Is Husky Energy Inc. Finally on the Right Path Forward?

With the oil market not getting any better, Husky Energy Inc. (TSX:HSE) has chosen to take some rather decisive actions in order to ensure it makes it through the current downturn. These actions, which were announced last week as part of the company’s update to its 2016 guidance, are really putting the company on a new path forward. Here’s a closer look at this new path.

Au revoir to the dividend

Husky Energy has two primary goals at the moment. It wants to balance spending with cash flow while at the same time maintaining a strong balance sheet. That’s growing harder to do with its cash flow continuing to fall alongside the oil price.

The only thing the company can do is work harder to control what it can, which is how it uses its cash flow. Prior to the downturn that cash flow was being used to sustain and grow its production as well as to deliver a tangible return to investors, primarily through a dividend.

However, with fewer and fewer dollars to go around, the company is turning its focus toward sustainability, which means that growth-focused capex and shareholder returns are on pause for the moment. As such, Husky Energy has revised its capex budget downward to a range of $2.1-2.3 billion from its previous range of $2.9-3.1 billion. In addition to that, the company is suspending its dividend for the time being.

The primary outcome of this belt tightening is that it will push Husky Energy’s breakeven point down, so it can run at a sub-$40 oil price by the end of this year. That puts the company in a better position to weather the current storm in the oil market.

No longer a part of the problem

The other important aspect of Husky Energy’s plan is the fact that it will likely lead to lower production in 2016 than originally anticipated.

The company now expects its production to be in a range of 315,000-345,000 BOE/d, which is down from its prior guidance of 330,000-360,000 BOE/d. That represents the potential for the company’s overall production to be at least flat or decline from last year’s level, which means that it will help with easing the oil glut instead of being a part of the problem.

While the company isn’t deferring any of its major heavy oil projects, it is deferring drilling in western Canada and is slowing the pacing of other discretionary activities within its portfolio. This slowdown will let nature take its course, so to speak, by allowing the natural decline of some of its conventional oil and gas assets to pull its overall production lower.

While the company is replacing a lot of this natural decline via the ramp up of its Sunrise oil sands project and the addition of three new heavy oil projects later this year, it isn’t growing its production by continuing to make the investments required to keep its conventional assets from declining. That’s an important step because the market really doesn’t need this incremental production at the moment.

Investor takeaway

Husky Energy is taking some bold steps, but these actions are expected to enable the company to operate within its cash flow while also improving its balance sheet, both of which are critical at this point in the oil cycle. More importantly, the company is now taking steps to help ease the oil glut by pursuing a plan that could lead to its production declining instead of growing. Because of this, the company finally appears to be on the right path forward.

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Fool contributor Matt DiLallo has no position in any stocks mentioned.

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