Stock of the Week: Husky

Or should we say, Cenovus, looks well-positioned to benefit from a potential oil shortage

Andrew Willis 30 November, 2020 | 4:38AM

 

 

Andrew Willis: The acquisition of Husky Energy by Cenovus Energy currently scheduled for early 2021 looks to have been impeccably timed.

We had expected one or more successful vaccines to be deployed in the first half of next year, and with the recent news on vaccines from Pfizer, Moderna and BioNTech, that looks to be on track. And once broad vaccination occurs, economic activity has the potential to return - followed by oil demand.

But this restoration of demand could be met with much less supply than we saw pre-pandemic, reminds equity analyst Preston Caldwell. Drilling activity collapsed this year, and unless it somehow comes back quickly from where it is now, the oil glut will turn into a shortage.

And an oil shortage will see prices rise – just as a giant integrated energy company comes online.

We see significant upside for both companies, with Husky at a 36% discount as the company continues to improve cost efficiencies to bring break-even prices around 31 U.S. dollars a barrel. Meanwhile, we think Cenovus is similarly undervalued and we think the market is overlooking their long-term cash flow potential from the oil sands and their industry-leading cost structure.

Now, combine the competencies of these two companies with our midcycle oil price forecast of 55 U.S. dollars a barrel for West Texas Intermediate (WTI), and you’ll see there’s plenty in the pipeline for investors.

For Morningstar, I’m Andrew Willis.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Cenovus Energy Inc7.76 CAD-1.27
Husky Energy Inc  

About Author

Andrew Willis

Andrew Willis  is Content Editor for Morningstar.ca. Follow him on Twitter @AndrewWillisCDN.

 

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