Should You Buy Husky Energy Inc. Around Earnings Report Time?

Low oil prices have brought Husky Energy Inc. (TSX:HSE) close to its 52-week lows. Should you buy it or its high-quality peers?

The Motley Fool

Husky Energy Inc. (TSX:HSE) is reporting its second-quarter earnings results tomorrow. Should you buy it now? First, let’s take a look at Husky Energy’s business.

The business

Husky Energy is an integrated energy company, meaning it operates in the upstream and downstream businesses. The upstream segment includes exploring for, developing, and producing crude oil and natural gas. The downstream segment includes refining crude oil and marketing petroleum products.

Is Husky’s dividend safe?

At about $22 per share Husky Energy yields 5.4%. Unlike some energy companies that increased their dividends, Husky has frozen its quarterly dividend at $0.30 per share since 2009.

Further, in 2008 it paid a quarterly dividend as high as $0.50. That means it cut the dividend 40% during that time. In the low oil price environment, the payout ratio is now overextended at 150%, but other integrated oil companies are in similar situations.

Earnings and valuation

Husky Energy’s earnings are tied with the commodity price. So, the commodity price volatility translates to Husky Energy’s earnings volatility.

Year Earnings Growth
2012 -12%
2013 -10.2%
2014 -35.1%

Because earnings are so volatile, if I use the price-to-earnings ratio (P/E) to evaluate the company, that valuation can jump around a lot as the price of the commodity changes. So, instead of using the P/E, it might make more sense to use the price-to-book ratio (P/B). To elaborate, the P/B is comparing the market price to the value of the company’s underlying assets.

The company’s trailing 12-month P/B is 1.1, and it hasn’t traded at such a low level for the past decade. In this period, the lowest it has traded was at a P/B of 1.3 in 2014. Based on the P/B metric, Husky’s shares are priced at the lowest levels in the last decade.

Should Foolish Investors buy Husky today?

All integrated energy companies have been affected by low oil prices. The future oil price is uncertain. No one knows when it will eventually go up, increasing energy companies’ profitability along with it.

I’m not encouraging the timing of the market, but around earnings report time the market can get especially emotional about a company. Husky Energy could go up or down 5-7% in one day.

Either way, if you are bullish in the long-term usage of oil, I believe Foolish investors can find higher-quality integrated energy companies. High-quality peers include the ones that continued to increase their dividends in 2009 when Husky cut its dividend. Specifically, these peers include Suncor Energy Inc. and Imperial Oil Limited.

However, their yields are lower than Husky’s, so they might not meet income investors’ objective of a certain minimum yield such as 4%. Their lower yield further implies that they’re higher quality because the market isn’t pushing their prices lower for higher yields.

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 Kay Ng owns shares of Suncor Energy, Inc. (USA).

More on Dividend Stocks

Airport and plane
Dividend Stocks

Down by 20%: Is Air Canada Stock a Buy After its Earnings?

Air Canada stock continues trading for a significant discount after its earnings release, but it still might not be a…

Read more »

Dividend Stocks

Better Buy for TFSA Passive Income: Fortis Stock or Enbridge?

Fortis and Enbridge stock look cheap today for a TFSA targeting passive income.

Read more »

grow dividends
Dividend Stocks

These 3 Stocks Could Grow (at Least 5X) in the Next Decade if They Repeat History

Three stocks could soar by least five times more if they repeat history with the return of a bull market.

Read more »

work from home
Dividend Stocks

3 Stocks to Hold for the Next 20 Years

Are you looking for some stocks to hold for 20 years or more? Here are three great options to consider…

Read more »

little girl in pilot costume playing and dreaming of flying over the sky
Dividend Stocks

3 Stocks You’ll Probably Be Able to Pass On to Your Grandkids

Three stocks are ideal holdings for generational wealth builders who will eventually pass these assets to the next generation or…

Read more »

Dividend Stocks

SmartCentres: Is Your Dividend at This REIT Safe?

The interest rate hike has pulled down property prices. Should you be worried about your monthly passive income from this…

Read more »

question marks written reminders tickets
Dividend Stocks

Better Buy: Boston Pizza Stock or Pizza Pizza Stock?

Both Pizza Pizza and Boston Pizza are excellent high-yield dividend stocks, but which is the better buy for investors in…

Read more »

Man data analyze
Dividend Stocks

Got $5,000? Buy These 2 Stocks and Hold Until Retirement

If you have $5,000 to invest, here are two TSX stocks you can buy and hold as part of your…

Read more »