Husky Energy’s integrated corridor business physically connects assets across North America, from the wellhead to the refinery, enabling the company to maximise value per barrel produced. Accounting for c 70% of Husky’s cash flow, the integrated corridor underpins its five-year plan, which envisages cumulative group free cash flow (FCF) of C$8.7bn from FY19 to FY23. Coupled with high/fixed-price contracts in Asia and high-margin offshore assets in the Atlantic, this enables Husky to maximise operational margins and be resilient through the cycles. Excess FCF is to be directed towards increasing shareholder returns and strategic growth projects. These are Husky’s main objectives, along with becoming a high-reliability organisation in terms of safety. Net debt remains below a targeted 2x funds from operations when stress tested at US$40/bbl WTI. Husky trades at 2.4x FY20 P/CF vs the North American large-cap E&P average of 3.5x and North American integrated average of 6.0x.
Husky’s integrated corridor processes mostly its own Canadian heavy oil. Ownership across the value chain enables the company to leverage the optionality of the asset base to maximise operational margins. Stress testing at US$40/bbl WTI provides the ability to fully fund FY19 sustaining capex and, with management’s projected growth/margin improvements, the ability to fund the entirety of sustaining capex, growth capex and dividends by FY23.
The new five-year (2019–23) plan reduces forecast capex by C$1.7bn relative to the previous plan, leading to a longer step-up in production. As near-term projects go into production, Husky will see an inflection point in FCF where high capex will be replaced by FCF generation, in excess of that of its peers. This will facilitate enhanced shareholder returns, which is one of Husky’s current priorities. Management expects c C$8.7bn of cumulative FCF over five years, providing the basis for a potential increase in FCF/dividend cover from an estimated 164% in FY19 to c 600% in FY23, highlighting the flexibility to increase cash returns.
Husky is trading at a large discount to North American large-cap E&P and integrated companies on current P/CF multiples for FY19 and FY20. This is reflected in its dividend yield of 5.3% versus peers’ average of 1.7%. Key drivers of funds from operations (FFO) include the underlying WTI oil price (FFO ± C$100m per US$1/bbl) and crack spread (FFO ± C$120m per US$1/bbl in Chicago 3:2:1).