Husky Energy Inc. (TSX:HSE) has taken a huge hit after the rout in oil prices; the stock plummeted over 60% from its summer 2014 highs. Fast forward to today, the stock has rallied slightly, but not nearly enough considering the price of oil has been slowly recovering to the $50 range. Husky suspended its dividend completely, and that spooked almost every investor from buying in to the company.
Decent quarter, new CEO coming soon
The company recently reported Q3 2016 results, and they were quite underwhelming. Husky Energy saw $1.4 billion in profit for Q3 with a $1.37 EPS, which was a good sign considering the company was in the negatives in earlier quarters. Net income for the quarter was at $1.3 billion from selling its midstream assets to a business that Husky Energy is still closely partnered with.
CEO Asim Ghosh also announced that he’ll be retiring in December after more than seven years of service. Stepping up will be the current COO Rob Peabody, who’s been in his current role for over 10 years.
The bountiful dividend could be coming back
There’s no question that investors in Husky Energy have been in the house of pain for quite a while, as the stock lost over half its value and the dividend payments got suspended.
As the billionaire genius Warren Buffett once said, “Be fearful when others are greedy, and greedy when others are fearful.” The same can be said about investors and Husky Energy; investor pessimism is very high at current levels, even though the price of oil has rallied substantially from its lows earlier this year.
Most of the investor pessimism comes from the fact that Husky Energy axed its dividend entirely, instead of going with the popular method of cutting the dividend bit by bit until finding a sustainable dividend to pay out to investors.
I believe cutting the dividend entirely was the right thing to do, as the company can always reinstate a dividend later on when oil prices improve. They peeled the Band-Aid off in one quick swipe, and this creates a better opportunity for contrarian investors to jump in before the dividend gets reinstated.
Divestments and sales made by Husky Energy will positively impact its balance sheet; when combined with the fact that oil prices are starting to recover, we might see cash flows jump up big, and Husky might restore its dividend, which will cause income investors to flock back into the stock.
If you’re a contrarian investor who believes oil prices are going to keep rising, then Husky Energy is a great bet, especially before it restores its dividend. I believe the worst is over for the energy giant and its balance sheet has slowly become manageable again.
Valuation and conclusion
The company currently trades at a one P/B, which is much lower than the five-year historical average P/B of 1.4. Investors who are bullish on oil will get very good returns with Husky Energy, as a dividend restoration could be right around the corner.
