Is Husky Energy’s (TSE:HSE) Dividend A Trap?

The writer of this article may or may not have positions in the securities below. Current positions of the writer had no influence on the outcome of the research or stocks listed inside of this article.

There’s no question Canadian stocks in the oil and gas sectors are trading at all time lows. There are a lot of bargains out there, including stocks that pay lucrative dividends in light of falling prices.

One stock in particular Husky Energy (TSX:HSE) is now yielding nearly 5.5% after stock prices have dipped to levels not seen in over 16 years.

A lot of income investors are keeping an eye on Husky due to the fact its yield is so high, and its payout ratio is so low (35.97%.) However, it’s easy to fall into a trap with stocks that have promising dividends like Husky. Sure, we get a yield north of 5%, but if the stock is continually falling in value, we lose money on that front and our overall return inevitably shrinks.

Is Husky Energy (TSX:HSE) worth the buy today?

Husky is realizing less $US/bbl on its oil, which is to be expected considering prices have been somewhat stagnant compared to levels seen 5 years ago. Even fluctuations of $1 on the price of WTI crude can have a $62 million dollar effect on the company’s net earnings.

Net earnings thus far are significantly lower in 2019 than they were one year ago today. Net earnings in 2019 sit at $1.52 billion, nearly 30% lower than earnings through the first 6 months of 2018.

The company’s overall production numbers have declined, seeing drops in its Western Canada, Atlantic and Asia Pacific segments. Husky attributes lower production levels to planned turnarounds and government-mandated production quotas in Alberta. The company is currently producing 277 mboe/day, and has stated it still plans to meet guidance of 290-305 mboe/day as its turnaround season is almost over and will be able to ramp up production.

The concerning issue about Husky is its declining revenue and earnings growth. Year over year, the company is posting revenue drops of nearly 10% per quarter, and earnings are shrinking at a rate of nearly 18% a quarter. Falling revenue and earnings are typical in light of lower oil prices, however this isn’t the case with major players such as Suncor Energy (TSX:SUImperial Oil (TSX:IMO) and Canadian Natural Resources (TSX:CNQ).

The company recently received approval to rebuild its Superior Refinery after an explosion in 2018. This should give the company a boost in production, as the refinery is expected to produce around 45,000 barrels a day.

However, the explosion didn’t come without cost. Husky will be investing approximately $400 million into rebuilding the refinery, and it will take some time to recuperate initial costs.

There is better oil and gas stocks to invest in today

Husky is trading at under 10 times forward earnings and only 0.47 times book value. I see recovery in the stocks price in the future, however in my opinion there are better oil plays here in Canada.

If you’re looking at getting some exposure to the Canadian oil and gas industry, I’d recommend sticking to the majors listed above. You may be sacrificing dividend yield, but I feel the majors will return more in the form of stock appreciation once negative sentiment in the industry turns around. Canadian Natural is trading at a deep discount, and offers one of the fastest growing dividends in the country right now.