On Monday, shares of Husky Energy Inc. (TSX: HSE) closed at $22.02, touching levels not witnessed by investors since 2005.
Like most every stock in the sector, Husky has been taking the decline in oil right on the chin, falling more than 40% from highs reached in June. The market has also been punishing the shares because of cost overruns on its Sunrise project in the oil sands. Based on current projections, Sunrise is expected to cost $3.2 billion and come online sometime by the second half of 2015, at about 30,000 barrels of oil per day. Most of that $3.2 billion has already been spent, it’s just a matter of the last few hundred million to get the project operational.
But unlike some of its weaker competitors, Husky is being unfairly punished. It still has a great balance sheet, and the second phase of its Liwan project in the South China Sea is now producing natural gas, which should lead to a bump in cash flows in 2015.
Plus, Husky has downstream operations, which deliver steady profits even during periods of weak oil prices. The company owns three refineries in Alberta, a 50% interest in two in Ohio, and a network of more than 500 gas stations across Canada. These downstream assets are on pace to deliver more than $1 billion in revenue in 2014, along with $250 million in pre-tax earnings, and that’s down some 20% compared to last year. Look for those results to improve in 2015.
Approximately one third of Husky’s production so far in 2014 is in natural gas, concentrated mostly in Western Canada. Natural gas prices have held up quite well compared to oil, so this should also help smooth earnings going forward. Plus, production from Liwan sells at a 50% premium compared to North American prices, thanks to there being far less supply in Asia. Increased production there will also add to the company’s bottom line in 2015.
And that’s without the benefit of oil recovering.
The kicker
Let’s take a quick look at where the company was when shares were last at these levels, back in 2005. Based on results from 2004, revenue, net of royalties, was $8.4 billion. Cash flow from operations was $2.2 billion. Total assets were $13.2 billion. And the company’s dividend was $0.06 per share per quarter.
Now, let’s compare that to today. Through just the first three quarters of 2014, revenue was more than $19 billion, and cash flow from operations was $2.75 billion. Total assets came in at more than $39 billion. There have been a few dividend hikes in the meantime, boosting the dividend to $0.30 per share on a quarterly basis.
Although shares outstanding have approximately doubled since early 2005, it’s still obvious investors are getting a much better deal if they buy the company today compared to a decade ago. This is because the outlook for oil was positive back then, and it’s negative now.
This just goes to show what a difference sentiment can make.
The opportunity
When was the last time investors were this pessimistic on oil?
For me, two time periods come to mind. In 2009, oil temporarily dropped below $40 per barrel, although most investors were too busy focusing on other things to notice. The other time was back in 1999, when The Economist famously predicted oil would fall to $10 per barrel. We all know how wrong that prediction was.
In 2009, investors who bought Husky when oil was at its lows were up more than 50% less than six months later. In 1999, it took a little longer than six months, but Husky’s price did increase 50% when oil recovered (although it subsequently went back down again). For long-term investors, the point remains. Times of maximum pessimism are good entry points.
I’m all but certain oil will be higher than it is today five years from now, which should lead to great performance from Husky shares. In the meantime, its natural gas and downstream businesses act as a natural hedge against the price of oil. Oh, and you’re getting paid a 5.5% dividend to wait.
