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Morningstar | Husky Raises Its Dividend, but Stock Looks Fairly Valued

No-moat Husky Energy increased its quarterly dividend by 67% to CAD 0.125 per share. The increase comes less than six months since Husky reinstated its dividend in March. On an annual basis, the dividend approximates a 3.6% yield, which puts Husky on par with industry leaders Suncor and Canadian Natural. More important, the increased dividend signals that the company believes it can generate enough cash flow to continue growth while rewarding shareholders.

Husky reported free cash flow of CAD 500 million compared with CAD 123 million in the year-ago quarter. However, free cash flow fell sequentially from CAD 895 million because of lower throughput from a planned turnaround at the Lloydminster Upgrader and the shutdown at the Superior Refinery in April. Ignoring FIFO gains and losses, U.S. refining margins increased to $14.94 per barrel, up from $9.64/bbl in the year-ago period. The increase is positive, especially with the narrowing of the heavy oil discount. Conversely, refining operations were disappointing in the prior quarter as margins remained flat from the year-ago quarter, despite the more attractive refining environment.

Husky continues to prioritize netback maximization in its upstream operations. Accordingly, the company continued lower heavy oil production in response to the heavy oil discount remaining at high levels, despite its decrease. During the quarter, production averaged 295.5 thousand barrels of oil equivalent a day, below our previously lowered expectations.

We are raising our CAD fair value estimate to CAD 20 per share from CAD 19, but are maintaining our $15 U.S. estimate, on our increased near-term commodity price forecasts. The stock was up 1.5% on the day, as the market responded favorably to the dividend increase. However, Husky’s stock is trading near our estimate, and we see minimal upside for investors. While we don't see upside in the stock, investors can collect a stream of cash flows that approximates a 3.6% dividend yield.

For a detailed look at Canadian crude and pipeline trends, please refer to our September Energy Observer "Don't Overlook Oil Sands: Falling Costs and More Infrastructure Will Make Canadian Production Globally Competitive."