(Updates with company comments, share price)
CALGARY, Alberta, Feb 5 (Reuters) - Husky Energy Inc's (HSE.TO) profit sank 79 percent in the fourth quarter due to the economic meltdown and a steep drop in crude prices, though Canada's No. 2 oil producer and refiner said costs are falling in the oil sands because of the downturn.
The company also chopped its quarterly dividend by 40 percent to 30 Canadian cents a share, saying it aimed to preserve its financial flexibility during the downturn.
While all but a handful of new large-scale projects in the oil sands have been delayed, deferred or canceled in recent months because of the plunge in oil prices, Husky said it and partner BP Plc (BP.L) are working to bring down costs for their C$10 billion Sunrise oil sands project.
John Lau, Husky's chief executive said on a conference call that the strategy may be paying off.
"The costs are actually 40 percent better than our original budget," he said, according to a transcript of the call.
The joint venture includes Husky's Sunrise oil sands property and a BP refinery in Toledo, Ohio. A final decision on whether to go ahead with Sunrise is expected next year and the project could produce as much as 200,000 barrels a day by 2020.
Husky, which is controlled by Hong Kong tycoon Li Ka-shing, earned C$232 million ($189 million), or 27 Canadian cents a share, down from year-earlier C$1.1 billion, or C$1.26 a share, the company reported late on Wednesday.
The most recent figure included inventory writedowns of C$382 million.
Adjusted to remove unusual items, Husky earned C$614 million, or 72 Canadian cents a share, down from C$709 million, or 84 Canadian cents cents a share.
The company had been expected to earn 52 Canadian cents a share, according to a Reuters Estimates compilation of analyst forecasts.
Cash flow, a glimpse into an oil company's ability to fund its development projects, fell 76 percent to C$339 million, or 40 Canadian cents a share, from C$1.4 billion, or C$1.68 share.
Revenue was C$4.7 billion, down from C$4.8 billion.
Husky and its Canadian energy peers have been hit hard by falling oil prices and the global financial crisis, and many companies have delayed or canceled major projects, especially in Alberta's oil sands.
The company is also known for its Husky and Mohawk gas station chains, recently acquired refineries in Ohio, and offshore exploration and production in Atlantic Canada and the South China Sea.
In the quarter, oil averaged $59.08 a barrel, down 35 percent from a year earlier, and a far cry from a record of more than $147 a barrel set in July. Canadian natural gas rose 9 percent to C$6.37 a gigajoule.
Husky said weak commodity prices cut returns in its exploration and production business as well as at its refining arm, where it lowered the value of its inventory and reduced profit margins.
Production averaged 358,400 barrels of oil equivalent a day, down 2.5 percent from the fourth quarter of 2007, as natural gas output fell sharply.
Husky shares were down 53 Canadian cents at C$29.40 on the Toronto Stock Exchange, and have posted a drop of 29 percent in the past 12 months.
Interests controlled by Li Ka-shing, such as Hutchison Whampoa Ltd 0013.HK and Cheung Kong (Holdings) Ltd (0001.HK), own more than 70 percent of Husky.
$1=$1.23 Canadian Reporting by Jeffrey Jones and Scott Haggett; editing by Rob Wilson