TSX Commentary

Husky Energy’s agreement to acquire 6,000 bbl/d of conventional heavy oil production in the Lloydminster area from Penn West appears logical on paper, although the purchase price is an open question. In connection with its third-quarter results, Penn West indicated that it was nearing the completion of a circa $250 million heavy oil disposition in eastern Alberta that would be completed before year-end. In the context of that $250 million figure, the acquisition is mildly accretive to RBC CM’ 2010/11 earnings/cash flow estimates, and would map to reasonable metrics of approximately $41,700 per flowing barrel of production per day and $20.85/bbl of proven reserves ($12.20/bbl on a 2P basis). Husky’s relative valuation appears compelling, but the missing piece in the story these days concerns better definition regarding its strategic direction and priorities moving ahead. Husky major catalysts revolve around: (1) sanctioning of its Liwan gas field in the South China Sea – expected in 2Q 2010; (2) details regarding its contemplated AsiaCo spinout – expected by mid-2010; and (3) giving its 60,000 bbl/d (50% wi) Sunrise in-situ oil sands project the green light – expected in 3Q 2010. RBC CM reiterates its Sector Perform, Average Risk rating on Husky Energy and one-year target price of $37 per share.