Husky Energy Inc. (TSX: HSE) is an integrated energy company based in Canada and operates in upstream and downstream activities.

Outlook: For FY20, the Company expects total capital expenditure within the range of CAD 1,600 million to CAD 1,800 million which includes CAD 950 million to CAD 1,075 million for the integrated corridor and CAD 600 million to CAD 650 million for offshore segment.

Q1FY20 Financial Highlights: Husky Energy declared its first quarter results and posted revenues, net of royalties of CAD 4,068 million, as compared to CAD 4,539 million in the previous corresponding quarter. The decline was resulted due to a decline in the overall demand. Production and throughput stood at CAD 298.9 mbbls/day and CAD 307.8 mbbls/day, against CAD 285.2 mbbls/day and CAD 333.6 mbbls/day, respectively in the previous corresponding quarter. Funds from operations dipped to CAD 25 million, from CAD 959 million in Q1FY19. During the quarter, depletion, depreciation, amortization and impairment surged to CAD 2,074 million from CAD 630 million in pcp, while purchases of crude oil and products stood at CAD 3,348 million against CAD 2,646 million in the previous corresponding quarter. The group reported a loss from operating activities of CAD 2,150 million, as compared to a profit of CAD 428 million. Net loss, during Q1FY20 stood at CAD 1,705 million, as compared to a net profit of CAD 328 million in pcp.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risk: The majority of the long-term debt is denominated in USD, and a weakening CAD would result in a rise in interest cost for the Company. Further, if the COVID-19 outbreak continues, demand for oil is likely to hit severely, which is likely to impact the group’s performance.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of HSE corrected ~58% so far this year, as investors stay aloof from oil companies due to weak demand and pile up inventory levels. The company’s structure, which includes the deep physical integration of upstream, midstream and downstream assets in the Integrated Corridor business, and long-term contracts in Asia provides insulation from the impacts of oil price and differential volatility. The company has unused credit facilities of CAD 3,405 million, sufficient to meet the near-term working capital requirements. Recently, the oil prices have witnessed a relief rally owing to the twin effect of production cut announced by OPEC+ and recovery in demand. We expect an improvement in the crude oil demand driven by the re-commencement of industrial and manufacturing activities across the major regions coupled with the easing in travel restrictions. An improved demand scenario is likely to act as a cushion to oil prices, which in turn would help the company’s performance. We have valued the stock using Price to CF based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have considered peers like Apache Corp, MEG Energy Corp, Vermilion Energy Inc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 4.35 on June 26, 2020.

HSE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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