As much fun as it is to try and predict when oil will recover, we’re collectively pretty bad at it.
If I surveyed 100 analysts about where the price of crude will be in a year, chances are I’d get about fifty different answers. Sentiment seems pretty bearish right now, so I’m guessing the majority would give an answer below the current price. The average would probably be somewhere in the high $50 range.
But investors have to remember that even the smartest minds in the business are still guessing about the future of oil. Just because their opinions are more educated than yours or mine doesn’t give them much of an edge.
Which is why we shouldn’t really try to predict the price of oil. Sure, we need to work with the assumption that crude will go up at some point in time, but we can’t predict the “when” part with much accuracy. Instead, investors should focus on investing in solid companies with the balance sheet strength to survive the storm that offer a compelling value at today’s levels.
That last point is key. The stalwarts of the industry in Canada—namely Suncor Energy, Imperial Oil, and Canadian Natural Resources—do not offer an investor much in compelling value. They all have great balance sheets and good operations, but the price of their shares has barely moved over the last year, all the while crude is down some 50%.
That doesn’t make a whole lot of sense to me.
Fortunately for investors, that leaves a pretty easy choice. Just buy Husky Energy Inc. (TSX:HSE).
The case for Husky
Even though Husky is a behemoth producer in its own right, it doesn’t get lumped in with the big boys of the sector. That’s good news for investors, who get the chance to buy a pretty solid company at depressed prices.
Husky isn’t just a producer. It owns several refineries, including two in the United States. It also operates 500 service stations in western Canada, giving it a ready market for its refined products. These downstream operations will help smooth earnings during these trying times.
Plus, the company’s capital expenditures have been slashed for 2015, coming in at $3.1 billion compared to $5.1 billion in 2014. That won’t really affect production, which will likely be up a bit in 2015 between 325,000-355,000 barrels of oil per day. In 2016 production will likely be better still, approaching 400,000 barrels per day.
Every company in the patch is looking to cut costs and Husky is no different. Management estimates it has between $400-600 million worth of fat it can cut, which will likely include more layoffs.
Put this all together, and investors have a fully integrated energy company with a solid balance sheet and smart management that’s positioning the company to easily weather the downturn. And yet it trades at a discount to its competition, including a share price that’s pretty close to book value.
These steps likely mean that the company will be able to maintain its 4.6% yield throughout this downturn, which is one of the reasons why I’m bullish on this stock. By keeping the dividend intact, Husky won’t see the wild price swings that other energy companies have. Long-term investors will stay invested in the name, while the traders concentrate on the riskier names.
If you’re looking for a way to play oil’s recovery and don’t want to take too much risk, Husky looks to be a pretty good choice. The company is making prudent moves now, and the dividend will be a nice bonus while waiting for shares to recover. Nobody knows when oil will ultimately get back to $80 per barrel again, but there’s little doubt Husky will be there when it happens.
Another way to play oil's recovery. Check this out!
What if I told you there was a way you could invest in an oil company that should go up as oil recovers, but won't see much downside if oil goes down even further? That stock exists, today.
This stock has a a tollbooth-like business; a solid management team; and a reliable, consistent, and rising dividend, and has killed the market over the last year—while oil tanked. In fact, we're so bullish on this stock that our analysts are calling it our one TOP stock for 2015 and beyond.
Fool contributor Nelson Smith has no position in any stocks mentioned.