CK Hutchison Holdings Limited (CKHUY) is an undervalued behemoth struggling to showcase its value. Despite its discounted asset base full of real estate development, ports, retail, telecommunications, and energy, the company is also fighting off several perceived risks. Disruption in Hong Kong, the demise of retail shopping, global trade slowdown, and falling energy assets.
Today news came out that it would be offloading its struggling Husky Oil play in a deal with Cenovus Energy (CVE). Bloomberg was quick to suggest the company was cutting its position in the article below, but was that truly fair? After all, this was an all-stock deal.
Indeed, the offloading of Husky looks to be more like the acceptance of a new C$23.6 billion merger that could further consolidate the industry and provide meaningful synergies. Additionally, for CK Hutchison, this also means an equity position in a more stable combined entity which is expected to save C$1.2 billion in annual synergies. Not bad for a company with a market cap valued at C$3.8 billion in the present.
Additionally, the merger can act as a hedge against the looming threat of a Biden win. As noted, by acquiring Husky's refineries:
"Oil sands companies in Alberta sell their crude at a discount to West Texas Intermediate because export pipelines are usually too full to accept all the oil that producers want to ship. That discount can be steep at times -- $20 a barrel or more -- and is currently more than $10.
The situation could get worse if Biden wins the Nov. 3 election and makes good on his promise to rescind the permit granted by President Donald Trump for the development of Keystone XL, the biggest of three major Canadian export pipelines under construction.
By acquiring Husky’s refineries in Ohio and Wisconsin, Cenovus will reduce its exposure to that problem. The merged company will be able to refine as much as 70% of its crude directly in the U.S. Midwest, the biggest market for Canadian crude, meaning the company won’t have to sell as much oil locally at depressed prices."
So let's re-evaluate this. Is this really a concession or a strategic win-win to gain a greater foothold in a changing landscape? There is little denying that CK Hutchison's energy holdings have struggled in recent years, but as the future of Canada's oil sands remain in jeopardy in the coming decade, this move looks to also like an opportunistic way to gain entry into an uplifted combined entity in the energy space moving forward. After all, it's hard to believe that taking a new equity position in a more diversified holding is really "cutting" anything when all of the potential downside risks remain.
All the same, this play overall has little bearing on CK Hutchison itself which has far more important assets in play. CKHUY currently trades with a severely undervalued price-to-book ratio of 0.37, a meager price-to-sales ratio of 0.64 and supports a forward price-to-earnings ratio of 4.90.