Li Ka-shing cuts Husky oil risk with US$2.9b Cenovus deal

[HONG KONG] Li Ka-shing, Hong Kong's richest man, is unwinding a bet he placed on oil more than three decades ago by paring his group's stake in Husky Energy, a Canadian asset dealing with mounting losses.

The tycoon's CK Hutchison Holdings and a Li family trust, which together own almost 70 per cent of Husky, agreed over the weekend to sell a part of their stakes to Cenovus Energy in an all-stock deal. The US$2.9 billion merger of two of Canada's biggest oil-sands players would reduce Mr Li's and CK Hutchison's combined holdings in the new entity to 27 per cent.

By cutting their Husky stake, Mr Li and his older son Victor - the chairman of CK Hutchison - are seeking to reduce the drag on the earnings at their group, which has been buffeted by the coronavirus pandemic. Shares of Calgary-based Husky have plunged more than 85 per cent in the past 10 years, and the company has reported a total US$3.3 billion of losses in the three quarters through June.

"The proposed Husky merger will effectively reduce earnings volatility induced by the Canadian oil operation," JPMorgan Chase & Co analysts led by Cusson Leung wrote in a note Monday. "This used to be the most cyclical element in CKH's earnings."

Like many of its peers, Husky has been losing money following the crash in oil demand due to the pandemic. But even before Covid-19, Canada's oil sands industry had already lost its luster due to a chronic lack of pipeline capacity to export crude. That has forced producers there to accept price discounts. The companies are also facing increasing environmental scrutiny, forcing many oil majors to shrink their footprint in Canada.

The deal, expected to close in the first quarter of 2021, means CK Hutchison will only be required to treat the new company's dividend income as earnings but won't have to record the firm's profits or losses in its own balance sheet, Mr Leung said in the note.

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Following the transaction, CK Hutchison will own 15.7 per cent of the new company, versus 40.2 per cent in Husky earlier. The Li Ka-shing Foundation, which now holds 29.3 per cent, will be left with 11.5 per cent of the combined entity.

The merger should give CK Hutchison ownership in a better and more balanced energy company by combining the strengths of Cenovus and Husky, Morningstar analyst Lorraine Tan said in a note Monday. But the deal is unlikely to bring much change to CK Hutchison's cash flow with minimal dividend prospect, she said.

Shares of CK Hutchison rose as much as 1.6 per cent Tuesday in Hong Kong, their biggest intraday gain in a week. The stock is still down 37 per cent this year.

CK Hutchison, whose operations span ports, retail and telecommunications, warned in August that profit may fall at its core businesses in the second half of the year after reporting a 29 per cent drop in the six months through June.

Victor Li, 56, also spoke of the need to conserve cash to prepare for "unexpected surprises".

'WORST PERFORMANCE'

Husky reported a loss of C$2 billion (S$2.06 billion) in the first half, which Victor Li called the "worst performance in memory". Analysts tracked by Bloomberg estimate an average loss of C$1.9 billion for the full year.

CK Hutchison is also in advanced talks with Cellnex Telecom, Europe's largest wireless tower operator, to sell its European mast assets for about nine billion euros (S$14.47 billion), people familiar with the matter said last week.

The Canadian deal and the tower sale talks reflect the group's "dynamic management style which is always looking for ways to enhance value or competitiveness of the company", Mr Leung said.

Victor Li took over the family empire in 2018 from his father, who's now 92 with the title of senior adviser.

The junior Li has been actively negotiating deals with mixed results. Some of his recent attempts to expand into utilities in countries like Australia and Israel faltered amid rising trade tensions between China and the US. CK Asset Holdings, the family's property development flagship, bought British pub operator Greene King last year for £2.7 billion (S$4.78 billion).

The transaction between Husky, bought by the Li family empire in the late 1980s, and Cenovus is the largest deal in the Canadian oil industry since Husky's attempted C$2.75 billion hostile takeover bid for MEG Energy. Husky abandoned that transaction in January 2019 after failing to win enough shareholder support.

BLOOMBERG