For some time now Canada’s sixth-largest energy company (by market cap) has overpromised and underdelivered for investors. But it appears that with the company reporting stellar results in the second quarter — in a difficult operating environment for energy companies — all of that is about to change. There are some impressive emerging catalysts going in Husky Energy’s (TSX:HSE) favour, and today I want to share five reasons I’m bullish on Husky. But first, let’s look at its most recent results. The second quarter in review The largest shareholder in Husky is Hong Kong-based Hutchison Whampoa, which owns 34% of…
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For some time now Canada’s sixth-largest energy company (by market cap) has overpromised and underdelivered for investors. But it appears that with the company reporting stellar results in the second quarter — in a difficult operating environment for energy companies — all of that is about to change. There are some impressive emerging catalysts going in Husky Energy’s (TSX:HSE) favour, and today I want to share five reasons I’m bullish on Husky.
But first, let’s look at its most recent results.
The second quarter in review
The largest shareholder in Husky is Hong Kong-based Hutchison Whampoa, which owns 34% of the company’s shares. Husky reported startlingly impressive results for the second quarter, especially in context: the majority of oil majors turned in disappointing numbers.
Husky net earnings rose 40% year over year to $605 million on the back of a solid growth in sales, with revenue up by 8% for the same period. Cash flow from operations also grew significantly, up by 26% year over year to $1.4 billion.
A key driver of Husky’s improvement was a substantial increase in production. In Q2, production grew 10% from the year-ago quarter, to 309,000 barrels of oil daily.
The company was also able to obtain higher realized crude oil prices for its Western Canadian production as the differential to West Texas Intermediate oil prices narrowed. Husky’s bottom line also benefited from higher natural gas prices.
In addition, unlike many of its peers, including Suncor (TSX:SU), Exxon, and Chevron — which saw downstream margins decline — Husky’s downstream margins grew. Its gross downstream margin rose by about 45% year over year.
1. Production will likely grow
A key driver of Husky’s improving future performance will be its ability to continue growing production. Its Liwan project in the South China Sea is set to come online sometime between the end of 2013 and the beginning of 2014. Husky operates the development and holds a 49% interest, while China’s CNOOC has majority control with 51%.
Liwan is China’s largest offshore natural gas reserve, estimated to have reserves of between 4 and 6 trillion cubic feet of natural gas. Once complete, the project will be capable of producing 424 billion cubic feet of natural gas, which is 10% of China’s total natural gas output. This is a massive project.
Husky has a range of under-development oil projects set to come online during 2014. The Sunrise Energy Project, in which Husky has a 50% interest, is expected to commence production in 2014 of around 60,000 barrels of oil per day. The Sandall heavy oil project, also scheduled to come online in 2014, is estimated to produce 3,500 barrels of oil per day. Average daily oil production should grow by 20% throughout 2014 as these projects come online.
There is a solid pipeline of other projects in varying stages of development in the Husky portfolio, with the earliest to production being the Rush Lake thermal development. This project is expected to produce 10,000 barrels of oil daily when it commences production in 2015.
2. It’s on track to achieve 2013 production guidance
Husky’s second-quarter results have confirmed that the company is well-positioned to achieve its 2013 production guidance, illustrated by the table below.
Source: Husky Energy Management Discussion and Analysis, July 24, 2013.
By the end of 2013, Husky’s increased production should result in top-line growth and, if oil prices continue to spike, Husky should see that growth flow through to the bottom line.
3. The outlook for oil continues to improve
The outlook for oil may be somewhat bearish right now, but year over year the spot price for West Texas Intermediate is up by 10%, with Dated Brent — a benchmark for many international oil varieties — down by 3% for the same period. The price for the majority of Husky’s production is driven by the price of West Texas Intermediate — a big positive for the company.
With growing political instability in the Middle East, some analysts are predicting a near-term rise in oil prices, creating supply-side constraints. Over the long term, energy demand will likely increase as emerging economies grow at exponential rates, driving increased demand for oil and natural gas.
This all bodes well for Husky’s bottom line. By virtue of its diversified upstream and downstream operations, it is able to take advantage of rising oil prices and higher refining margins. Husky is also positioned to take advantage of any additional recovery in natural gas prices, which year over year are up by about 31%.
4. It pays a healthy dividend
Husky’s quarterly dividend of 30 cents per share equates to a yield of 4%, which is one of the best among its peers. The dividend is an incentive for investors to be patient as they wait for the catalysts discussed earlier to gain traction.
5. It appears undervalued
Despite having solid future growth prospects and an attractive dividend yield Husky remains under-valued. Currently, it is trading with an enterprise value of six times EBITDA and 10 times proved and probable reserves. These compare favorably to major integrated oil and gas peers.
|Company||Enterprise Value to EBITDA||Enterprise Value to Proved and Probable Reserves|
Source data: Husky, Suncor, Exxon, and Chevron 2Q 2013 Financial Filings.
As the table above shows, on a relative basis, Husky looks like a better value than many of its peers. (It also looks like Suncor is undervalued, as I’ve argued elsewhere.)
The Foolish bottom line
Husky’s rock-solid second-quarter financial results — in a difficult operating environment, no less — indicate that the company is set up for success. While investors wait for these catalysts to kick in, they will continue to be rewarded by a solid dividend yield — a yield that is one of the best among Canada’s integrated oil majors.
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Matt Smith does not own shares of any companies mentioned.