It’s not that the oilpatch analysts had written off incoming CEO Asim Ghosh before he even got started. It’s just that they’d come to expect disappointing results from Husky Energy. The Calgary-based integrated energy company had missed production targets six years in a row when Ghosh arrived in June 2010, and its shares were languishing. Most observers yawned when the new appointee assumed the leadership mantle from longtime CEO John Lau, despite Ghosh’s immediate message to the market that he was going to aggressively reposition Husky. Sure, the figurehead at the top had changed for the first time in 17 years, but it didn’t look as if the fundamentals would.
So the turnaround that Ghosh has staged at the company has taken many by surprise. Under the new CEO, the company has met targets for 10 consecutive quarters and looks to be positioning itself for strong future growth. What once looked like an overly diversified operation with no strategic focus now appears smartly disciplined. Husky is making a comeback, and it has taken place largely under the radar of most market watchers.
“They’re almost a stealth improving company,” says Phil Skolnick, an analyst with Canaccord Genuity in New York. “A lot of investors and analysts, we all kind of missed the trade that happened on the stock last year. Everyone was used to the old Husky always disappointing.”
Ghosh’s pedigree didn’t help. Despite its public listing, Husky is controlled, to the tune of some 70%, by Hong Kong billionaire Li Ka-shing via his companies LF Management and Investments, and Hutchison Whampoa Luxembourg Holdings. Ghosh, like Lau, was reared in Li’s multinational empire. A complete outsider to the oilpatch, he relocated to Calgary from India after a prolonged stint as managing director and chief executive officer of telecommunications company Vodafone India—in which Li had a majority stake until 2006. His CV also includes several executive positions, including the CEO role at AS Watson (another subsidiary of Li’s Hutchison Whampoa) and the high-profile role of co-founding CEO of Pepsi Food’s startup operations in India. Ghosh’s MO in most of those positions was grow, baby, grow—in size and in shareholder value. (Vodafone, now one of the largest mobile telephone companies in the world, was effectively a startup when Ghosh came on board, as was Pepsi’s Indian operation.) But his expertise in the energy industry was non-existent. The reaction of Middlefield Capital’s Dennis da Silva to Ghosh’s appointment was typical: “To me it just reeks of the status quo,” da Silva said in 2010, highlighting Ghosh’s close ties to the Li Ka-shing empire. “You have an insider becoming the CEO. So to me, really nothing changes.”
What could an outsider to the oilpatch actually accomplish? As it turns out, a lot. And being a newcomer to the industry—its jargon, conventional wisdom and expectations—may have helped Ghosh look at Husky dispassionately. Immediately after taking the reins, he noticed two things. First, Husky had a “complex structure” that was poorly understood—and as a result, poorly rewarded by the market. An integrated company with offshore and onshore operations, the company had interests in the oilsands, conventional oil and natural gas, and a geographic footprint that included Southeast Asia. Strategically, its operations looked diffused and unfocused—as did its reporting. Being a public company controlled by a Hong Kong billionaire didn’t really help either. As Skolnick puts it, when you’ve got one shareholder with such a big stake, the market tends to be cynical. “There’s no point in really being interested in the story,” he says.
Second, while having a “supportive” and patient dominant shareholder allowed the company to pursue long-term plays and make decisions that wouldn’t pay off for years—such as the investment in the oilsands and the Southeast Asia play—such long-term goals were often pursued at the expense of short-term results. “We had gone from a company that was tremendously predictable, to a vision too far in the future—to the point of having taken our eye off the short term, both financially and in production terms,” Ghosh told media in 2011.
He liked the long-term view—notably, the eventual upside of the company’s Asian and oilsands investment, and its overall integrated nature, and even its long-term bet on conventional heavy oil. But he had to fix its short-term production and earnings.
The knee-jerk reaction when a company wants to pretty up its balance sheet is, often, to sell off expensive non-core assets. While Ghosh quietly shed some non-core assets to bolster short-term earnings, the company actually bought more than it sold, notably adding about $1.2-billion worth of assets to its Western Canadian gas portfolio in 2010–11. The real “fix” on the balance sheet came from a series of substantial equity raises and getting Husky’s “supportive” majority shareholders to take their dividend in the form of shares instead of cash for a year.
Add to that a substantial corporate reorganization at the top, which included both promoting some long-term Husky insiders, but also bringing on-board five new senior VPs with deep oilpatch experience (including John Myer, now Husky’s senior vice-president of oilsands, from Suncor Energy, and Rob Symonds, Husky’s senior vice-president of Western Canada productions, from Enerplus Resources Fund), and Ghosh was ready to focus on crafting the new Husky story.
He liked the company’s diversification. As he put it in 2011, “At the end of the day you are in a commodity business, and commodities are cyclical. I like the fact that we are offshore, that we are onshore, that we’ve got gas and we’ve got oil, and that we’ve got conventional and unconventional, and that we have heavy oil, and I like the geographic diversification that we’ve got.”
But the market had to see this diversification as focused and disciplined—targeted. Enter Ghosh’s articulation of Husky’s current post-recapitalization story and strategy, presented as focused on three growth pillars: its gas business in Southeast Asia, the jewel of which is the Liwan Gas Project in the South China Sea; a Western Canadian heavy-oil foundation, focused on the oilsands Sunrise Energy Projects; and White Rose offshore oil operations on the Atlantic coast. Husky upped its capital-expenditure plan to $4.6 billion in 2011 (raising it modestly in subsequent years; at $4.8 billion for 2013) and focused 50% of its upstream spending on those three segments. Liwan alone, which was headed to the auction block before Ghosh arrived, saw more than $1-billion worth of investment in 2011.
The Liwan story is particularly compelling, as Husky has locked in forward contracts to sell gas at prices ranging from US$11 to US$13, while North American natural gas prices continue to slump in the $3–$4 range. Construction of the project is about 75% completed, with production expected in late 2013 or early 2014. On the oilsands front, the company is entering 2013 with 49 steam-assisted gravity-drainage (SAGD) wells drilled in the Phase 1 of Sunrise Energy Project, with 85% of the project’s costs now “fixed,” and the construction schedule on track for first production in 2014. Combine all that with the fact that Husky expects first oil from the Atlantic region in 2014, and it’s clear why Ghosh is excited about the company’s prospects for 2014 and beyond.
By late 2012 and early 2013, most market-watchers were, if not coming around, then certainly paying attention. JPMorgan analyst Kathleen Lucas Minyard was grouping Husky with the stars of the integrated sector as early as September 2012, looking to “organic growth” from the Husky portfolio as the Liwan and Sunrise projects reach production dates, and noting that the company’s above-average 4.5% dividend yield (now closer to 4%) ought to continue to attract yield-oriented capital.
It’s not a critic-less party. In its October 2012 oil report, Goldman Sachs downgraded the company to a Sell. Interestingly, its concerns were fuelled partly by the fact that Husky was trading above the $23 a share that was its six-month price target at the time; in April 2013, analysts raised their target prices on Husky to as high as $34. This, after a year of flatter growth and considerable volatility in the commodity markets, marked by continued discounts on Canadian crude and low gas prices.
But that volatility, as Ghosh likes to note, is the upside of the integrated nature of the company, which gives it a continued hedge against the differential in world oil prices through its downstream and midstream assets—on the midstream side, Husky operates a 2,000-kilometre crude-oil pipeline system, and its downstream operations include upgrading and refining crude oil, and marketing gasoline, diesel, jet fuel, asphalt and ethanol in Canada and the United States. Like its peers in that space, that setup allows it to choose to upgrade or refine more of its product internally and address some of the price differentials that hammer other producers.
With the fundamentals of the energy industry still volatile, it’s not going to be an easy upward march for the company. But it’s unlikely Ghosh’s Husky will be ignored by analysts and the market again. “It’s clearly a different company,” says Skolnick. “With interesting assets.” And a compelling story for 2013–14—and beyond.