North American Oil Sands "Cold Winter" Restructuring Sinoworth Merger Husky Energy

In 2020, Canadian oil fields close to the Arctic circle will be extremely cold, and local oil and gas exploration companies will be in a difficult situation. Husky energy, which has been controlled by Hong Kong tycoon Li Ka Shing for nearly 30 years, has recently joined a series of mergers and acquisitions of North American oil companies.

On October 25th, sinovus energy and husky jointly announced the merger, which was annexed by the former, arousing the attention of the capital market and the oil industry. In terms of capital market, Hong Kong Changjiang Hutchison industrial group (0001.hk, hereinafter referred to as "Changhe"), the former controlling shareholder of husky energy, stopped the "Yin drop" market for several days on the 27th, rising 0.75% to HK $46.75 per share. Investment bank analysts who follow Changhe believe that Changhe will participate in the operation of the new energy company as a two shareholder, and it is not expected to continue to incorporate Husky's performance into the statements, which can reduce the volatility of performance.

In the oil industry, as sinoworth's main asset is an oil sand mine located in northern Canada, its actions are regarded as the self-help of oil sand explorers. Oil economics researchers pointed out to reporters of Southern finance and economics that buying and selling assets is a normal behavior of the industry. The current low oil price period provides "gamblers" with an opportunity to quit, but the value of oil sand assets should not be denied. In addition, the crude oil prices of Canadian oil sand explorers have been significantly reduced compared with the price quoted by West Texas in the United States for a long time. Sinoworth hopes to get rid of some pressure of "being bargained" by merging Husky's midstream and downstream assets. Husky said the crude oil produced by the new company is expected to be more in line with international oil price indicators.

Changhe shares 27% in the new company

Sinoworth and husky, headquartered in Alberta, Canada, are both medium-sized oil and gas explorers. This merger and acquisition does not involve cash transactions, but the new company shares in exchange for old company shares. Husky's shareholders exchanged 0.7845 new shares and 0.0651 warrants per share of the new company. However, the market believes that sinoworth, as the acquirer, has given a 21% premium in this price. Therefore, on October 26, the first trading day after the announcement of the merger, sinoworth's share price fell by 8.36%, while Husky's share price rose by 12%. After adjusting the stock price, sinoworth's market value is about 5.8 billion Canadian dollars, and Husky's market value is about 3.8 billion Canadian dollars.

After the merger, the company retains the name of sinoworth (hereinafter referred to as "new sinoworth"), with 61% shares held by sinoworth's original shareholders and 39% shares held by Husky's former shareholders. Li Ka Shing family trust and Cheung Kong Hutchison Industrial Co., Ltd. originally held about 69.51% shares in husky, so they obtained 27.1% shares in the new company. New sinoworth will own the oil sand project, traditional oil and gas field project and a small number of refining plants of the former sinoworth. In addition, it will also acquire Husky's oil and gas field projects in Canada, China and Indonesia, as well as Husky's pipeline and refining equipment assets in the United States.

The merger has been irrevocably supported by Husky and sinoworth's controlling shareholders. It can be implemented after the approval of sinoworth shareholders, regulatory approval and the Queen's Court of Alberta, Canada. It is expected to be completed in the first quarter of 2021. New sinoworth's debt bearing company is currently valued at $23.6 billion and is expected to reach 750000 barrels of oil equivalent per day in the future, making it Canada's third largest oil and gas explorer.

Li's "financial technology" looks good and achievements

Husky energy is controlled by the Li Ka Shing family since 1991. It was originally a "cash cow" worthy of the Li family. However, the oil and gas exploration industry is characterized by "strong cycle", and the company's performance is deeply affected by market fluctuations. After the first loss in the third quarter of 2015, negative factors seemed to linger. In the first and second quarters of 2016, husky recorded a net loss again. In the fourth quarter of 2019, husky turned into a loss again, with a Book loss of $2.3 billion, including large non cash impairment of assets; in the first and second quarters of 2020, there is still "blood flow", with net book losses of $1.7 billion and $304 million respectively. Li zeju, chairman of Yangtze River Hutchison industry and co chairman of husky energy, called this "the worst performance since memory.".

Although Changhe only holds 40.19% of Husky's shares, Li Ka Shing family trust, which holds 29.32% of shares, is regarded as a person acting in concert, so it has a controlling position. Husky energy's poor performance is often shown in the consolidated statements of Changhe, which forms great pressure on the company's management.

According to Changhe's 2020 semi annual report, Husky is the only one with net loss among the major business sectors of ports, telecommunications, infrastructure, retail and energy, and it is also the sector with the largest annual decline in revenue and net profit, which has a great drag on Changhe's performance. Cheung Kong Hutchison was merged and restructured by the former Yangtze River industry and Hutchison Whampoa in March 2015. After the merger, the highest share price was HK $159.87 per share, but it continued to decline in the following five years. On October 27, Changhe closed at HK $46.75 per share.

Some market analysts believe that the merger of "finance and technology" can help Changhe get rid of the drag of Canada's oil and gas business. Taking the performance of the first half of 2020 as an example, excluding husky, Changhe's EBIT (interest and tax profit) will significantly increase by HK $5.487 billion to HK $32.164 billion. Husky's international oil price remains at a loss. Huo Jianning, CO managing director of Changhe and co chairman of husky energy, said at the first quarter performance meeting in 2020 that "for every dollar of oil price drop, husky will lose an additional C $51 million."

Under the current merger arrangement, Changhe's stake in new sinoworth will be only 15.7%. Cusson Leung, an analyst at J.P. Morgan, points out that as it does not have a controlling position in the new company, Changhe will not have to consolidate the performance of new sinoworth energy into its statements, but only record it as annual dividend income. "Husky is the most cyclical sector in Changhe's asset sector, and this [excluding it from the statements] can make Changhe's performance look more stable," he said

However, according to the merger announcement, the quarterly dividend of new sinoworth is only about C $0.0175 per share. According to morringstar analyst Lorraine Tan, this dividend plan is not attractive, so the cash flow to Yangtze River Hutchison will be very limited.

Self help of oil sand dealers

Oil sands in Canada are a kind of "unconventional" oil and gas assets, with complex production process and high cost. Since 2017, oil and gas explorers of different sizes, including international giants, have sold oil sand assets in the market, including ConocoPhillips of the United States, Royal Dutch Shell, total of France, Chevron of the United States, etc.

Zhu Runmin, a senior economist who has been engaged in petroleum economic research and international crude oil price forecasting for a long time, told reporters from the southern finance and economics media that although oil sand assets are frequently sold in the short term, they still have investment value in the market in the long run. He pointed out that the current high oil price of US $40 per barrel has seriously damaged the oil market. He believes that the oil price has a "reasonable balance" level, which is "lower than the reasonable balance" at present. "Some market players are like gamblers, so they leave at such times."

In the view of sinoworth and husky, the combination of sinoworth's upstream assets and Husky's midstream and downstream assets will "shorten the value chain and save the condensation cost of transporting heavy oil", thus "improving the profit margin". According to the joint announcement, in terms of refining and chemical industry, although sinoworth has a daily output of 475000 barrels of oil equivalent, its daily refining capacity is only 250000 barrels. After the merger of husky, the daily production of new sinoworth will be increased to 750000 barrels of oil equivalent, and the daily refining capacity will be greatly increased to 660000 barrels, including 350000 barrels of heavy crude oil. Zhu Runmin pointed out that sinoworth wants to continue to operate oil sands assets in the "cold winter", which is to help itself and "keep warm".

In fact, the crude oil from oil sand wells, which was originally expensive, has also suffered a merciless price reduction in the market. According to the international crude oil quotation, on October 29, WCS (Western Canadian select) quoted the price index of crude oil produced in western Canada at $27.89 per barrel, while the price index of West Texas light crude oil (WTI) of the United States quoted us $35.92 per barrel, with a discount of 22.4%. This shows that if Canadian oil sand explorers want to transport the oil to the Gulf of Mexico for refining and processing, they need to accept a "bargain" of nearly $10 per barrel from American traders. One of Husky's and sinoworth's expectations for the deal is to "reduce the exposure to the oil price differential in western Canada and make it more in line with international oil prices".

The price problem is particularly prominent at a time when the price of the pipeline is lower than that of the pipeline, which is particularly prominent at the time when the price of the pipeline is lower than that of the pipeline. Canada, which is located in high latitude, faces most of its waterway ice in winter, so that its crude oil has to rely on the U.S. market: it is transported to Cushing, West Texas, the world's largest crude oil trading hub through tanker or pipeline, and then transported overseas through the warm Gulf of Mexico. To make matters worse, the pipeline connecting Alberta and West Texas has been difficult to expand in recent years due to the resistance of domestic environmental organizations to petrochemical energy. In Husky's 2019 annual report, the company said "annual production in Alberta continues to be constrained by government quotas" because the government does not want the local pipeline to be under too much pressure.

However, Zhu Runmin pointed out that in order to get rid of the absolute control of the US market, Canada has been carrying out the expansion of trans mountain oil pipeline. The project will be expanded on the basis of crude oil throughput, and will be able to transport the oil from Alberta to British Columbia, which is close to the Pacific Ocean, aiming at the Asian market. According to the progress announced by the local government, the project is expected to be completed in 2022.

Both sinoworth and Husky's management said they were optimistic about the merger outlook. Sinoworth president Alex Pourbaix said the merger would bring immediate positive cash flow as it would save on fixed assets. Robert herbowski, the president of the company, said that he would be more flexible because he would be more flexible. At a joint press conference held on the 26th, the management of the two companies said that they would reduce their net debt to twice the income level within 24 months in order to obtain an investment grade debt rating.

Capital markets also welcomed the merger. On October 27, husky, listed on the Toronto Stock Exchange, rose for the second consecutive day, rising 7.32% to C $3.81 a share. Sinoworth fell to an increase of 6.92% to $3.63 a share on the New York Stock Exchange and 6.71% to C $4.77 on the Toronto Stock Exchange.

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