Last week was a tough one for investors in the energy sector.
On Thursday, OPEC made things worse by refusing to cut its members’ production. Market observers say the cartel is in a staring match with U.S. shale producers. OPEC is hoping it can bankrupt some of the more levered operators, which would take supply off the market. This, combined with other producers simply not going ahead with planned projects, should likely be enough to slow production enough to cause prices to rise again, at least in the long-term.
What should investors do? Is now the time to buy energy names, or will there be better deals down the road?
From my perspective, it’s an easy choice. High quality energy stocks are on sale. It’s impossible to catch them on the bottom, so it’s better to slowly start buying now, leaving a little capital available to average down if needed.
One of the finest names in the sector is Husky Energy Inc. (TSX: HSE). Here are five reasons why you should own this energy giant.
1. Diverse operations
Husky has three main operating areas. It operates in Western Canada (primarily in the oil sands), in Atlantic Canada, and it has operations in Asia.
The Asian operations are perhaps the most interesting, especially the Liwan project, which is a joint project with CNOOC, the state-owned Chinese operator. Liwan is already producing 200 MMCF of natural gas per day, and that’s just the first stage of the project. Look for that number to increase as phases 2 and 3 come online.
The nice thing about Husky’s expansion into Asia is the premium natural gas gets in that region. Although the gap has narrowed to approximately 25% above U.S. prices, natural gas in Asia has traded at more than twice as much in the past.
2. Oil sands expansion
Besides the Liwan project, Husky’s other big growth area is the Sunrise project in the oil sands, which is a joint project with BP.
Expectations are that the newest phase of Sunrise will produce 30,000 barrels per day of oil net to Husky. Although costs have been a factor — including a $400 million overrun announced in October, which brought the total cost of the project to $3.2 billion — the project looks to be entering projection by the end of the year. This will free up capital expenses for other projects going forward.
3. It’s cheap
Husky is one of the cheapest companies in the sector, at least from a price-to-book value basis.
Currently, the company trades at about a 10% premium to its book value. Considering the company’s low debt levels and the overall strength of the balance sheet, that’s just too cheap. A company with balance sheet strength is especially important during this uncertain time for the oil market. Plus, Hong Kong billionaire Li Ka-shing owns 70% of the company. If things get really bad he could step in with additional capital.
4. Downstream business
Husky owns three refineries in Canada, as well as a 50% interest in one in Ohio. This allows it to maximize the price it gets for the majority of its Western Canadian production.
As well, the company owns more than 500 service stations across Canada, giving it a ready market for its refined products. Downstream assets are more consistent, helping to smooth out bumps in the price of crude.
5. A generous dividend
Husky has always had a good dividend. Now thanks to the sell-off in the sector, it has a great dividend.
Shares currently yield 5%. Not only does the company have a history of paying uninterrupted dividends during previous bear markets in energy, but it expects capital expenditures to decrease going forward now that the Sunrise expansion is set to go online. This will free up cash flow to help ensure the sustainability of the dividend.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Nelson Smith has no position in any stocks mentioned.