Husky may be top pick as crude surges
• Husky Energy Inc., the best oilsands stock last year, may emerge as a top pick for investors who are looking to capitalize on surging crude prices and already have shares of the largest Canadian producers.
The company controlled by Hong Kong billionaire Li Ka- Shing is the cheapest stock among six producers in North America that also own refineries, trading at an enterprise value of seven times debt- adjusted cash flow. That’s less than half Chevron Corp.’s valuation.
Among Canadian producers, what makes Calgarybased Husky appealing is that its significant refining capacity insulates it against the price discounts weighi ng on Canadian heavy crude, while i ts growing natural gas sales under contract make it immune to fluctuations at Alberta’s AECO hub, said Chris Cox, an analyst at Raymond James. It’s particularly attractive for fund managers who already have positions in Suncor Energy Inc. and Canadian Natural Resources Ltd.
“As the market is starti ng to get a l i tt l e more constructive on oil prices, there’s been this growing question of, ‘ OK, where next after Suncor?’ ” Cox said. “When you consider all the various moving parts of the macro perspective — the concerns over heavy oil prices, concerns over AECO gas and this constructive outlook for refining — you could almost do a process of elimination and Husky really quickly came to the top of that list.”’
Much of Husky’s 9- percent advance came in the final weeks of last year as oil prices surged past $ 60 a barrel in New York and the company projected in early December t hat i t would generate free cash flow of $ 1 billion in 2018. The gains compare with a 10- per- cent loss for the S&P/ TSX energy index in 2017. Suncor and Canadian Natural both rose about 5 per cent.
Yet Husky still has a way to go in regaining analysts’ favour. Even after four upgrades l ast month, only 27 per cent of the analysts covering the company recommend buying the shares. That compares with 86 per cent for Canadian Natural and 63 per cent for Suncor.
Still weighing on t he s t ock is t hat it i sn’ t as much of a pure play on the Canadian oil sands as its rivals, and some of its refining operations are less profitable than peers. Also, almost 70 per cent of the shares are owned by Li, and companies where investors are getting a minority interest tend to garner lower valuations, Cox said.
Another factor that may l ure portfolio managers back to Husky is the potential reinstatement of its dividend, which the company cancelled as oil prices sank in late 2015.
Husky executives said last month that the board is l i kely to bring back a dividend this year because it has repaired its balance sheet and is generating free cash flow, and oil prices have rebounded.