As crude rallies, Husky may emerge as top oil-sands stock pick

The company controlled by Hong Kong billionaire Li Ka-Shing is the cheapest stock among six producers in North America that also own refineries, trading at an enterprise value of seven times debt-adjusted cash flow. That’s less than half Chevron Corp.’s valuation.

Among Canadian producers, what makes Calgary-based Husky appealing is that its significant refining capacity insulates it against the price discounts weighing on Canadian heavy crude, while its growing natural gas sales under contract make it immune to fluctuations at Alberta’s AECO hub, said Chris Cox, an analyst at Raymond James. It’s particularly attractive for fund managers who already have positions in Suncor Energy Inc. and Canadian Natural Resources Ltd.

“As the market is starting to get a little more constructive on oil prices, there’s been this growing question of, ‘OK, where next after Suncor?’” Cox said. “When you consider all the various moving parts of the macro perspective -- the concerns over heavy oil prices, concerns over AECO gas and this constructive outlook for refining -- you could almost do a process of elimination and Husky really quickly came to the top of that list.”’

Much of Husky’s 9% advance came in the final weeks of last year as oil prices surged past $60/bbl in New York and the company projected in early December that it would generate free cash flow of C$1 billion ($800 million) in 2018. The gains compare with a 10% loss for the S&P/TSX energy index in 2017. Suncor and Canadian Natural both rose about 5%.

Yet Husky still has a ways to go in regaining analysts’ favor. Even after four upgrades last month, only 27% of the analysts covering the company recommend buying the shares. That compares with 86 percent for Canadian Natural and 63% for Suncor.

Still weighing on the stock is that it isn’t as much of a pure play on the Canadian oil sands as its rivals, and some of its refining operations are less profitable than peers. Also, almost 70% of the shares are owned by Li, and companies where investors are getting a minority interest tend to garner lower valuations, Cox said.

Another factor that may lure portfolio managers back to Husky is the potential reinstatement of its dividend, which the company canceled as oil prices sank in late 2015. Husky executives said last month that the board is likely to bring back a dividend this year because it has repaired its balance sheet and is generating free cash flow, and oil prices have rebounded.

“They had to spend the downturn resetting some growth expectations, resetting the balance sheet, resetting the funding levels, and once they’ve gotten those ducks in a row, especially with where crack spreads are and refining margins are, now they’re at a point where they’re going to be looking pretty decent,” Cox said.