Husky Energy earnings beat Street, but refining margins drag

CALGARY — Husky Energy Inc. has posted better than expected earnings in the first quarter of 2012, but said they could have been even better if not for the high volume of a pricey type of crude processed at a refinery in Ohio.

CALGARY — Husky Energy Inc. has posted better than expected earnings in the first quarter of 2012, but said they could have been even better if not for the high volume of a pricey type of crude processed at a refinery in Ohio.

The Calgary-based oil and gas company, controlled by Hong Kong billionaire Li Ka-Shing, reported first-quarter earnings of $591 million, or 60 cents per share, beating the average analyst estimate of 55 cents per share, according to Thomson Reuters.

The company benefited from higher production and crude prices, but cited tighter refining margins as one factor that dragged on earnings.

Husky (TSX:HSE) was able to benefit from a big gap between Canadian and international crude prices at its heavy oil upgrader in Lloydminster, Sask., as well as at its refinery in Toledo, Ohio, which it jointly owns with BP.

But margins were tight at its refinery in Lima, Ohio, which processes a large portion of light oil whose price is tied to Brent, a benchmark for crude produced in the North Sea. Lima also underwent some repairs during the quarter.

“The downstream business was a positive story for us over the last year,” said chief financial officer Alister Cowan on a conference call Thursday.

“We did, however, see some tightening of U.S. refining margins in the first quarter, but overall it does remain positive.”

Historically, Brent has traded close to West Texas Intermediate, the North American benchmark. But recently bottlenecks in the U.S. Midwest have caused WTI to trade at a steep discount to Brent. Heavy Canadian crude, in turn, trades at a discount to WTI, which means the current market has been especially tough on oilsands producers.

Those that have refinery interests in the western part of the continent, however, have an edge, because it means they buy their raw product at a lower price.

On Thursday, CEO Asim Ghosh called the company’s refining and marketing assets an “extra arrow in our quiver” to guard against “unprecedented” volatility in oil prices. What the company loses out on in the upstream, or production, side of the business, it makes up for in the downstream.

“Overall I think we are materially derisked, and we are in a better place than companies that do not have the connectivities and the refining assets that we do,” he told reporters.

Husky’s U.S. refining division saw a drop in net earnings to $71 million from $116 million in the first three months of 2012 compared to a year earlier. Ghosh said where it gets its crude from, and when, varies from month to month and the company is taking steps to improve flexibility in where it sources its crude.

Another major Canadian energy player, Imperial Oil Ltd. (TSX:IMO), reported its best downstream profits on record in the first quarter at $455 million. And Cenovus Energy Inc. (TSX:CVE), which has refinery interests in Illinois and Texas, reported an $87-million improvement in operating cash flow in its refining and marketing segment during the quarter.

Husky overall first quarter earnings were lower than the $626 million, or 70 cents per share, in the prior-year period when the company recorded an after-tax gain of $143 million on the sale of non-core assets.

Excluding the after-tax gain and related taxes, net earnings increased 22 per cent compared with a year ago, the company said in a release.

Gross revenue was just under $6 billion compared with $5.07 billion or revenue in the same 2011 quarter.

Shares in the company, which reported after markets closed Wednesday, were up 58 cents at $24.88 Thursday afternoon on the Toronto Stock Exchange.

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