter totalled 297,000 boepd, down from 318,000 boepd, as Husky performed maintenance on its Tucker and Sunrise thermal oilsands operations and slowed production from its cold heavy oil wells.
Analysts were disappointed with Husky’s slight miss on production and its reduction of 2018 production guidance by 10,000 to 15,000 boepd, along with its increase in capital spending expectations for the year.
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