PrefBlog

Standard & Poor’s has announced:

• On Dec. 15, 2020, Cenovus Energy Inc. and Husky Energy Inc. announced that substantially all their respective shareholders and Husky’s preferred stock shareholders approved the companies’ proposed combination.
• Following receipt of all necessary regulatory approvals, both companies announced the completion of the combination on Jan. 4, 2021.
• S&P Global Ratings lowered its long-term issuer credit and senior unsecured debt ratings on Husky to ‘BBB-‘ from ‘BBB’. S&P Global Ratings also lowered its global scale and Canada scale preferred share ratings to ‘BB’ and ‘P-3’, respectively, from ‘BB+’ and ‘P-3(High)’, respectively.
• S&P Global Ratings removed the ratings from CreditWatch with negative implications, where they were placed on Oct. 25, 2020, when the two companies announced their intention to merge.
• The stable outlook reflects our expectation that Cenovus, with the addition of Husky’s integrated operations, will retain the strong operating performance of its steam-assisted gravity drainage (SAGD) assets, and benefit from improved cash flow stability resulting from its expanded integrated midstream and downstream operations.

S&P Global Ratings today took the rating actions listed above. The combination with Cenovus has reduced the ownership interest of Husky’s major shareholder group, which includes CK Hutchison Holdings Ltd. (A/Stable/–), from about 70% to 27% of Cenovus. At this ownership level, and with the resulting proportionate representation on the Cenovus board of directors, CK Hutchison and its related entities now hold a minority interest in the company. At this ownership level, we do not believe this shareholder group has influence over Cenovus’ strategic decision-making. As a result, the previous one-notch uplift we applied to our credit rating on Husky, which was supported by our opinion that Husky was a moderately strategic investment for CK Hutchison, would not be applied to our rating on Cenovus.
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Based on our expectation that future asset performance will remain consistent with the recent track record, we are projecting a weighted-average, two-year (2021-2022) funds from operations (FFO)-to-debt ratio in the 24%-26% range.

A negative rating action on Cenovus would also apply to Husky. Assuming the pro forma company’s business risk profile is unchanged during our 24-month outlook period, we would lower the rating if the company’s FFO-to-debt and DCF-to-debt ratios deteriorated below the minimum levels needed to support the ‘BBB-‘ rating. Specifically, we could lower the rating if our estimate of the combined entity’s weighted-average FFO-to-debt ratio approached 20% with limited prospects of improving. This would most likely occur if differentials materially exceed our assumptions, or if leverage increased.

Based on our view that the combined entity’s business risk profile is unlikely to strengthen and support an upgrade, we could nevertheless raise the rating if the company’s cash flow and leverage metrics improve. We could raise the rating to ‘BBB’, if the company were able to increase and maintain its weighted-average adjusted FFO-to-debt ratio above 45%. Above this threshold, the financial risk profile and a ‘BBB’ rating would accommodate higher levels of discretionary spending than is currently factored into our base-case assumptions. Alternatively, we could also raise the rating if the adjusted FFO-to-debt ratio increased and remained at the upper end of our 30%-45% range, and the company also maintained financial policies focused on generating strong DCF, such that it sustained a weighted-average DCF-to-debt ratio above 10%. We believe this could occur with strengthening hydrocarbon prices.

Affected issues are HSE.PR.A, HSE.PR.B, HSE.PR.C, HSE.PR.E and HSE.PR.G.

Update: DBRS has announced that it:

downgraded Husky Energy Inc.’s (Husky or the Company) Issuer Rating and Senior Unsecured Notes and Debentures rating to BBB from BBB (high) following the close of the previously announced combination with Cenovus Energy Inc. (Cenovus; rated BBB with a Stable trend). DBRS Morningstar also downgraded Husky’s Preferred Shares – Cumulative rating to Pfd-3 from Pfd-3 (high) and its Commercial Paper rating to R-2 (middle) from R-2 (high). All trends are Stable. The actions remove the ratings from Under Review with Negative Implications where they were placed on October 25, 2020, when the combination was announced. DBRS Morningstar discontinued its rating on the Company’s Preferred Shares as the Husky preferred shares have been exchanged for Cenovus preferred shares as part of the combination.
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DBRS Morningstar assessed the consolidated business risk profile of the combined entity to be moderately stronger relative to Husky’s stand-alone business risk profile. However, the rating downgrades reflect DBRS Morningstar’s opinion that the impact of the stronger business risk profile is more than offset by weakness in the combined entity’s consolidated financial risk profile, relative to Husky’s stand-alone financial risk profile, because of a material increase in indebtedness and resulting weaker financial metrics (see DBRS Morningstar’s press release “DBRS Morningstar Places Husky Energy Inc. Under Review–Negative Following Agreement to Combine with Cenovus Energy Inc.,” dated October 25, 2020).

Cenovus, as the resulting combined entity, plans to pursue a conservative financial policy and prioritize deleveraging the balance sheet over the medium term. A sizable free cash flow (FCF; cash flow after capital expenditures and dividends) surplus is expected by 2022 as earnings and operating cash flow increase based on the assumption of recovering crude oil prices, improved refining margins, and the realization of expected synergies from the combination. DBRS Morningstar expects key credit metrics, using its base-case commodity price assumptions, to remain relatively weak in 2021 before materially improving in 2022 (lease-adjusted debt-to-cash flow around 2.5 times). DBRS Morningstar expects Cenovus to maintain a strong liquidity position.
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Given DBRS Morningstar’s current commodity price assumptions, a rating upgrade is unlikely over the next two years. However, a negative rating action may result if the projected improvement in credit metrics does not materialize because of weaker-than-expected crude oil prices and refining margins and/or the combined entity is unable to realize the projected synergies as planned.

With respect to Cenovus, DBRS announced:

DBRS Limited (DBRS Morningstar) upgraded Cenovus Energy Inc.’s (Cenovus or the Company) Issuer Rating and Senior Unsecured Debt rating to BBB from BBB (low) following the close of the previously announced combination with Husky Energy Inc. (Husky; rated BBB with a Stable trend). All trends are Stable. The actions remove the ratings from Under Review with Positive Implications where they were placed on October 25, 2020, when the combination was announced. DBRS Morningstar also assigned a rating of Pfd-3 with a Stable trend to the Preferred Shares – Cumulative issued by Cenovus as part of the combination. Post-closing, Husky is a wholly owned subsidiary of Cenovus. Both entities are to be amalgamated, after which Cenovus will continue as the surviving entity and become the obligor under Husky’s existing long-term notes and other direct obligations.

This entry was posted on Monday, January 4th, 2021 at 6:27 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.