TSX Commentary

Husky Energy Inc. (HSE) – $26.94 – Q4: Supercharged Under the Hood?
Sector Perform, Average Risk, Price Target: $37.00
Husky Energy’s fourth-quarter operating EPS of $0.39 fell shy of RBC CM’s $0.45 estimate, largely in connection with soft downstream earnings in Canada and higher upstream depletion, but its results contained little drama otherwise. Husky’s fourth-quarter production of 291,500 boe/d was in line, its U.S refining losses of $43 million were as expected, and its Lloydminster
upgrading operations exceeded our expectations. Husky’s Mizzen (35% wi) oil discovery off-shore Newfoundland is notable, and is sure to be a feature on Husky’s conference call, slated for 4:15 PM ET (800-597-1419) on February 4. The potential spin-out of a portion of Husky’s Asian assets – Liwan and Wenchang oil – into a separate entity, has been telegraphed since last spring, but remains dependent upon market conditions. At current levels, Husky is arguably inexpensive, trading at a 2010E debt-adjusted cash flow multiple of 5.1x (vs. 8.0x for RBC CM’s Canadian integrated peer group) and a P/NAV ratio of 0.82x, in line with its peer group. RBC CM notes that while it remains neutral on Husky, the stock still appears oversold on a relative multiple basis. RBC CM’s target price reflects an equal weighting toward a multiple of 1.0x estimated Base NAV of $33.02 per share (vs. $33.39 previously) and a 2011E mid-cycle debt-adjusted cash flow multiple of 7.1x.