Thursday, July 16, 2020

Stock report: CFRA - Husky Energy Inc - July 11, 2020

July 16, 2020

Introduction

The report is provided with Ameritrade.com. 

Summary Husky Energy is a Canadian-domiciled oil & gas company with a focus on Western Canada
crude oil development, as well as U.S. refining operations in the Midwest.

Beginning in mid-March 2020, HSE began to
shut in 80,000 boe/d production from its
Integrated Corridor assets (mostly heavy oil).
We estimate these cuts to comprise about 28%
of 2019 production, and reflect weak pricing for
crude oil and other related products in Western
Canada.
Owing to the pandemic’s impact on energy
demand, HSE is prudently reducing its U.S.
refining runs to minimal levels (which we
estimate is roughly 60% utilization), and has
also suspended its strategic review of its
Canadian retail and commercial fuels
businesses. We think potential for non-core
asset sales (or spinoffs) is going to have to
wait for the return for a normalized macro
picture so that price points are more attractive
to HSE.
In late April, Canadian benchmark crude
Western Canada Select (WCS) was trading at a
US$8.50 per barrel discount to U.S. benchmark
WTI (which in turn was trading at about $17 per
barrel, so WCS is effectively half price). Based
on data from the U.S. EIA and the CME Group,
we think realized prices for WCS improve
through year-end, but likely to no more than
$20 per barrel, which is still relatively low.

Investment Rationale/ Risk

Our recommendation is Hold. Although Western
Canada oil differentials should weaken, and
energy demand remains tenuous, we estimate
HSE has less exposure to Western Canada than
its peers. In addition, we think HSE's U.S.
Midwest refinery exposure could be helpful.
While U.S. refinery runs are likely to be weak
while the pandemic crushes demand, we think
distillate demand holds up relatively better
than gasoline, and HSE's refineries are more
aligned with distillate production.
Risks to our recommendation and 12-month
target price include lower than expected spot
prices on synthetic crude and heavy crude oil;
unfavorable regulatory announcements;
weaker-than-expected results from
cost-cutting; and slower-than-expected
completion of the crude oil flexibility project at
the Lima refinery.
Our 12-month target price of C$4.50 reflects
an 8.6x multiple of enterprise value to
projected 2020 EBITDA, above HSE's historical
forward average. We estimate a significant free
cash flow deficit this year, although HSE's
relatively low debt on the balance sheet is
helpful.

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