Goldman slaps ‘sell’ rating on Husky Energy

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Market Blog's roundup of some of today's key analyst actions

Goldman Sachs today downgraded Canada's Husky Energy Inc. to a "sell" rating, believing that the stock has the most downside of all the oil producers it covers.

Goldman cut its view on Husky in a lengthy report on the oil market, in which it reversed years of bullish recommendations citing a rise in unconventional oil supplies in the United States and Canada. The bank cut its 2013 Brent forecast to $110 a barrel from $130 (U.S.) and saw long-term prices hovering near $90.

Goldman primarily made the downgrade because the stock is trading well above $23 (Canadian), its new six-month price target (it previously was $25), and due to its belief that Husky's valuation is becoming overheated next to peers. On an enterprise value/debt-adjusted cash flow basis, Husky is trading at 6.7 times 2013 estimates, versus a cheaper 4.6 times for U.S. domestic oil companies and 6.2 times for Canadian oil firms.

But Goldman's concerns didn't end there.

"While our downgrade of Husky is primarily a relative to the sector valuation call, we struggle with the investment niche Husky fits into," Goldman said in the report. "As a diversified integrated oil, we do not see Husky as having an advantaged project queue via its Sunrise (oil sands) or Liwan (offshore China) projects. We do not believe the company is on-track for a 'shrink to grow' restructuring strategy. We do not consider it an acquisition candidate. Finally, in an environment where oil prices are expected to be range-bound albeit at 'high and structurally stable' levels, we no longer see it benefiting from a tailwind of secularly rising oil prices. On our analysis, Husky has an above-average required oil price to fund capex and dividends."

Goldman also today upgraded ConocoPhilips to "neutral" from "sell," and Western Refining Inc. to "buy" from "neutral." It left its six-month price target unchanged at $55 on ConocoPhilips and raised the target on Western REfining by $2 to $34

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Production and sales at Iron Ore Co. of Canada, which is 15.1 per cent owned by Labrador Iron Ore Royalty Corp. and majority owned by Rio Tinto, came in well below Desjardins Securities analyst Jackie Przybylowski's expectations. She cut her production and sales forecasts for the fourth quarter and cautioned that cash flows will suffer.

Upside: Ms. Przybylowski cut his price forecast by $3 to $36 and reiterated a "hold" rating.

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407 International Inc., owned 16.8 per cent by SNC-Lavalin Group Inc., reported third-quarter revenues of $202-million. That met expectations, but its fourth-quarter dividend declaration of 24.5 cents came as a surprise to National Bank Financial analyst Trevor Johnson. This "should result in about $16-million more income for SNC from its concessions portfolio than we previously forecast," he said.

Upside: Mr. Johnson reiterated a "sector perform" rating and $42 price target.

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Desjardins Securities analyst Jeremy Rosenfield has reiterated Algonquin Power & Utilities Corp. as a "top pick" after the company's recent statement that it is targeting utility acquisitions in six U.S. states. "Ultimately, we remain positive on AQN's ability to make accretive utility acquisitions as part of its longer-term growth strategy," he said.

Upside: Mr. Rosenfield maintained an $8 price target.

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Fission Energy Corp.'s 60 per cent owned Waterbury Lake uranium property in Saskatchewan's Athabasca basin "is an enviable combination of location, high-grades and opportunity," said Cantor Fitzgerald analyst Rob Chang. Mr. Chang believes the uranium sector is still underpinned by solid fundamentals despite the Fukushima tragedy that sparked a plunge in prices for the commodity.

Upside: Mr. Chang initiated coverage with a "buy (speculative)" rating and price target of 75 cents.

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For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at#eyeonequities