Husky review of $2.2B West White Rose a plea for government help, analyst says

Husky review of $2.2B West White Rose a plea for government help, analyst says
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ST. JOHN’S, N.L. — An announced review by Husky Energy Inc. of its $2.2-billion West White Rose project off the coast of Newfoundland could be interpreted as a call for the province to take an equity stake to ensure it is built, an analyst says.

Under a “worst-case scenario,” it could also signal the Calgary-based company’s option to eventually shut down or sell the currently producing White Rose offshore oil project itself, added analyst Phil Skolnick of Eight Capital in a report.

Construction on the project expected to produce up to 75,000 barrels of oil per day was suspended in March because of the COVID-19 pandemic and Husky’s refocusing of priorities because of the global economic downturn and low oil prices.

“A full review of scope, schedule and cost of this project is critical, given the minimum one-year delay to first oil caused by COVID-19, and our priority of maintaining the strength of our balance sheet with ample liquidity,” said Husky CEO Rob Peabody in a news release on Wednesday.

“Unfortunately, the delay caused by COVID-19 and continued market uncertainty leaves us no choice but to undertake a full review of the project and, by extension, our future operations in Atlantic Canada.”

The West White Rose project is about 60 per cent complete, with about $1.1 billion in work left to be done in Newfoundland and Labrador and an expected $11 billion in future capital and operating expenditures over its life, Husky said.

“We fully appreciate that this project represents billions in government taxes and other anticipated public benefits. Without it, these will not materialize,” Peabody said in the release.

It states Husky has discussed the project’s “challenges and risks” with the provincial and federal governments and has proposed ideas designed to protect jobs and the economic benefits the project will deliver.

“We need to find a solution now,” Peabody added.

Husky is the operator of the White Rose field and satellite extensions, which are located in the Jeanne d’Arc Basin approximately 350 kilometres off the coast of Newfoundland and have been producing oil since 2005.

Husky’s recent messages concerning next year’s capital plans suggest cutting debt is taking priority over funding West White Rose construction, Skolnick said.

“Essentially, we believe that HSE is messaging to the Newfoundland and Labrador government that given the importance that this project has on tax revenues and associated employment, if the government wants to take on a working interest to help put certainty into construction, the company is open to negotiating that,” he said.

He added that if the new project doesn’t go ahead, it raises questions about asset life extension projects on the SeaRose FPSO (floating production storage and offloading) unit, which is to be used at West White Rose.

If Husky decides those projects aren’t worthwhile to preserve the 20,000 bpd it currently gets from its share of the existing project, it could lead to a scenario where it attempts to sell or shuts down the project entirely in 2022, he said.

Newfoundland and Labrador is the third-largest oil producer in Canada and its offshore oil industry has been hit hard by crashing global oil prices.

In mid-March, Equinor and Husky announced an indefinite deferral of the Bay du Nord project, slated to be the province’s first deepwater operation.

Drilling on the Hibernia platform was suspended in April, as was a refit for the Terra Nova floating production storage and offloading vessel.

The Newfoundland and Labrador government has been imploring Ottawa to help the sector out, even holding a news conference in late May to appeal for federal aid.

West White Rose is expected to create about 250 full-time platform jobs.

Husky has a 60 per cent working interest, which would result in net output of up to 52,500 barrels per day if the project is completed.

Due to the short offshore weather window needed for construction, the suspension in March meant that West White Rose is delayed for at least a year.

By Dan Healing in Calgary with a file from Sarah Smellie in St. John’s.

Companies in this story: (TSX:HSE)

This report by The Canadian Press was first published Sept. 9, 2020.

The Canadian Press

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