Fitch Ratings Affirms Husky Energy Inc.

CHICAGO -- Fitch has affirmed the credit ratings of Husky Energy Inc.'s (Husky). Fitch affirms Husky's issuer default rating (IDR), senior unsecured debt and revolving credit facilities at a rating of 'BBB+' and the company's subordinated unsecured capital securities 'BBB-'. Fitch is also withdrawing the company's senior secured rating as the senior secured bonds for the Terra Nova project were redeemed in February 2006. The Rating Outlook is Stable.

Behind the strength in crude and natural gas prices, Husky continues to generate very strong earnings and credit metrics. For the twelve months ending March 31, 2006, the company generated more than $4.5 billion of EBITDA, providing nearly 30.0 times (x) interest coverage with leverage, as measured by debt-to-EBITDA of 0.4x. In addition to the growing upstream operations, Husky's credit rating also remains supported by the company's conservative balance sheet and integrated operations. With the reversal of the heavy oil revision from 2004 and the start-up of the White Rose development, organic replacement of upstream production has been strong in recent years, averaging 116% between 2003 and 2005. The low leverage is reflected in Fitch's calculation of the company's debt to proven reserves. By assigning a modest portion of the company's debt to the midstream and downstream operations, debt to barrels of oil equivalent (boe) of proven reserves was only US$1.41/boe at year-end 2005 and US$2.11/boe of proved developed reserves, both very strong metrics within the company's peer group.

The key credit concern with Husky, and somewhat offsetting the strong credit profile that is currently reflective of a higher rating, is the concentrated ownership structure with approximately 72% of the company's common stock owned by Hutchison Whampoa Ltd. (rated 'A-' with a Stable Outlook by Fitch) and its chairman, Li Ka Shing. Capital expenditures are also expected to be very high throughout the remainder of the decade as the company continues to pursue several 'Mega Projects'. As a result, free cash flow could be limited, or potentially negative, under a declining price environment. As with the rest of the industry, Husky also continues to face increasing costs for drilling and oil field services which are reflected in the company's rising finding, development and production costs. Under the robust commodity price environment, Fitch also expects Husky to continue to distribute excess free cash flow to shareholders in the form of special dividends. Fitch also expects the company to manage these distributions prudently as it has in the past. Of note is that given the ownership structure, Husky faces few limitations under its bond indentures with regards to distributions or change in control.

The company's upstream operations remain primarily focused in Western Canada with 80% of first quarter 2006 production coming from the region. The company has invested significant capital into the White Rose development project offshore east of Newfoundland (72.5% interest) in a continuing effort to diversify from Western Canada. The company's remaining production outside Western Canada comes from its 40% interest in the Wenchang oil field in the South China Sea, which netted 13,500 barrels per day (bpd) of production before royalties to Husky during the quarter. In total, roughly one-third of production is light and medium crude (129,900 bpd in the first quarter), one-third Lloydminster heavy crude (109,500 bpd) and one-third natural gas (685.4 million cubic feet per day (mmcfd)). The company is negotiating a development plan and production sharing agreement for a gas development project offshore Indonesia. This should reverse a big piece of the negative revision from 2003 when the original project was cancelled. Husky bought out its partner in the Indonesian project in October 2004.

Husky also holds significant acreage in the Western Canadian oil sands with the Tucker and Sunrise developments. Production from Tucker is expected to peak at around 30,000 to 35,000 bpd with first oil in 2007. Under the current plans, Sunrise is expected to peak at 200,000 bpd through a phased development with first oil expected sometime between 2010 and 2012. Production for the oil sands projects remains expensive relative to typical conventional oil developments due to the nature of extracting the bitumen from the ground and processing into synthetic crudes or refined products. Both the Tucker and Sunrise oil sand reserves are expected be reported as oil and gas reserves under U.S. Securities and Exchange Commission guidelines due to the use of steam assisted gravity drain (SAGD). The company booked approximately 48 million boe of bitumen reserves in 2005 for the $500 million Tucker project. Ultimate cost and financing of the Sunrise development remains uncertain.

In the midstream operations, Husky operates an 80,000 bpd upgrader and 25,000 bpd asphalt refinery in Lloydminster, Saskatchewan to process heavy crude into either a synthetic crude (the upgrader) or asphalt (the refinery). The midstream operations also include significant pipeline assets as well as a cogeneration and natural gas power facilities. The midstream assets provide a stable source of earnings with EBITDA averaging $490 million per year for the last three years (2003-2005) including $769 million in 2005. One of Husky's Mega Projects includes a potential expansion of the upgrader to add 67,000 bpd of capacity for an initial estimate of $2.3 billion with start-up expected between 2010 and 2012. The expansion should help mitigate the risks of rising heavy crude and oil sands production.

In addition to the asphalt refinery, the company's downstream operations include a small 11,000 bpd light products refinery in British Columbia that has been upgraded to produce low sulfur fuels. The company also owns over 500 of its 570 retail outlets which are spread across Canada and is building 2 ethanol plants (in Lloydminster and Minnedosa, Manitoba). EBITDA has averaged $120 million per year for the last three years from the downstream segment.

Husky is a large Canadian integrated oil company primarily focused on the exploration and production of crude oil and natural gas. The company also has significant midstream and downstream assets which provide some counter cyclicality and balance in downturns in the upstream sector. EBITDA from these operations have historically generated more than 3.0x interest coverage (5.2x in 2005) as a stand alone business for the company.

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