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.