Husky Energy Inc. Business Information, Profile, and History

Company Perspectives:

Husky is entering into an era of large-scale project developments while continuing to optimize current operations. The major challenge for the Company will be in the successful implementation of those projects, while maintaining a focus on current operations and financial discipline.

History of Husky Energy Inc.

Husky Energy Inc. is one of the top integrated oil and natural gas concerns in Canada, carrying out extraction, transport, storage, upgrading, marketing, and retail operations. Most of the company's production activity occurs in western Canada, where Husky's holdings include natural gas reserves in British Colombia, oil and gas fields in the southern regions of Alberta and Saskatchewan, and oil sands deposits in northeast Alberta. In addition, Husky has a long history of working with heavy oil, extracting and refining it into asphalt to be marketed for road construction projects across North America. Alternatively, the heavy crude is sent to the company's Lloydminster Upgrader on the Alberta-Saskatchewan border to be converted into light synthetic crude appropriate for transportation fuel. Other mid- and upstream activities at Husky include the Hussar gas storage facility in Alberta and a network of 580 gas stations operating under the Husky and Mohawk brand names. With an eye toward long-term growth, Husky has begun exploration and development projects off the east coast of Canada, and holds interests in the Terra Nova and White Rose projects. Husky also has exploration and production joint ventures in China. Although headquartered in Calgary, Alberta, the company has been majority owned by a Hong Kong businessman, Li Ka-Shing, and his family since 1986. Li's associate John C.S. Lau, president and CEO of Husky, was instrumental in bringing financial stability to Husky after he joined the company in 1992. Li's son Victor is co-chairman of the board.

The Nielson Era: 1938-78

Husky Energy's roots are in Wyoming. It was there that Glenn Nielson, a rancher from Cardston, Alberta, convinced a farm supply cooperative and a Montana contractor to join him in purchasing two heavy oil refiners. The facilities were organized into the Husky Refining Co. on January 1, 1938, with headquarters in the small town of Cody. The company expanded slowly in the prewar years, with annual revenues in the hundreds of thousands of dollars. Husky Refining gradually acquired tracts of oil-rich land, waiting to develop them until it had enough revenue to proceed without debt. By 1940 the company's assets also included a small chain of gas stations and a trucking line.

The demand for heavy oil skyrocketed during World War II, allowing the young company to attain financial stability for the first time. When the war had run its course, Nielson's Canadian background reasserted itself, and in 1946 he moved one of his refineries to Alberta. Husky Oil and Refining Ltd. was incorporated in Canada the following year as a wholly owned subsidiary of the U.S. company. With headquarters in Calgary, the Canadian company processed heavy oil, producing bunker fuel for railroads and asphalt for highways. In 1953 the Canadian branch separated from its U.S. parent and was renamed Husky Oil Ltd. Both companies went public independently. Operations in Canada gradually outpaced activities south of the border until, in 1960, the Canadian company bought all shares of the U.S. unit.

During the 1960s Husky Oil Ltd. grew into a true integrated company, with producing, refining, and marketing divisions. About C$35 million was invested in the development of heavy oil operations and reserves in the Lloydminster area, and Husky also began exploring for conventional oil. By the end of the decade the company was a major regional presence, with annual revenues in 1970 of about C$175 million. A few years later the OPEC oil embargo pushed oil prices higher and made further expansion possible. Husky bought the marketing and refining assets of Union Oil Company in 1976, an acquisition that included a retail network in western Canada and a refinery in Prince George, British Colombia. Profits that year reached C$30 million on revenues of C$522 million. In the late 1970s Husky began considering a major new undertaking: the construction of an expensive upgrader that could convert heavy oil into synthetic light oil. The company began looking for partners who, like Husky, desired a new outlet for their heavy oil production.

As the company entered 1978, the Nielson family expected to lead Husky comfortably into its fifth decade. But by the end of the year, an outside entrepreneur would have seized control after a month of whirlwind takeover bids. At the beginning of June 1978, Glenn Nielson was chairman of Husky, while his son Jim acted as CEO. The two owned only about 20 percent of the company, but ran it like a private family firm. Then, on June 9, they got a message that Wilbert Hopper, president of the state oil and gas company Petro-Canada, wished to meet with them. He offered to buy out the Nielsons at a C$9 premium over the last recorded trading price. The Nielsons refused; besides the huge tax liability that would face them after such a deal, they did not want the independent Husky absorbed by a concocted state conglomerate. So, acting quickly, they turned to Dr. Armand Hammer, chairman of the Los Angeles-based multinational Occidental Petroleum Corp. Occidental arranged a higher counterbid and also structured the deal to reduce tax consequences for the Nielsons. Both Occidental and Petro-Canada made formal offers and waited for shareholders to accept.

But in the end, control of Husky went to an outsider: Bob Blair, CEO of Alberta Gas Trunk Line Co. Ltd., a company dealing in natural gas pipelines and petrochemicals. Blair had a reputation as a nationalist, progressive oilman with ties to the Liberal Party. He had been buying shares in Husky since early in 1978, and managed to acquire a controlling 37 percent stake by the end of June. The two major contenders were forced to abandon their bidding war. Under Blair's ownership, the Nielsons stayed on as consultants, but soon, dissatisfied with their reduced role at Husky, sold out their share and moved back to Wyoming to concentrate on other enterprises.

Turbulent Expansion: 1979-91

By May 1979, Alberta Gas Trunk Line held 68 percent of Husky. Blair renamed AGTL "Nova Corp." in 1980. That year Marathon Oil Co. made an offer for Husky, but the transaction was abandoned at the request of U.S. Steel, which was engaged in a friendly takeover of Marathon. So Nova began pouring money into Husky, which in 1982 ranked 13th in Canadian oil production. Husky acquired a small producing company, Candel Oil Ltd., built a new refinery at Lloydminster, and moved into an elegant new office complex in downtown Calgary. Exploration began in North Africa, Indonesia, Australia and offshore Newfoundland. Bigger was better throughout the 1980s. Husky did, however, get rid of its Denver-based U.S. subsidiary in 1984. The unit's oil and gas production operations were sold to Marathon Oil Co. and the downstream operations, to a group of investors that included three former Husky executives. The transaction helped reduce Husky's growing debt.

Husky's expansion policy began to appear ill-advised in the second half of the decade, when Arab nations flooded the world market with cheap oil. Husky recorded its first year-end loss in 1986, and share price plummeted. Soon Husky was looking for a private partner to prop up the company's finances. The company found a willing investor in Li Ka-shing, a Hong Kong billionaire with holdings in Canada and a friendly business relationship with Blair. In a deal worth about C$855 million, Li bought a 43 percent stake in Husky Oil through his Hutchison Whampoa trading company. Li's family acquired another 9 percent, and 5 percent was purchased by the Canadian Imperial Bank of Commerce. Nova was left with a 43 percent stake. Husky was delisted from the stock market, but Blair continued to run the company. With restored optimism, Husky looked for good returns in the coming decade.

Continued expansion and low oil prices, however, prevented Husky from attaining financial prosperity. In particular, the Lloydminster Bi-Provincial Upgrader project, initiated in 1988, was a financial black hole for many years. In theory, the upgrader was to make a profit on the differential between the prices of heavy and light oil. If the differential was wide enough and the upgrading process fairly efficient, Husky could make money converting heavy oil into light. But both the high cost of the project and the uncertainty of oil prices discouraged potential industry partners from joining Husky on the project. Consequently, Husky President Art Price turned to the government. Early in 1984 he succeeded in convincing the Liberal-controlled federal government to provide financing, but the deal fell through when the Progressive Conservatives gained control in the fall elections.

After negotiating for several more years and trimming the price of construction, Husky finally won a deal. In 1988 the provincial governments of Alberta and Saskatchewan, together with the federal government, agreed to fund 75 percent of the estimated C$1.2 billion cost of constructing an upgrader. Even though Husky only provided one quarter of the equity for the deal, it was to receive half of the profits. Blair insisted that the jobs and tax revenue generated by the upgrader would make the deal worthwhile for all parties. The upgrader would process 46,000 barrels per day of heavy crude, a welcome development in a market that was oversupplied with heavy oil. Husky commenced construction of the upgrader, persevering over the next few years despite about C$300 million in cost overruns.

Expansion continued into the 1990s amid poor performance. In 1988, Husky carried out a takeover of Canterra Energy Ltd., a large Calgary-based conventional oil company, in a deal that made Husky one of the ten largest oil and gas producers in Canada. The company also built a gas-processing plant north of Calgary, but lost out on a potentially lucrative supplier for the plant. In 1990 Shell Canada Ltd. and Husky were battling over who would develop a major gas discovery near the town of Caroline, a village 100 miles northwest of Calgary. Once partners, the two companies now had competing proposals for development. The town of Caroline favored Shell's proposal, which would build a new gas plant nearby. Husky, on the other hand, wanted to transport the gas 35 miles by pipeline to its Ram River gas plant. Shell's plan won approval that fall from the Alberta Resources Conservation Board.

Hong Kong Taking Charge: 1992

By 1992, it was clear that Blair's aggressive expansion had only pulled Husky further into debt. The company lost C$315 billion in 1991. Once again, Li stepped in with an offer from his Hutchison Whampoa holding company. He negotiated a deal late in 1991 to buy Nova's remaining 43 percent stake in Husky for approximately C$325 million. Li then took a stronger hand in management of the company. He sent John Chin-Sung Lau to Husky in 1992 as vice-president. Although Lau had no experience in the oil industry, he had successfully turned around some of Li's other businesses with a strict focus on efficiency and profits.

Lau's first years at Husky were rocky, and employees felt that Lau and President Art Price were competing for their loyalty. Price eventually resigned in mid-1993, and Lau became CEO. Now the undisputed leader, he set about ridding the company of useless undeveloped properties, laid off hundreds of employees, and scrapped the company's "quality work environment" initiative. Canadian Business wrote that Husky was gaining a reputation as a bad place to work, marred by reports of sexual harassment and disrespect toward female employees. A former employee was quoted as saying, "Lau was very hard-nosed, all teeth and claws. He was very abrasive." Nevertheless, by 1996 Husky was performing better and Lau was declaring himself willing to give employees more access to management. The company made a C$35 million profit in 1996 on revenues of C$2.11 billion.

The Lloydminster upgrader was also emerging from years of dismal performance. The upgrader began operation in 1992 and lost C$140 million in the first three years of operation, due to the fact that the cost of upgrading was higher than the heavy oil-light oil price differential. The federal and provincial Alberta governments sold their stakes in the project in 1994, but Husky and the Saskatchewan government held on to 50 percent stakes in the hopes that the facility would eventually turn a profit. Eventually the upgrader reorganized to operate more efficiently, the price differential improved, and the upgrader made a combined C$26 million in 1996 and 1997. Saskatchewan managed to recover all the money it had put into the project and sold its interest to Husky for C$310 million in 1998.

Looking Eastward: Late 1990s

With a financial situation that looked fairly secure in the short term, Husky began to focus more attention on projects that held promise for long-term profits. The Canadian oil industry began extensively developing properties off the east coast of Canada by the late 1990s. Husky had a minority interest in the second project in the area, Terra Nova, and was the operator and majority holder for a third project, White Rose. Both properties were located in the Jeanne d'Arc Basin just offshore of Newfoundland. Husky had been exploring in the east coast area since 1982 and then invested heavily there in 1998 and 1999. Extensive work at Terra Nova began in mid-1998, when a floating production and storage system was constructed. Production commenced there in January 2002 after delays. The White Rose project was in an earlier stage of development. Husky, working with partner Petro-Canada, struck oil on the site in 1999, but subsequent drilling in 2000 was less promising. After carefully reconsidering the prospects at White Rose, Husky announced in March 2002 that it would move ahead with development.

The company was also looking even farther east, working on projects in China. In April 1998 Husky began testing production from wells in the Pucheng oil field in Henan province, in a joint venture with China National Petroleum Corp. In late 2000 the company also signed an agreement to develop two fields in the South China Sea with the China National Offshore Oil Corporation. Other expansion included the purchase of Mohawk Canada Limited for C$102 million in July 1998. The acquisition added about 300 gas stations and an ethanol plant to Husky's assets. Profits were rising steadily after 1998, with net earnings in 1999 reaching C$43 million on revenues of C$2.79 billion.

In the summer of 2000 Husky took a step that catapulted it into the leading ranks of Canada's oil and gas producers. The company merged with a smaller public oil concern, Renaissance Energy Ltd., for approximately C$3.02 billion. The combined company, renamed Husky Energy Inc., took over Renaissance Energy's listing on the Toronto Stock Exchange. When the deal was announced, there was some negative reaction to the idea of a large private company swallowing a small public company, and Husky tried to build trust by releasing an unprecedented amount of information about its finances and operations. When the deal went through, Li and his family controlled about 70 percent of the new public company. Husky's leadership said that Renaissance, which worked primarily with small low-risk oil pools in Western Canada, would provide steady income to finance capital development at the offshore Newfoundland fields, expand retail stations in Canada, and work with oil sands in Alberta.

Results for 2000--earnings of C$464 million on revenue of C$5.09 billion--reached record levels, and were followed in 2001 with earnings of C$201 million on revenues of C$6.63 billion. Now that Husky was an attractive investment, Li was interested in selling. There was speculation in the fall of 2001 that France's TotalFinaElf was a potential buyer, but talks were postponed. In the early months of 2002 Husky confirmed that it was in talks with PetroChina, a massive company that could easily raise the funds to buy Husky. The company's future ownership was up in the air, as Li showed himself open to selling the firm he had helped guide to prosperity.

Principal Subsidiaries: 579518 Alberta Ltd.; 147212 Canada Ltd.; Pounder Emulsions' Operations Ltd.; Husky BPU Operations Ltd.; Husky Oil Limited; Husky (U.S.A.) Inc.; HOI Resources Co.; Longridge Resources Inc.; Avid Oil & Gas Ltd. (38%); Carnduff Gas Limited (94%); Husky Energy International Sulphur Corporation; Husky Oil China Ltd.; Husky Oil (Madura) Ltd (Alberta); Husky Oil Overseas Ltd. (Cayman Islands).

Principal Competitors: Imperial Oil Ltd.; Shell Canada Ltd.; Petro-Canada.

Chronology

• Key Dates:
• 1938: Glenn Nielson founds Husky Refining Co. in Cody, Wyoming.
• 1946: Nielson moves some Husky operations to Alberta, Canada.
• 1953: The U.S. and Canadian companies separate and go public.
• 1960: Canadian Husky Oil Ltd. acquires all shares of the U.S. unit.
• 1978: Entrepreneur Bob Blair acquires a controlling share in Husky Oil.
• 1987: Burdened with the debt of expansion, Blair sells a majority stake in Husky to Hong Kong investor Li Ka-Shing.
• 1991: Li acquires all but 5 percent of Husky and installs new management.
• 1998: Husky invests heavily in acquisition and development of properties offshore Newfoundland.
• 2000: Husky merges with Renaissance Energy and goes public.