Morningstar | Husky Rebounds With Strong 1Q; Stock Still Looks Undervalued
No-moat Husky Energy reported a strong first quarter that exceeded our and consensus expectations as a result of the company’s integrated operations. The company recorded EBITDA of CAD 1.047 billion compared with our estimates of CAD 948 million. The company’s cash flow from operations of CAD 959 million also exceeded our expectations of CAD 889 million. The better-than-expected performance was driven by higher-than-expected netbacks on the company’s upstream production and higher production levels but partially offset by lower-than-expected downstream and refining results. Husky’s upstream production averaged 285 thousand barrels of oil equivalent a day, ahead of our expectations of 281 mboe/d, driven by higher-than-expected thermal bitumen production. Combined, the firm’s four downstream operating segments generated EBITDA of CAD 659 million but was less than our expectations of CAD 793 million. We expected higher refining margins from the company’s inventory that was purchased at lower prices during the previous quarter.Accordingly, we are lowering our downstream EBITDA forecast but increasing our forecasts for the company’s upstream netbacks. The adjustments have an offsetting impact, and we are maintaining our $13 (CAD 17) fair value estimate and no-moat rating. Husky’s Canadian shares are up modestly after the earnings release, but the stock is the top-performing in the subsector, with crude oil down 3%. Even though Husky is in less of a position to benefit from advanced extraction technology than peers, its integrated corridor should help it generate cash flow. As such, we think the market is overlooking the company’s integration and stable cash flows, and we see Husky’s stock as an undervalued opportunity for long-term investors. The stock is currently trading in 4-star territory, and we see 17% upside coupled with a 3.5% annual yield.
For a detailed look at Canadian crude and pipeline trends, please refer to our January Energy Observer, "Pipelines Are Canada's Lifelines."
Husky Energy is engaged in the exploration, development and production of oil and natural gas. Co.'s operations are located in Canada and United States. As of Dec. 31, 2011, Co. had total proved oil and natural gas reserves of 1,172.4 million barrels of oil equivalent (Mmboe) gross (1,010.7 Mmboe net).
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