Imperial Oil $42 – Toronto symbol IMO

IMPERIAL OIL LTD. $42 (Toronto symbol IMO; Conservative Growth Portfolio, Resources sector; SI Rating: Average) is Canada’s largest oil company, with major operations in Alberta and the Northwest Territories. Oil accounts for over 70% of its production, while natural gas supplies the other 30%. Imperial also refines crude oil into gasoline and other petrochemicals, and operates over 2,000 gas stations under the “Esso” banner. ExxonMobil Corp. owns 69.6% of the stock.

In the three months ended September 30, 2006, Imperial’s revenue fell 13.6% to $6.65 billion from $7.7 billion a year earlier. Overall oil production grew 12% due to rising output at its oil sands facilities, but conventional oil and natural gas volumes fell. Despite the lower revenue, income rose 31.3%, to $0.84 a share (total $822 million) from $0.64 a share ($652 million). That’s because the company earned higher profits from heavy oil and chemicals than from conventional oil and gas. Cash flow per share rose 60.9%, to $1.11 from $0.69.

Imperial is Canada’s largest oil sands operator. It owns 25% of the massive Syncrude joint venture, and runs it. It also owns its own oil sands project at Cold Lake, Alberta. These operations accounted for 71% of its third quarter crude oil production.

The company now plans to spend roughly $5 billion on a new oil sands project at Kearl Lake, Alberta. Imperial will own 70% of this project and operate it; ExxonMobil will own the remaining 30%. Imperial aims to start work on Kearl Lake in 2007, and begin initial production three years later. This first phase could increase its daily oil output by one third.

Imperial still hopes to build a pipeline that would transport natural gas from the Mackenzie Delta to Alberta. The company estimates the cost at $7.5 billion, but that could grow to $10 billion due to rising costs for steel and labour. Regulatory delays and falling gas prices have also hurt the potential profitability of this project. Imperial is now looking at other ways to transport the gas, including cooling it to a liquid form and shipping it by tanker.

The stock trades at 14.9 times its likely 2006 profit of $2.81 a share, and at 11.6 times forecast cash flow of $3.61 a share. The $0.32 dividend yields 0.8%.

Imperial Oil is a buy.

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