Husky Energy Can Handle Low Oil Prices

Joe Gemino: Best idea Husky Energy remains our top Canadian integrated pick, with the stock trading at a 20% discount to our fair value estimate. We believe that the market is overlooking Husky's ability to generate free cash flow in low oil price environments. Husky's downstream and midstream operations comprise about 30% of the company's EBITDA and help mitigate market volatility by generating cash flow when commodity prices are low. 

The company continues to further its strategic transition toward low sustaining capital production, with capital costs approximating CAD 6/bbl. We expect such production to grow from 8% of the company's total production in 2010 to approximately 45% by the end of this year. Improved efficiency on the company's oil sands production affords the company break-even prices below $35/bbl Brent (excluding overhead costs). This cost structure compares favorably to its peers.

In addition, concerns over natural gas production in China appear overstated, despite causing repeated meaningful share price movements in the past. Although Husky came to a favorable agreement with CNOOC over price realizations for its Chinese production, there remains some concern that CNOOC will attempt to renegotiate if low prices persist. Whatever transpires from here, natural gas production from China represents only 7% of Husky's total production, and additional price declines will not have a significant impact on the company's value.