It’s hard to see opportunity through the chaos in the energy market, but long-term investors should love all this noise.
It seems like every day something happens that either sends crude soaring or plunging. Lately, the bad days outnumber the good ones, and crude has once again sunk to new lows, touching $42 per barrel before rallying. Traders are pessimistic because inventory numbers are up and rig counts aren’t declining as quickly as planned.
It’s impossible to guess where oil will trade a month from now, a year from now, or a decade from now. I don’t know which direction the next 10% move will be. But I am certain which direction the next 100% move will be, and that’s what investors have to remember during these dark times. Some of the weaker oil companies will go under if crude doesn’t recover soon, but most will hang in there and eventually recover, leading to nice profits for those with the fortitude to buy now.
How should investors play this turnaround? One idea is to buy Husky Energy Inc. (TSX:HSE), a company with a premium pedigree that is trading at a pretty cheap price.
The Rodney Dangerfield of the patch
Comedic actor Rodney Dangerfield’s infamous punchline was “I don’t get no respect!” In a lot of ways, Husky is in the same boat.
Husky is a fully integrated energy giant with operations that include low-cost production from the oil sands, natural gas production in Asia (which enjoys much higher spot prices than in North America), refineries in Alberta and Ohio, and a fleet of more than 500 retail stores to sell its gasoline and other refined products to consumers.
And yet, shares of the company are down more than 20% over the last year and nearly 30% from their peak in June. This is a much bigger haircut than other rivals, like Imperial Oil and Suncor.
Perhaps the market is concerned about cost overruns from Husky’s upcoming Sunrise project, which is slated to cost closer to $3.1 billion and not the $2.7 billion originally budgeted. On a project that has a projected output of 60,000 barrels per day by the end of 2016, this isn’t such a big deal in the long term.
Taking prudent steps
Although the company had a solid cash position of more than $1.2 billion at the end of 2014, it still took the opportunity to raise $900 million in new debt and preferred shares, pushing its total indebtedness to more than $6 billion.
Some of this capital is earmarked to thermal oil projects that will start producing later this year and in 2016, and some capital will go to its U.S. refineries. Between Sunrise and the thermal projects, oil production is slated to increase 10% in 2015 and even more in 2016. It’s prudent to finish these projects that are so close to completion, even if crude remains weak.
Raising capital also helps to maintain Husky’s generous 4.6% dividend. Although borrowing money to pay shareholders is never an ideal long-term plan, it can work for a few months, especially if crude recovers later in the year.
And even after this capital raise, the balance sheet is still in fine shape. The company’s $6 billion in debt is offset by more than $38 billion in assets, and there’s only $300 million worth of debt due before 2019. That’s the kind of balance sheet built to weather storms.
The bottom line? Husky is a solid enough company that it offers a place to hide while the crazy crude market calms down, yet it still offers good potential upside when oil returns to normal levels. For investors not willing to take a whole lot of risk, Husky looks to be a good way to play the eventual recovery in the oil patch. Oh, and getting paid nearly 5% to wait is nice too.
