Can Your Money Work For You With IMO?

IMO - Imperial Oil

Imperial Oil is an integrated energy company, engaging in the exploration, production, refining, and marketing of energy products. It is Canada’s largest refiner of petroleum products and a leading marketer of fuels, lubricants, asphalts, and specialty products. By revenues, downstream constitutes nearly 70% of total revenues, followed by the upstream segment (25%) and the chemicals segment (~5%).

Imperial has a presence in both upstream and downstream parts of the value chain. In the upstream part, Imperial owns and operates some of the best oil sands in Canada. Its Cold Lake operation is one of the largest in situ operations in the world, whereas Kearl is considered as one of Canada’s highest-quality oil sands deposits. In the downstream part, the company operates 400 kbd of refining capacity in strategically located refineries. Imperial’s Sarnia and Strathcona are amongst the largest integrated refining capacities in Canada. In addition, the company also operates a profitable polyethylene business. Imperial Oil enjoys nationwide leadership across the entire value chain. Its Esso and Mobil are popular brands across Canada. The popularity of Imperial products can be measured by the fact that the company manufactures and sells about one-fourth of the petroleum products used by the Canadians every day.

Investment Data

Revenue Growth & Market Exposure

Imperial has a presence in both upstream and downstream parts of the value chain and is less vulnerable to volatility in the energy sector. It is in a position to better capture the synergies arising through integrated manufacturing and marketing activities. Founded in 1880, Imperial Oil has a deep experience of operating in diverse geological and geographical environments and has witnessed several ups and downs cycles in the oil industry. This long-standing experience enhances the company’s resilience in combating volatile and tough times in the energy industry.

Imperial operates through a well-diversified asset base of upstream, downstream and chemical assets, consisting of high-quality oil sand deposits, large refining capacities, and an extensive pipeline network. The company is an industry leader in research and technology, having invested more than billions in R&D over decades. It is further enhancing its portfolio by focusing on the highest value assets and core competencies. Ownership of long-life, quality upstream assets, strategically positioned refineries, strong logistics, and leading brands are strong competitive advantages of Imperial. The company also stands a good chance to benefit from the rising demand for oil and gas which is estimated to grow by 20% by 2040.

Net income for 2019 declined by more than $100 million YoY, despite a $662 million favourable impact from the Alberta government’s corporate income tax rate reduction enacted in June. Upstream earnings benefited from higher prices and volumes.
Imperial is working towards increasing the annual production of its Kearl mines, Aspen in-situ project, and Cold Lake expansion projects, which should drive top-line growth. The company continued to spend on key projects in both the upstream and downstream including the Strathcona Cogen project and the Alberta products pipeline. Imperial also benefited from the government’s revisions to the curtailment program increasing the operator threshold for those subject to curtailment from 10 kbd to 20 kbd.

Imperial is currently reviewing its spending plans in an effort to identify further efficiency opportunities. The company is looking forward to delivering production growth at Kearl with the new crushers and continuing to drive down the assets all-in unit operating costs towards the target of $20 per barrel. It is anticipating total production to be around 415,000 barrels per day for 2020 driven by the volume gains. The Kearl is already producing 216,000 barrels per day and the supplemental crushers project is also making good progress. The company’s digital opportunities also represent a value potential of greater than $500 million per year.

Dividend

Imperial Oil is a Canadian Dividend Aristocrat with a century-old history of making consecutive dividend payments to stockholders. The company has been increasing its dividends for the last 25 years in a row. It returned more than $2 billion to shareholders through share purchases and dividends in the last year and $8 billion over the last 10 years. It has repurchased 50% of shares since 1995. The company has compounded dividends at a rate of 10%+ for the last three years. Its EPS has also registered a growth of ~30% CAGR during the same time period. The last dividend raise was over 20%. Imperial currently has an annual average dividend yield of 6.7% and a very low payout ratio of 30%.

Imperial’s upstream assets have a proven reserve life of more than three decades, generating over $16 billion in cash over the last ten years. It is estimated that Imperial Kearl mines could alone help meet North America’s energy needs for the next four decades. The company is further targeting a production growth through FY 2020, on the back of sustained production at Cold Lake and improved reliability at Syncrude. The Cold Lake site is already producing 140 kbd and has the ability of producing through decades with significant reserves remaining. The Syncrude multi-year improvement plan is progressing as per plan.

Imperial is a subsidiary of Exxon Mobile Corp which holds a 70% stake in the company. A strong parent adds to Imperial’s financial strength and improves access to cheap capital sources. Imperial generated strong cash generation in each of the Upstream, Downstream and Chemicals businesses throughout the year.

Imperial’s integrated businesses and balance across the upstream, refining, and petroleum product sales continues to support the strength and resiliency of its cash-generating capability across a range of market conditions. Its 2019 cash from operating activities was the highest since 2012. Given the company’s sound balance sheet and strong future production projection, Imperial Oil should continue its dividend growth streak going forward.

Competition

After the oil price downturn, many large energy companies like Royal Dutch Shell, Total SA and ConocoPhillips sold their oil sands deposits. Suncor which is the largest oil producer in Canada and derives a majority of its revenues from its oil sand business is Imperial’s largest competitor. Canadian Natural Resources also holds some of the best oil sands assets in North America, particularly thermal in situ properties. CCenovus Energy is a large integrated oil and gas company based in Canada. The company got a boost after the acquisition of most of ConocoPhillips’ operations in Western Canada, which almost doubled its oil sands production.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:SUSUSuncorEnergyOil & Gas Integrate0.3922.7034.620.0018.69-1.420.03703.701.000040.840.142034Consumable - NecessitiesNONONONOCanada1
TSE:IMOIMOImperial OilEnergyOil & Gas Integrate0.6921.4515.759.5818.692.240.04104.100.392940.880.119368Consumable - NecessitiesNOYESYESNOCanada1

Bottom Line

Imperial has faced numerous periods of low global crude oil prices over its long history and is currently facing a challenging market environment caused by the COVID-19 pandemic and oil price decreases as a result of the breakup of the Russian-Saudi oil deal over production cuts. The company’s integrated business model and strong financial position should provide resilience to face periods of market volatility. Imperial Oil’s leading position in the Canadian oil sands industry, a large scale of operations, integration across the value chains, and a strong parentage should allow the company to grow profitably in the future without much risk. A payout of just 30% and strong cash flows should provide enough room for future dividend growth.

Even with a low P/E and a low payout ratio, you need to ask yourself if your money is working for you considering the state of the oil industry in Canada and the price competition not in Canada’s favor. Some day, when additional pipelines are built, we may see a new opportunity but until then it’s a risk.

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DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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